Drafting Legal Opinions for Article 9 Security Interests: Navigating the Complexities and Avoiding Liability

Transcription

1 Drafting Legal Opinions for Article 9 Secrity Interests: Navigating the Complexities and Avoiding Liability Erik W. Hepler, Kirkland & Ellis James C. Schlwolf, Shipman & Goodwin

2 Overview Opinions are typical in financing transactions Always given at initial closing Given in connection with some, bt not all, amendments Always if new money Contrast to M&A transactions For many years, opinions were rotinely given in M&A deals Today they are almost never given

3 Overview Who gives opinions Borrower s consel Some lenders/investors reqire opinions from their own consel Local Consel State-by-state isses Foreign consel

4 Overview What does an opinion look like? Introdction Describes where the opinion reqest comes from List of docments reviewed and being opined on Standard assmptions Exection by parties Genineness of signatres Certificates of governmental officials, etc.

5 Overview What does an opinion look like? (cont.) Standard assmptions (cont.) Officers certificates Knowledge definition Actal opinions Entity and contract opinions UCC opinions Attachment Perfection Priority (?)

6 Overview What does an opinion look like? (cont.) Assmptions Qalifications What law is covered? Conclding paragraphs What time period is covered? Who can rely?

7 Sorces of Opinions Official sorces ABA Reports ABA Gidelines ABA Principles TriBar Reports TriBar II TriBar LLC & Partnership Reports TriBar Remedies Report

8 Sorces of Opinions (cont.) Official Sorces (cont.) TriBar Reports (cont.) TriBar Article 9 Report TriBar Report on Secondary Sales of Secrities (UCC Article 8 may apply to secrity interest in investment property) State Bar Reports Corporate, LP and LLC Reports Real Estate Opinions Remedies Reports

9 Sorces of Opinions (cont.) Official Sorces (cont.) Other Official Sorces ALI Restatement of law governing lawyers National Cstomary Practice Statement Good Smmary at the ABA Legal Opinion Resorce Center Unofficial Sorces Law Firm model opinions Do yo se yor form or the form sent by Lender s consel?

10 Predicate opinions No conflicts/no consents Specific Stats Opinions Diligence Isses

11 Organization, existence and good standing Corporate power De athorization De exection

12 Credit Party is an [entity] existing and in good standing nder the [state entity law]. Opinion is often limited to information gained from certificates issed by the state in qestion 12

13 Credit Party has the [type of entity] power to execte, deliver and perform its obligations nder the Opinion Docments to which it is a party Reqires analysis of organizational docments of the Credit Party, as well as the relevant entity law of the state of organization some entities may have restrictions on debt actions that they can take in their organizational docments 13

14 Credit Party has taken the [type of entity] action necessary to athorize its exection, delivery and performance of the Opinion Docments to which it is a party. need to diligence that proper board/manager and/or shareholder/member action has been taken to athorize the transaction 14

15 The Opinion Docments have been dly exected and delivered on behalf of the Credit Party. ensre that docments are signed by properly athorized persons 15

16 The exection, delivery by the Credit Party of the Opinion Docments [performance by the Credit Party therender/the payment by the Credit Party of its obligations therender] will not (i) constitte a violation of the organizational docments of the Credit Party, (ii) constitte a violation of any applicable provision of existing [covered state] law or United States federal stattory law or pblished reglation, or (iii) reslt in a violation of, or reslt in the creation of a lien nder, any agreement indentified in Exhibit A attached hereto

17 No conflicts with other agreements shold be limited to a specified list not all agreements or all material agreements need to review listed agreements to make sre there is no conflict no conflicts merely reqires that a reasonable ftre performance will not conflict not that there is no way in the ftre (sch as a defalt) there wold not be a conflict shold state law be limited to stattory law and reglations as well? treatment of financial covenants 17

18 No consent, approval, athorization or order of, or filing with, any United States federal of [covered state] governmental athority or body, is reqired for Credit Party to obtain the right to execte, deliver, and perform its obligations nder, the Opinion Docments, except for (1) those already obtained, (2) those reqired by Credit Party for the ordinary corse of bsiness, and (3) those reqired nder the Secrities Laws. 18

19 if Credit Party is a reglated entity (e.g., a pblic tility or a railroad), may exclde things relating to their reglation sometimes separate reglatory consel will cover those matters 19

20 Investment Company Act Litigation Reglation U 20

21 The Credit Party is not an investment company reqired to be registered as sch nder the Investment Company Act of 1940, as amended, or the rles and reglations therender reqires diligence on the Credit Party to determine its stats even if this opinion is not given, some consider it an element of enforceability 21

22 To or actal knowledge, (1) there are no actions, sits or proceedings pending or threatened against the Credit Party with respect to the Opinion Docments and (2) there does not exist any jdgment, order or injnction prohibiting the consmmation of the transactions contemplated by the Opinion Docments shold not cover litigation in general (even material litigation), if not with respect to the Opinion Docments 22

23 Assming application of the loans as contemplated by the credit agreement and that the lender is not sbject to Reglation T, the exection and delivery of the credit agreement by the Credit Party and the making of the loans therender will not violate Reglation U or X. if no margin stock owned by Credit Party, simple opinion to give where margin stock is present, more analysis is necessary 23

24 Diligence is most important with respect to entity opinions most likely area to face liability Diligence important both to law and to organizational docments never assme the easy answer where margin stock is present, more analysis is necessary 24

25 Coverage Limitations 25

26 Each of the Opinion Docments is a valid and binding obligation of the Credit Party and is enforceable against the Credit Party in accordance with its terms.

27 Unless exceptions taken, covers most provisions of agreements Inclding sry, choice of law, etc. 27

28 Shold not be read to cover creation and perfection of secrity interests 28

29 UCC Opinions Attachment Perfection Priority Remedies

30 UCC Opinions (cont.) UCC Opinions - Example The Secrity Agreement creates in yor favor a valid secrity interest in the items and types of property of the Borrower described in Section of the Secrity Agreement to the extent that a secrity interest may be created in sch property nder the UCC. Assming that there is no agreement among the parties to postpone the time of attachment, sch secrity interest has attached and is enforceable against the Borrower with respect to sch Collateral. The Financing Statement shall be delivered for filing to the Office of the Secretary of the State of Delaware. Upon de filing, sch Financing Statement will perfect the secrity interest created by the Secrity Agreement in the items and types of Collateral described in sch Financing Statement in which a secrity interest may be perfected nder the UCC by the filing of a financing statement in sch office. We are not admitted to practice in the State of Delaware and the opinion set forth above is based solely pon or review of the compilation of the Delaware Uniform Commercial Code set forth in the CCH Secred Transactions Gide.

31 UCC Opinions (cont.) UCC Opinions - Attachment Based on contract opinions Scope Athority Existence Enforceability Is the transaction sbject to the UCC? Is the collateral covered by the UCC?

32 UCC Opinions (cont.) UCC Opinions Attachment (cont.) Scope (cont.) Has the secrity agreement been properly athenticated? Is there appropriate granting langage? Is the collateral properly described? v Reminder all assets is OK in the UCC-1 bt not in the secrity agreement

33 UCC Opinions (cont.) UCC Opinions Attachment (cont.) Scope (cont.) Assmptions v Rights in collateral v Vale given

34 UCC Opinions (cont.) UCC Opinions Perfection By filing By possession By control De Diligence Things yo need to know Type of entity Jrisdiction of organization Registered organization?

35 UCC Opinions (cont.) UCC Opinions Perfection (cont.) De Diligence Things yo need to know (cont.) Chief Exective Office Secrities certificated or ncertificated? Location of deposit accont Individal Name v v Driver s License Other? Trst - identity of trstee

36 UCC Opinions (cont.) Perfection by filing Ordinary collateral Collateral of a type as to which perfection is accomplished by filing Proper filing location and fee UCC-1 is completed correctly and or legally sfficient Correct debtor name and address Correct indication of collateral v All assets OK on UCC-1

37 UCC Opinions (cont.) Perfection by Filing Fixtres Typically done as part of mortgage filing Determine proper filing location Typically land records or recording office, not Secretary of State Check correct boxes Note special rles for transmitting tilities

38 UCC Opinions (cont.) Perfection by filing Non-US Debtors A non-us debtor is not a registered organization Look to place of chief exective office Use filing system for that jrisdiction

39 UCC Opinions (cont.) Perfection by filing individal and trst debtors 2010 Amendments to Article 9 clarified rles Individals Name of driver s license or other recognized ID (if state chose Option-B otherwise driver s license) Trsts Name of trst, if there is one, or name of settlor of trst, otherwise

40 UCC Opinions (cont.) Perfection by possession Certificated secrities Possession trmps filing How do yo determine who has possession? v Agent or bailee? v Gratitos bailee in mltiple lender sitations v Acknowledgment from bailee

41 UCC Opinions (cont.) Perfection by control Reqired for perfection against deposit acconts, secrities acconts, electronic chattel paper Control agreement Depository mst agree to follow orders of secred party withot frther consent of debtor What if depository will not provide a control agreement?

42 UCC Opinions (cont.) Perfection by control (cont.) Electronic Chattel Paper Determine whether collateral is electronic chattel paper Choice of Law Some states e.g. NY, DE, have non-niform provisions

43 UCC Opinions (cont.) UCC Opinions Priority Priority opinions are rarely given with respect to filing collateral and are often considered to be an inappropriate reqest Sometimes given in rated loans Many firms have a policy against giving priority opinions When given, are typically based on a UCC search report review v Can yo assme its accracy, particlarly if it was done by an otside service?

44 UCC Opinions (cont.) UCC Opinions Priority (cont.) Priority opinions may be given in connection with perfection by possession or control Can also be given in the case of a protected prchaser nder Article 8

45 UCC Opinions (cont.) UCC Opinions Remedies A general remedies opinion is typically not given Standard waivers are assmed Practical realization opinion is often given Typically located within assmptions and qalifications

46 Who can rely on opinion? Addressee(s) Syndicate lenders Participants Prospective lenders or participants? Consel? Third parties, e.g. accontants, investment bankers, valation firms, trnarond consltants?

47 Period covered by opinion As of date of opinion Sbseqent periods shold be disclaimed

48 Inbond that agreement choosing opinion law state as governing law is enforceable can often be given (if there is a clear state law) many firms do not give (or give in limited fashion: except to the extent sch choice of law of New York as the governing law is made in compliance with the stattory laws of the State of New York ) 48

49 Otbond that opinion law state will recognize choice of other jrisdiction s law generally shold be resisted comes p most freqently in crossborder deals 49

50 Some transactions may have credit parties from mltiple jrisdictions, or agreements with different governing laws Where a firm does not practice in one or more sch states, differing approaches to handling isses 50

51 For ot of state parties may se local consel may se gide opinion (relying on reading entity statte only) common approach for Delaware 51

52 For ot of state agreements may refse to cover them may se local consel may se as if approach (opine on docments as if they were governed by covered law) need consent of recipient for sch approach 52

53 Many of the same concerns as mlti-state transactions, bt heightened Enforcement of foreign jdgments opinion can be given in reasoned form in certain states otbond choice of law opinions typically reqested ability to give in qestion (and can depend on state) Beware the as-if opinion 53

54 Assmptions Qalifications

55 Mst be reasonable can t make factal assmptions known to be incorrect in certain instances ( as-if opinions, for example) can assme things if disclosed to and discssed with recipient Can t directly or indirectly assme legal conclsions 55

56 Accracy of docments and signatres Predicate opinions and enforceability of docments for non-covered parties No oral agreements Accracy of government certificates Accracy of factal information in agreements and in client certificates 56

57 rights in the collateral vale having been given where opinions given on specific types of collateral, assmptions regarding the classification of sch collateral 57

58 Except as expressly otherwise set forth in this letter, or advice on every legal isse addressed in this letter is based exclsively on the internal laws of the State of or the Federal law of the United States which, in each case, in or experience is generally applicable both to general bsiness organizations which are not engaged in reglated bsiness activities and to transactions of the type contemplated in the Opinion Docments (bt withot or having made any special investigation as to any other laws), except that we express no opinion or advice as to any law or legal isse (a) which might be violated by any misrepresentation or omission or a fradlent act, or (b) to which any Credit Party may be sbject as a reslt of yor legal or reglatory stats. 58

59 May also cover certain specific other laws for certain specified opinions other state entity laws for predicate opinions other state UCCs for filing opinions 59

60 Secrities Laws Antitrst laws, employee benefit laws, fidciary dty laws, environmental and land se laws, tax laws, health and safety laws, labor laws, criminal laws, reglatory laws Terrorism and sanctions laws 60

61 (i) applicable bankrptcy, insolvency, fradlent conveyance, reorganization, moratorim and similar laws affecting creditors rights and remedies generally and jdicially developed doctrines in this area sch as sbstantive consolidation and eqitable sbordination; (ii) the effect of general principles of eqity (regardless of whether enforcement is soght in a proceeding at law or in eqity); (iii) an implied covenant of good faith and fair dealing; and (iv) other commonly recognized stattory and jdicial constraints on enforceability inclding stattes of limitations. 61

62 Garantees pon changes to the nderlying obligation Fradlent conveyance savings clases Eligible contract participant isses with swap garantees E.U. bail-in provisions 62

63 Waivers of nwaivable rights provisions that amont to penalties indemnification for secrities laws violations sbmission to jrisdiction, vene, waiver of trial by jry arbitration provisions covenants not to compete reqirements to amend in writing 63

64 Each enforceability opinion is also sbject to the qalification that certain provisions of the Opinion Docments may not be enforceable in whole or in part, althogh the inclsion of sch provisions does not render the Opinion Docments invalid, and the Opinion Docments and the law of the State of contain adeqate remedial provisions for the practical realization of the rights and benefits afforded thereby. Sometimes limited to secrity docments 64

65 Very state specific isse In some states, shold not be covered at all In other states, shold only be covered in certain types of transactions, or with certain types of borrowers and/or lenders 65

66 proceeds (with reference to 9-315) bankrptcy provisions regarding preferences and Section 552 Priority of secrity interests (except for protected prchaser opinions) Real estate-related collateral (inclding timber, crops, farm prodcts, as-extracted collateral) Money, L/C rights, certificate of title collateral, commercial tort claims, consmer goods 66

67 spergeneric collateral descriptions collateral where perfection governed by federal law (airplanes, boats, etc.) 67