On October 14, 2011, the staff of the Division of Corporate Finance of the SEC issued a legal bulletin which provides guidance on preparing legality and tax opinions filed in connection with registered offerings of securities. Although not a rule, regulation or statement of the SEC, the bulletin provides guidance on preparing legality and tax opinions filed in connection with registered offerings of securities by discussing the requirements for the opinions, the staff's views regarding the required elements for these opinions, the staff's practices in reviewing the opinions and the filing of consents to include the opinions in registration statements.

Legality Opinions

The required elements for opinions in securities offerings depends on the type of security being offered:

  • Shares of capital stock of U.S. corporate registrants. The opinion must state whether the shares will be legally (or validly) issued, fully paid and non-assessable when sold.
  • Equity securities of non-corporate registrants. For limited liability companies, limited partnerships or statutory trusts registrants, the opinion must state whether the securities will be legally (or validly) issued when sold and whether purchasers will have any obligation to make payments, other than the purchase price, or contributions to the registrant or its creditors based solely on the purchasers' ownership of the securities.
  • Shares of capital stock of foreign corporate registrants. The opinion can be made by either foreign counsel or competent U.S. counsel, but the opinion must explain the laws of the registrant's jurisdiction of incorporation. Despite the explanation of the foreign laws, the opinion is only required to refer to material information of those laws when the same terms, such as "fully paid," have different meanings in the foreign law.
  • American depositary shares (ADS). The public offering and sale of ADSs require two filings: a Form F-6 and a registration statement. Each requires its own legality opinion and should state that the ADSs will be legally issued and will entitle their holders to certain rights when sold.
  • Debt securities and guarantees. The opinion should state that the debt securities will be "binding obligations of the registrant" under the law of the jurisdiction governing the indenture and that each guarantee will be the binding obligation of its guarantor, as the guarantee is a separate security.
  • Options, warrants and rights. The opinion should state that the option, warrant or right is a binding obligation of the registrant under the law of the jurisdiction governing the option, warrant or rights agreement and give an opinion as to the legality of the underlying securities.
  • Rights under shareholder rights plans ("poison pills"). When a registration statement is filed for the common stock to which the rights relate, counsel’s opinion can acknowledge the uncertainties involved and discuss the possibility of a determination that would question the legality of the rights in the future.
  • Units comprised of two or more underlying securities. The legality of each unit and the components of each unit must be addressed in the opinion, typically in the form of a binding obligation opinion.  

Some transactions and filings require other or additional legality opinions:

  • Shelf offerings. Although a signed opinion must be filed before a registration statement becomes effective, the opinion can include assumptions regarding the future issuance of securities that would generally not be acceptable for a non-shelf offering. An updated opinion must be filed when the takedown occurs, unless an appropriately unqualified opinion was filed at the time of effectiveness.
  • Medium-term note programs. The registrant can file a qualified opinion at the time of filing and an update and unqualified opinion when the takedown occurs. The registrant can choose to file an opinion with the prospectus that assumes that the securities to be offered and sold will be legally issued and then provide an appropriately unqualified opinion as to a specific takedown in the text of the pricing supplement itself.
  • Acquisition shelf transactions. The legality opinion must be filed as an exhibit and may be subject to assumptions regarding the future sale of the registered securities in an acquisition that would otherwise not be acceptable for a non-shelf registration statement.
  • Exchange offers. The assumption that the required shareholder approval for the exchange offer will be obtained is appropriate where the registrant determines to seek shareholder approval at or after the time of the mailing of a Form S-4.
  • Reincorporation before closing of offering. The opinion should address the laws of the registrant’s new jurisdiction of incorporation and can be subject to the assumptions that any required shareholder approval for reincorporation will be obtained and the necessary filings will be made in accordance with state law so that the incorporation of the new corporation is effective.
  • Offerings conditioned on charter amendments. The assumptions that the required shareholder approval will be obtained and any necessary filings will be made in accordance with state law are appropriate in the legality opinion so that the amendment to the articles or certificate of incorporation can become effective.
  • Securities Act Rule 462(b) registration statements. So long as a legality opinion already exists in a registration statement that covers these types of securities, the opinion can be incorporated by reference in the Rule 462(b) registration statement. If not, there must be a new legality opinion for the Rule 462(b) registration statement.
  • Resale registration statements. The opinion should state that the securities "are" legally issued and fully paid because the securities are already outstanding.  

The staff warns against assumptions being made by counsel in legality opinions, such as legal incorporation and sufficiency of authorized shares, but believes that certain assumptions, like the assumption that the representations made by officers and employees are correct as to questions of fact, are appropriate. It is important to note that the staff does not accept any limitation on reliance on the opinion to "only" or "solely" the company, its board or another counsel; purchasers are entitled to rely upon the opinion.  

Tax Opinions

Item 601(b)(8) of Regulation S-K requires tax opinions where the tax consequences are material, such as in mergers or exchange offers where the transaction is tax-free and where the transaction is offering significant tax benefits or where there are unusual tax consequences such as debt offerings with unusual original issue discount issues, rights offerings and limited partnership offerings. Generally, the opinion should address the material federal tax consequences and can recommend that the investor seek the advice of their tax counsel or adviser. The heading or introductory language in the prospectus cannot say "certain" or "principal" tax consequences, which may imply that material tax consequences have been omitted. The opinion must be specific to the facts of the transaction and identify the specific tax consequences on which counsel is rendering an opinion – it cannot be a mere description of the law. The tax opinion can be conditioned or qualified so long as the conditions or qualifications are adequately described in the registration statement, and uncertain tax opinions can be made with qualifying language such as "should" and "more likely than not." However, counsel will be required to state why it cannot give a "will" opinion, describe the uncertainty in the opinion and provide risk factor disclosure regarding the uncertainty.  

http://www.sec.gov/interps/legal/cfslb19.htm