Source: http://businesslaw.calbar.ca.gov/Publications/OpinionResources/ThirdPartyOpinionforVentureCapitalFinancing.aspx
Timestamp: 2017-02-28 12:15:38
Document Index: 715477349

Matched Legal Cases: ['§ 4', '§ 202', '§ 2', '§ 2115', '§ 1933', '§ 4', '§ 1646', '§ 15', '§ 13', '§ 13', '§ 2115']

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Sample California Third-Party Legal Opinions For Venture Capital Financing Transactions Exhibit A
The Committee chose as the transaction model for the Venture Opinion a private offering, not involving general solicitation or general advertising, of Series B Preferred Stock by a Delaware corporation10 under transaction documents governed by California law.11 The Venture Opinion is annotated and contains alternative language for use when the company is incorporated in California. Because the Venture Opinion uses a Delaware corporation as the issuer, opinion preparers
should consider in each case whether they have the competence to give, when requested, opinions under the Delaware General Corporation Law.12 Finally,
the opinion recipients are identified in the Venture Opinion as the purchasers of the company’s Series B Preferred Stock under the stock purchase agreement. A Series B Preferred Stock financing highlights, among other things, the serial nature of most Venture Financings.
A clean version of the Venture Opinion, without footnotes, follows the annotated form and is attached as Exhibit A. Sample California Third-Party Legal Opinion for Venture Capital Financing Transactions13
(e) At the time of conversion of the Shares into Common Stock [and/or Warrant Shares into Common Stock] a sufficient number of shares of Common Stock will be authorized and available for issuance under the Company’s certificate of incorporation as then in effect to satisfy (i) the conversion of all Shares (and all other then outstanding shares of the Company’s Preferred Stock) into Common Stock at the then effective respective conversion rates of such shares and (ii) the exercise, conversion and exchange rights of all other then outstanding securities of the Company that are then, directly or indirectly, issuable or exchangeable for, or convertible into, Common Stock at their then effective rates of issuance, exchange or conversion.39 [; and] [(f ) At the time of exercise of the Warrants, a sufficient number of Warrant Shares will be authorized and available for issuance under the Company’s certificate of incorporation as then in effect to satisfy the Company’s obligations under the Warrants to issue all of such Warrant Shares.]40
6. Each of the Purchase Agreement, Investors’ Rights Agreement, [and] Co-Sale Agreement [and Warrant]59 is a valid and binding obligation
of the Company enforceable60 against the Company in accordance with its terms.61
(c) violate any judgment, order or decree applicable to the Company of any court or arbitrator identified in Section _____ of the Schedule
of Exceptions;68 or (d) violate any Covered Law (as defined in Section E (“Certain Qualifications”) below) to which the Company is subject.69
(2) Where a statement is qualified by “to our knowledge” or any similar phrase, that knowledge is limited to the actual knowledge of lawyers currently in this firm who have been involved in representing the Company in connection with the Transaction Documents. Except as otherwise expressly indicated, we have not undertaken any independent investigation to determine the accuracy of any such statement, and no
inference as to our knowledge of any matters bearing on the accuracy of any such statement should be drawn from the fact of our representation of the Company.80
(4) [The enforcement of Section _____ of [the __________ Agreement], relating to the payment of attorneys’ fees and costs, is subject to the effect
of Section 1717 of the California Civil Code.]81
(6) [We express no opinion regarding the enforceability of [Section _____] of the [__________ Agreement], which purports to waive the parties’
rights to a jury trial.]83
(9) With respect to the equity capitalization opinion set forth in Section C (“Opinions”), paragraph 4,86 please note that we do not maintain any of the Company’s stock records. Such records are maintained by [a third-party stock transfer agent (“Agent”)] [the Company] and we do not
have any control over the procedures used by [Agent] [the Company] for issuing and transferring shares of the Company’s capital stock. Accordingly, in giving the equity capitalization opinion, we have relied without further investigation on (a) the Restated Charter, (b) the Bylaws, (c) minute books relating to meetings and written actions of the incorporator(s), Board of Directors, and stockholders of the Company [in our possession] [delivered to us by the Company for the purposes of giving this opinion], (d) our review of the stock records of the Company maintained by [Agent] [the Company], consisting of [description], (e) statements in a certificate the Company has delivered to us relating to the equity capitalization of the Company, and (f ) the attached Certificate of Transfer Agent issued by [Agent] [the Company] as of [date] (collectively, the “Capitalization Records”). We have not undertaken to verify the accuracy and completeness of that information
other than by reviewing the Capitalization Records. Accordingly, our opinion on the number and character of issued and outstanding securities means that, based upon the examination referred to above, the Capitalization Records are consistent with the information as to the number and character of outstanding securities that is set forth in Section C (“Opinions”), paragraph 4.87
(10) We express no opinion as to the enforceability of any indemnification or contribution provisions in the Transaction Documents (or other provisions having an effect similar to any of these types of provisions) to the extent that the enforceability of such provisions is limited [by United States federal or state laws concerning the issuance or sale of securities or] by public policy or statutory provisions or that such indemnification
or similar provisions purport to indemnify a party against, or release a party from liability for, its own fraudulent or illegal actions or [gross] negligence.88
(ix) records certified to us by an officer of the Company as constituting the records of proceedings and actions of the board of directors [and the
stockholders] of the Company relevant to the opinions set forth below;
(x) a Certificate of Status—Foreign Corporation with respect to the Company, issued by the California Secretary of State on __________, 20__; (xi) a Good Standing Certificate with respect to the Company, issued by the Delaware Secretary of State on __________, 20___;
Each of the documents identified in items (i) through [(iv) OR (v)] above is sometimes referred to below as a “Transaction Document.”
The shares of Common Stock issuable upon conversion of the Shares are referred to herein as the “Conversion Shares [,” the shares of Series B Preferred Stock issuable upon exercise of the Warrants are referred to below as the “Warrant Shares,” and the shares of Common Stock issuable upon conversion of the Warrant Shares are referred to below as the “Warrant Conversion Shares].” We have also examined such other documents and made such further legal and factual examination and investigation as we deem necessary for purposes of giving the following opinions.
(i) the conversion of all Shares (and all other then outstanding shares of the Company’s Preferred Stock) into Common Stock at the then effective respective conversion rates of such shares and (ii) the exercise, conversion and exchange rights of all other then outstanding securities of the Company that are then, directly or indirectly, issuable or exchangeable for, or convertible into, Common Stock at their then effective rates of issuance, exchange or conversion. [; and]
(b) result in a breach of or constitute a default by the Company under any Scheduled Agreement, but excluding (i) financial covenants
and similar provisions therein requiring financial calculations or
determinations to ascertain compliance or (ii) provisions relating to the occurrence of a “material adverse event” or “material adverse
change” or words or concepts to similar effect;
of Exceptions; or
9. Based on, and assuming the accuracy of, the representations of each of the Purchasers in the Purchase Agreement, the offer and sale of the Shares [and the Warrants] and, assuming [the Warrants were exercised by the Purchasers in accordance with their terms on the date of this opinion letter and] the Shares [and the Warrant Shares] were converted
on the date of this opinion letter in accordance with the conversion provisions of the Restated Charter, the issuance of [the Warrant Shares and] the Conversion Shares [and Warrant Conversion Shares] do not require registration under Section 5 of the Securities Act [or qualification under the California Corporate Securities Law of 1968, as amended].
Our opinions are limited to the federal law of the United States, the law of the State of California, and the Delaware General Corporation Law but in each case only to laws that in our experience are typically applicable to transactions of the type exemplified by the Transaction Documents. We express no opinion with respect to compliance with any law, rule or regulation that as a matter of customary practice is understood to be covered only when an opinion refers to it expressly.
Without limiting the generality of the foregoing [and except as specifically stated herein,] we express no opinion on local or municipal law, antitrust, unfair competition, environmental, land use, antifraud, tax, pension, labor, employee benefit, health care, margin, privacy, insolvency, fraudulent transfer, antiterrorism, money laundering, racketeering, criminal and civil forfeiture, foreign corrupt practices, foreign asset or trading controls, or investment company laws. We express no opinion on any securities laws except as expressly stated in Section C (“Opinions”), paragraph 9. The law covered by this opinion
letter is referred to herein as the “Covered Law.”
rights to a jury trial.]
(10) We express no opinion as to the enforceability of any indemnification or contribution provisions in the Transaction Documents (or other provisions having an effect similar to any of these types of provisions) to the extent that the enforceability of such provisions is limited [by United States federal or state laws concerning the issuance or sale of securities
or] by public policy or statutory provisions or that such indemnification or similar provisions purport to indemnify a party against, or release a party from liability for, its own fraudulent or illegal actions or [gross] negligence.
This opinion letter may be relied on solely by the Purchasers for use in connection with their purchase and sale of the Shares [and Warrants] pursuant to
the Purchase Agreement. This opinion letter may not be relied on by any other party or for any other purpose without our prior written consent.
Although at one time venture-backed companies often incorporated in California and then reincorporated
in Delaware immediately before an initial public offering, today venture-backed
companies usually incorporate in Delaware at the outset.
12. The fact that venture (and other) transactions commonly involve Delaware corporations presents an issue for non-Delaware lawyers asked to give legal opinions in these transactions. The 2007
Business Transactions Report states:
2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 20 (footnote omitted); see infra note 51. The practice of non-Delaware lawyers has long been to give opinions on routine matters such as the corporate status of Delaware corporations and the due authorization by Delaware corporations of agreements when they regularly represent Delaware corporations and follow developments in Delaware corporation law. The practice of non-Delaware lawyers has been not to give opinions on more difficult questions of Delaware corporation law or on Delaware contract law (although some California lawyers, like lawyers elsewhere, also give routine opinions on Delaware limited liability companies even though those opinions require some consideration of Delaware contract law). See, e.g., 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 91–92; TriBar Opinion Comm., Third-Party “Closing” Opinions: Limited Liability Companies, 61 BUS. LAW. 679, 681–83 (2006) (discussing coverage by non-Delaware
lawyers of Delaware contract law for purposes of providing closing opinions on Delaware limited liability
13. Consistent with the Transactional Opinion, the Venture Opinion is often referred to as an “opinion letter” even though, in addition to legal opinions, it contains a factual confirmation (which is presented in Section D (“Confirmation”)). As with the Transactional Opinion, the Venture Opinion does not specifically state that it is to be interpreted in accordance with the customary practice of lawyers giving opinions in California; however, regardless of whether such a statement is included in the opinion letter, the opinion letter should be interpreted in light of such customary practice. Some opinion preparers, nonetheless, include a reference to customary practice in their opinion letters to make clear how the opinion letter is to be interpreted. One increasingly accepted method of referring to customary practice is to refer to the Principles, supra note 7. This could be done by including,
either at the beginning or at the end of the opinion letter, a statement such as:
16. Although at one time venture-backed companies were often incorporated in California and then reincorporated in Delaware immediately before an initial public offering, today venture-backed
companies located in California usually incorporate in Delaware at the outset. See 2009 Venture Capital Report, supra note 2, at 166. Back
19. Practice varies on whether to list documents that the opinion preparers have reviewed. See TRANSACTIONAL OPINION, supra note 3, at 3 n.7, and for an extended discussion regarding the description of an opinion giver’s factual examination, see 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at
24–32. Back
a Certificate of Status—Domestic Coporation with respect to the Company, issued by the California
Secretary of State on _____, 20___;
30. This certificate addresses factual matters relevant to the Company and the opinion giver. These may include such matters as the absence of dissolution proceedings and the absence (or identification) of pending litigation. Some opinion preparers do not refer to this certificate and instead rely on the general statement about the making of “further legal and factual examination” to cover any such
matters. See TRANSACTIONAL OPINION, supra note 3, at 5 n.13. Finally, some opinion preparers draft this certificate (as well as other similar opinion-related certificates) to be signed by an officer on behalf of the Company. Other opinion preparers draft the certificate to be signed by an officer in his or her own name. The Committee believes that these approaches are all appropriate. Back
32. See NVCA FORM, supra note 5, at 3 n.12 (“Because shares may be issued in the future under antidilution clauses or otherwise, as a matter of customary practice [an opinion regarding the duly authorized, validly issued, fully paid and nonassessable status of conversion shares] is understood to mean that sufficient authorized shares are available on the date of the opinion letter, not that sufficient
authorized shares necessarily will be available on the conversion date. To make the limited nature of the opinion clear, some opinion preparers include an express assumption regarding the availability of sufficient authorized shares in the future.”). The Venture Opinion addresses this issue expressly in the assumptions below (see Section B (“Assumptions”), paragraphs (e) and (f)). It does not address the issue in the opinions themselves or in the definition of terms but these approaches are also acceptable. Back
33. Some opinion givers include a statement to the effect that they have not conducted a search of the docket of any court or other tribunal. According to the 1998 TriBar Report, no such disclaimer is
necessary (and no such search is required in connection with a “no litigation” confirmation). See TRANSACTIONAL OPINION, supra note 3, at 6 n.14 (citing the 1998 TriBar Report, supra note 8, at 664; 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 64 n.195); see also Section D (“Confirmation”) (concerning the “no litigation” confirmation). Also, some opinion givers omit the last paragraph, thus intending to imply that the list of documents reviewed constitutes the exclusive scope of their document review. Merely deleting the last paragraph, however, is not generally understood
to be sufficient to limit the responsibility of the opinion preparers to review other pertinent documents. When such a limitation is intended, additional language should be added that makes clear that the opinions being given are based solely on a review of the listed documents. 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 25–26 (“If no specific limitation is included, a list of documents
is not generally understood to constitute a limitation on the general responsibility of the opinion giver to follow customary diligence in rendering the opinion.”). Back
34. The 1998 TriBar Report takes the view that assumptions of general applicability need not be stated. For example (and without limitation), the following assumptions, relating to facts that “are common to transactions generally and are customarily assumed as a matter of course,” are understood to be applicable whether or not stated as long as they are not known to be false or reliance on them in
the particular circumstance is not unreasonable: (a) that individuals have legal capacity, (b) that copies of documents furnished to the opinion preparers conform to the originals, (c) that the original documents furnished to the opinion preparers are authentic, (d) that the signatures on executed documents are genuine, and (e) that the agreement that is the subject of the enforceability opinion is
binding on the other parties to it. See TRANSACTIONAL OPINION, supra note 3, at 6 n.15 (citing the1998 TriBar Report, supra note 8, at 615).
The Committee notes that the recent decision in Fortress Credit Corp. v. Dechert, 934 N.Y.S.2d 119 (App. Div. 2011), may lead some opinion givers to state expressly some or all of the assumptions of general applicability. This stems from the fact that the court in that case noted, as one of the bases for dismissing the action, that the opinion letter in question included an assumption regarding the genuineness of the documents reviewed. Although the result in the case no doubt was correct, the Committee believes that, in the absence of facts suggesting that the opinion preparers knew that the documents were not genuine, the case should ultimately have been decided the same way whether or not an express assumption had been included in the opinion letter. However, for many of the same reasons that some opinion givers are inclined to include an express reference to the Principles in their opinion letters (see, e.g., supra note 13), some opinion givers state some or all of the general assumptions.
The Committee believes that, whether or not assumptions of general application are stated, an opinion letter should be read as if they were stated—and the opinion preparers should not be responsible for affirmatively investigating their accuracy. The Committee notes that a “laundry list” approach to assumptions (and to qualifications/exceptions)—that is, utilizing a standard list of assumptions, qualifications, or exceptions that may include assumptions, qualifications, or exceptions that do
not apply to the actual terms of the agreement(s) being considered—can impair the value of an opinion letter as a communications tool. See TriBar Remedies Opinion Report, supra note 8, at 1486.
In addition to assumptions of general application, opinion givers sometimes include express assumptions about matters that are not generally applicable to all opinions but are necessary for the
particular opinions being given. Inclusion of these assumptions is required if they are to be relied on, and their inclusion shifts to the recipient the burden of confirming the matters assumed or taking the risk that they are not accurate. See 1998 TriBar Report, supra note 8, at 616. Back
See the introductory clause to opinion 9 that seeks to cover the facts described in the 2007 Business Transactions Report and that tracks the form of the “no registration opinion” suggested in the
NVCA FORM. See NVCA FORM, supra note 5 (opinion 8). Back
38. Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, required the U.S. Securities and Exchange Commission to adopt new requirements for offerings made in reliance on the Rule 506 exemption, including Venture Financings. Rule 506, as revised, now requires: (i) that no persons related to the offering (as identified in Rule
506(d)(1)) be “bad actors” (as defined in Rule 506(d)) and (ii) that written disclosure of prior bad actor events (as identified in Rule 506(e)) be provided to each purchaser a reasonable time prior to
sale. The Committee believes that opinion givers may appropriately rely on an express assumption regarding the absence of “bad actors.” The Committee does not take a position on whether the absence of
“bad actors” may be addressed by expressly assuming the accuracy of the representations set forth in certificates or other documents. See generally No Registration Report, supra note 7, at 191–92 (sample
opinion, while predating the bad actor rules, relies on reference to representations in agreements to establish facts). Back
41. Opinion literature has long recognized that the benefit an opinion provides a recipient must be balanced against the costs of preparing the opinion. See, e.g., 2007 REMEDIES REPORT, supra note 6, app. 4, at 4–9. Most early stage venture-backed companies have limited resources that place a practical limit on the diligence the opinion preparers can perform without exceeding the Company’s budget for legal fees in the transaction. In these transactions, the Schedule of Exceptions to the representations and warranties in the Purchase Agreement—a document that, in a traditional Venture
Financing, is not likely to be lengthy—often discloses matters such as potentially defective securities issuances, failures to have made required filings, and failures to have followed procedural requirements in approving organizational documents or contracts. These disclosures may be made out of a belief that they evidence a real problem; they may also be made simply because the Company is unwilling or unable to invest the time or incur the expense of determining whether a real problem exists. In either case, an opinion recipient’s counsel should discuss with its client the potential legal consequences of the matters disclosed in the Schedule of Exceptions so that the client can make an
informed decision as to whether to assume the risk and proceed with the Venture Financing. The subject matter of certain representations and warranties for which exceptions are taken may also be the subject of requested opinions (as in opinions on the validity of stock issuances, breaches of existing agreements, or the obtaining of consents or approvals) or confirmations (such as the absence of litigation). As a result, exceptions similar to those taken in the Schedule of Exceptions may be relevant to the opinions given. While the opinion preparers may choose to restate in the opinion letter itself some or all of the exceptions in the Schedule of Exceptions to the extent the opinion preparers find them relevant (and to set them out either as exceptions, qualifications, or assumptions, as appropriate), opinion preparers in Venture Financings often include an exception or qualification in
the opinion letter substantially similar to that included in the bracketed text when the Schedule of Exceptions includes matters that might otherwise be addressed by express exceptions, qualifications, or assumptions. Considerations such as cost, or the desire to avoid highlighting in an opinion letter matters that could provide a “road map” for a plaintiff or governmental agency to pursue legal action
against the Company based on the disclosed problem, are reasons for this practice in the Venture Financing context, though not all opinion givers follow this practice and not all recipients accept opinion letters containing the bracketed language. The Committee believes that this practice can be appropriate in the context of Venture Financings when the exceptions or qualifications are clearly identified in the Schedule of Exceptions, and when their effect as possible limitations on the relevant opinions is or should be apparent. The fact that items constituting exceptions or qualifications are set forth outside the opinion letter in a document to which the letter refers and to which the recipient and its counsel have access should not of itself require restatement of those exceptions or qualifications in the opinion letter when their potential relevance to the topics addressed in the opinion letter should be understood by both opinion giver and recipient.
Regardless of how exceptions, qualifications, and assumptions are stated, the opinion preparers should not give an opinion that, while technically correct, they recognize will mislead the opinion recipient with regard to its subject matter. See, e.g., 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 10 (fraudulent and misleading opinions); id. at 20 (“[A] lawyer should not render an opinion based on factual assumptions if the lawyer knows that the assumptions are false or that reliance on those facts is unreasonable.”). For example, if the opinion preparers discover that a board meeting at which the directors approved the issuance of shares was not in fact a valid meeting despite minutes
to the contrary, a disclosure of the “possible invalidity of the board meeting” in the Schedule of Exceptions may not be sufficient to permit giving a “validly issued” opinion regarding the issuance of those shares. By contrast, where the facts at issue are not clear (such as where there is inadequate record keeping, but the opinion preparers believe the actual facts would support the giving of a particular opinion), noting the state of the record in the Schedule of Exceptions is appropriate and would appropriately qualify the opinion given.
Some opinion preparers broaden the bracketed text by including a reference to the Purchase Agreement itself in addition to the reference to the Schedule of Exceptions. This practice may have the unfortunate
consequence of making it difficult for the opinion recipient to etermine what facts or other disclosures the opinion giver is relying upon for purposes of giving opinions (e.g., factual statements that may be set forth in exceptions to affirmative or negative covenants or other provisions, exhibits, or schedules in the Purchase Agreement). Even if the opinion giver were to limit the broader reference to include only representations in the Purchase Agreement, the opinion recipient may find it difficult to determine if the opinion giver is inappropriately attempting to rely on more in the Purchase Agreement than just the factual representations in the Purchase Agreement. See, e.g., DONALD W. GLAZER, SCOTT FITZGIBBON & STEVEN O. WEISE, GLAZER AND FITZGIBBON ON LEGAL OPINIONS § 4.2.1, at 121 (3d ed. 2008) [hereinafter GLAZER & FITZGIBBON] (“Opinion preparers also sometimes base opinions on representations of the company in the agreement. Representations, however, often are framed not as statements of fact, which may be relied on to support an opinion, but as conclusions of law,
which may not.”).
45. Consistent with the Transactional Opinion, this opinion does not include: (1) an opinion that “the Company has the corporate power and authority to . . . ,” and (2) reference to the power of the
Company to “own and operate its assets.” See TRANSACTIONAL OPINION, supra note 3, at 8–9 n.18 (“Historically, the corporate power opinion included a reference to ‘authority’ in addition to ‘power.’ Because of concerns that a reference to ‘authority’ could lead to a more expansive interpretation of the ‘corporate power’ opinion, current practice appears to be moving away from including ‘authority.’ However, the ‘corporate power’ opinion is generally understood to have the same meaning whether or not ‘authority’ is included and, to the extent that the word ‘authority’ is included, it is generally understood to be limited to ‘corporate authority’ even without the modifier ‘corporate’ immediately preceding the word ‘authority.’ In addition, the corporate power opinion has historically included an express opinion that the subject corporation has the corporate power to own and operate its assets. Current practice seems to be evolving away from this form of opinion in favor of limiting the ‘corporate power’ opinion to the Company’s power to carry on its business as it is currently onducted.”
(citing the 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 44)).
46. The opinion on corporate power to “perform” covers both the obligations in the Transaction Documents that the Company is required to meet at closing and the obligations that the Company
is required to perform in the future. See 1998 TriBar Report, supra note 8, at 657−58 & n.139 (general discussion of obligations to be performed in the future). Opinion preparers must determine whether
the corporation law of the state in which the Company was incorporated or the Company’s Restated Charter or Bylaws prohibit the Company from performing its obligations under the Transaction Documents both at and after the closing. For example, is the Company agreeing to conduct a banking business that would not be permitted under its articles of incorporation? See, e.g., CAL. CORP. CODE § 202 (West 1990 & Supp. 2012). Back
In analyzing whether the Company has the corporate power to “perform its obligations,” opinion givers sometimes have concerns regarding circumstances that may arise in the future: for example, the law could change or the certificate of incorporation could be amended to prohibit future stock issuances
or sufficient authorized but unissued shares might not be available when Conversion Shares, Warrant Shares, and Warrant Conversion Shares are to be issued. Nevertheless, the opinion preparers are entitled to rely on customary practice that the opinion letter speaks only as of its date and thus may ignore possible changes in the law or subsequent amendments to the certificate of incorporation. See GLAZER & FITZGIBBON, supra note 41, § 2.2.1, at 572. In addition, the opinion preparers may rely
on the assumptions that in the Venture Opinion are stated expressly (Section B (“Assumptions”), paragraphs (e) and (f)) for the sufficiency of available common and preferred shares when Conversion Shares, Warrant Shares, and Warrant Conversion Shares are issued. Back
Finally, by covering “corporate action on the part of the Company,” the opinion by its terms makes clear that, in general, it is not covering authorizations or approvals that do not constitute corporate action but that are required by a law other than the applicable corporation law (i.e., usually the law of
the state in which the Company is incorporated). For example, the opinion does not cover board approval of the future filing of a registration statement under a registration rights agreement even though board approval of the filing (or at least signing of the registration statement by a majority
of directors) is required by the Securities Act. See 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 45 (“The phrase ‘duly authorized by all necessary corporate action on the part of the Company’ may be preferable to ‘duly authorized’ alone, as the latter might be construed to imply authorization under law other than the GCL or by a governmental regulatory body . . . , although the Committee does not believe that any such inference is justified or appropriate.”). However, if the Company is a
Delaware corporation and it may be subject to the requirements of section 2115 of the California Corporations Code (which provides for the application of specified provisions of California corporation law to certain internal affairs of foreign corporations that have a sufficient nexus to California to justify their application), CAL. CORP. CODE § 2115 (West 1990 & Supp. 2012), the Committee believes that a due authorization opinion in an opinion letter that covers California law and does not expressly limit the opinion’s coverage to the Delaware corporation law also addresses any authorization requirements
imposed by section 2115 on a “quasi-California” Delaware corporation. See 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 47–48 (“If [section 2115 applies], the opinion giver [of a duly authorized opinion] will need to be aware of the provisions of the Corporations Code specified in Section 2115 as possibly being applicable to the “quasi-foreign” corporation.”); CERTIFICATE OF INCORPORATION OF THE NATIONAL VENTURE CAPITAL ASSOCIATION iii–iv (rev. Aug. 2013), available at http://goo.gl/ >
VIjFz (under the “Model Legal Documents” tab) (for a legal analysis of the interaction between Delaware corporation law and section 2115); infra note 75 (for further discussion of the interaction of
Delaware corporation law and section 2115). That said, under customary practice the opinion giver may assume, without so stating, that the requirements for application of section 2115 have not been
met unless the opinion giver believes that assumption is not reliable given the apparent locus of the Company’s business or identity of its stockholders. Back
2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 46. As a matter of customary usage, therefore, “execution” means the signing of relevant documents by an authorized person, and “delivery” means the transmission of those documents to the appropriate parties at consummation of the transaction, thus completing these elements of contract formation. Under this customary usage, “execution” alone—without “delivery”—would not result in the formation of a contract. The Committee is cognizant of section 1933 of the California Code of Civil Procedure, CAL. CIV. PROC. CODE § 1933 (West 2007) (“The execution of an instrument is the subscribing and delivering it, with or without affixing a seal.”), but believes, as a matter of customary usage, that “executed,” standing alone in an opinion, merely means that appropriate persons have signed the agreement on behalf of the Company. See TRANSACTIONAL OPINION, supra note 3, at 9 n.19 (citing 2007 BUSINESS TRANSACTIONS
REPORT, supra note 6, at 45–48).
Closings today often are effected by an electronic exchange of signature pages. When the opinion preparers do not witness the physical execution of the signature pages, they are permitted, as a matter of customary practice, to assume, without so stating, that all signatures are genuine. See GLAZER& FITZGIBBON, supra note 41, § 4.3.3, at 152 (a partial listing of implied assumptions that need not be expressly stated under customary practice); see also supra note 34. In addition, customary practice permits the opinion preparers to assume, without so stating, that an electronic exchange of signature
pages, coupled with express or implied authorization to attach them to the relevant documents, is an appropriate procedure to constitute actual delivery. Some opinion preparers are not comfortable relying on customary practice, however, and instead obtain an officer’s certificate regarding execuion and delivery of the relevant documents and describe their reliance in the opinion letter as follows:
In rendering the opinion set forth in Section C “Opinions”), paragraph 3 concerning the Company’s
execution and delivery of the Transaction Documents, e have not necessarily observed their execution by the Company but have relied exclusively upon representations regarding the Company’s execution and delivery of the Transaction Documents made to us in a certificate and our review of copies, facsimiles or .pdf files of executed signature pages delivered to us by representatives of the Company or their agents.
51. See 1998 TriBar Report, supra note 8, at 648–49 (extended general discussion of the duly authorized opinion); 2008 TriBar Preferred Stock Report, supra note 8 (amplification regarding duly authorized opinions on preferred stock). Note that the duly authorized opinion confirms that the Company has the power under the corporation law of the state where the Company is incorporated and the Company’s charter documents to create stock with the rights, powers, and preferences of the shares in question. 2008 TriBar Preferred Stock Report, supra note 8, at 923–24; 2009 Venture Capital Report, supra note 2, at 171; see also 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 66–69 (extended
discussion of the duly authorized opinion as it relates to California corporations). For issues presented under Delaware law that California lawyers may not have the competence to advise on, see
supra note 12. See generally 2008 TriBar Preferred Stock Report, supra note 8, at 923 n.12 (“The applicable
state corporation statute may be the statute of the state in which the opinion preparers practice
or it may be the statute of another state, such as Delaware. Non-Delaware lawyers are usually willing to give the duly authorized opinion on preferred stock issued by Delaware corporations when difficult issues are not presented.”); C. Stephen Bigler & Jennifer Veet Barrett, Words that Matter: Considerations in Drafting Preferred Stock Provisions, BUS. L. TODAY (Jan. 2014), http://goo.gl/BkT58Z; C. Stephen Bigler & Jennifer Veet Barrett, Drafting a Mandatory Put Provision for Preferred Stock After
ThoughtWorks, BUS. L. TODAY ( Jan. 2012), http://goo.gl/7UTU93; MODEL LEGAL DOCUMENTS OF THE NATIONAL
VENTURE CAPITAL ASSOCIATION (2014), available at http://goo.gl/VIjFz (under the “Model Legal
Documents” tab) (complete set of venture capital documents under Delaware law updated as of
the date of publication of this Venture Opinion). Back
53. In Venture Financings in which a third-party opinion letter is given, investors routinely request an opinion that the outstanding securities of the Company are fully paid and nonassessable. As a matter of customary diligence, opinion preparers usually confirm that the Company has received the consideration required by the corporate action authorizing the issuance by obtaining an officer’s certificate. See 1998 TriBar Report, supra note 8, at 650–51 (extended discussion of the fully paid and nonassessable opinion); 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 72–74 (extended discussion of the fully paid and nonassessable opinion as it relates to California corporations); see also Section
E (“Certain Qualifications”), paragraph (8) below for reference to reliance in the opinion letter on such an officer’s certificate. Back
54. In the past, opinion letters in Venture Financings sometimes have covered three additional items:(a) the reservation of shares for future issuance (a “Reservation of Shares Opinion”), (b) the number
of outstanding stock options and the number of shares reserved for grant or issuance under stock option plans (an “Outstanding Options Opinion”), and (c) the absence of certain preemptive rights (a
“No Outstanding Preemptive Rights Opinion”). These opinions (whether taking the form of an opinion or a confirmation) have not been included in the Venture Opinion for the reasons that follow:
Reservation of Shares In Venture Financings, opinion givers in the past have stated that the Company has taken the action necessary to reserve the number of shares required to be issued under the Purchase Agreement, upon conversion of convertible securities and upon the exercise of options or warrants. Consistent with the conclusions of the 2007 Business Transactions Report, the Committee believes that such “reservation of shares” opinions should not be requested:
Although the Committee believes that the reservation of shares should be addressed only in the Company’s representations and warranties in the Purchase Agreement, if an opinion giver decides to provide
an opinion on this point, then it might give an opinion that the board of directors has adopted a resolution reserving a specified number of shares for issuance. See NVCA FORM, supra note 5, at 3 n.12. For
example, in Section A (“Documents Examined”) above, the following language could be included:
Resolutions adopted by the Board of Directors of the Company and copies of which are attached hereto as Exhibit A reserving (a) the Shares to be issued pursuant to the Purchase Agreement, (b) [the Warrant Shares to be issued upon exercise of the Warrants, (c)] the Conversion Shares [and Warrant Conversion Shares] to be issued upon conversion of the Shares [and Warrant Shares, respectively], and (d) shares of Common Stock of the Company for issuance under the Company’s [Stock Plan Name] (the “Resolutions”). Similarly, in Section C (“Opinions”), the following language could be included:
Likewise, even though sometimes given in the past, an opinion regarding the number of shares issuable upon exercise of outstanding options and reserved for future issuance under option plans
or pools ordinarily should not be requested. For an extended discussion, see 2009 Venture Capital Report, supra note 2, at 172–73. Compare NVCA FORM, supra note 5, at 3 n.10 (under Delaware law) (“Opinion recipients sometimes ask an opinion giver to state that, to the opinion giver’s knowledge, the Company has no outstanding options, warrants or other rights to acquire Company stock other than as disclosed in the Transaction Documents. Many law firms are unwilling to give this opinion because it constitutes negative assurance on a factual matter they rarely are in a position to confirm. When, however, the opinion is given, the opinion letter should describe what the opinion preparers have done to support it.”).
55. The Committee believes that an opinion recipient should not request either (1) a separate opinion to the effect that “the rights, preferences and privileges [of the stock being purchased in
the transaction] are as set forth in the Restated Charter,” or (2) a quasi-remedies opinion that provisions in the Restated Charter will be “enforceable.” See 2009 Venture Capital Report, supra note 2, at 170–72; 2008 TriBar Preferred Stock Report, supra note 8, at 924. Back
56. In Venture Financings in which a third-party opinion letter is given, investors routinely request an opinion that the securities they are purchasing are fully paid and nonassessable. See 1998 TriBar
Report, supra note 8, at 650 & n.136; 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 72–74. Because
many Venture Financings have historically involved a real-time exchange of checks or wire transfers,
stock certificates, signature pages of the Transaction Documents, and other closing documents
(such as the third-party opinion of Company counsel), a practice of expressly assuming in the opinion
letter that the Shares have been paid for in accordance with the terms of the Purchase Agreement has
evolved. In giving the opinion set forth in this sentence, the opinion preparers still must determine that
the consideration for the Shares called for by the Purchase Agreement is consistent with that set forth in the resolutions of the board authorizing the stock issuance and the corporation law of the state in which the Company was incorporated. Back
59. This opinion does not cover all documents defined as the Transaction Documents. The Voting Agreement is intentionally omitted. The Committee believes that an opinion of Company counsel regarding the enforceability of a voting agreement against the Company is of little or no value to the recipient and should not be requested. See 2009 Venture Capital Report, supra note 2, at 182–85. Moreover, the enforceability of some provisions typically contained in a voting agreement, particularly so-called “drag-along” provisions, is not free from doubt even as against the stockholders to
whom they apply (and whose obligations are not ordinarily covered by an opinion of Company counsel in a Venture Financing). Id. at 185. Other agreements ancillary to the sale of the securities in a Venture Financing (commercial agreements, intellectual property licenses, and “management rights letters”) are also not generally an appropriate subject of a third-party opinion. For an extended discussion, see 2009 Venture Capital Report, supra note 2, at 187–88. See also Section E (“Certain Qualifications”), paragraph 12. Back
60. The 2007 Remedies Report addresses the meaning and scope of this opinion. According to that report, the remedies opinion is customarily understood to mean that “(i) a contract has been formed, (ii) a remedy will be available in the event of a breach of the undertakings in the contract (or the undertakings will otherwise be given effect), and (iii) remedies in the contract will be given effect, unless, in the case of (ii) or (iii), expressly or implicitly excluded.” 2007 REMEDIES REPORT, supra note 6, at 3. In establishing whether a contract has been formed, the opinion preparers will need to confirm or assume the predicates of formation, many of which, as a matter of customary practice, they are permitted to assume without so stating (for example, the capacity of individuals) and others of which are covered in other opinions that typically accompany a remedies opinion, such as (in the case of parties who are entities) the opinions addressing power and due authorization.
See TRANSACTIONAL OPINION, supra note 3, at 11–12 n.23. As to what a remedies opinion does not mean, see supra note 55 (remedies opinion on the certificate of incorporation (Delaware) or the articles of incorporation (California) is not appropriate).
[T]his report . . . concludes that the long-standing supposed continental divide over the meaning and scope of the remedies opinion—the “New York view” that it covers “each and every” provision of a contract versus the “California view” that it covers only the “essential provisions”— should no longer be of concern in opinion practice. Instead, the focus should be on customary
practice. Customary practice comprises customary diligence (particularly the legal diligence customarily undertaken in giving a remedies opinion), customary competence, and customary usage (the customarily understood meaning of terms used in third-party legal opinions).
Giving a legal opinion in general—and giving an enforceability opinion in particular—requires that the opinion preparers conduct factual and legal due diligence. A good discussion of customary factual diligence cited by the 2007 Remedies Report can be found in Article II of the 1998 TriBar Report. 1998 TriBar Report, supra note 8, at 608–19. Customary legal diligence, addressed in Appendix 8 of the 2007 Remedies Report, begins with a review by competent opinion preparers of the agreement or agreements covered by the opinion. 2007 REMEDIES REPORT, supra note 6, app. 8. If a question arises about the enforceability of a particular provision, the opinion preparers must determine whether the opinion covers the issue. If it does, they must determine whether the issue can be resolved. If the
issue cannot be resolved, they should include an appropriate exception in the opinion. See 2007 REMEDIES REPORT, supra note 6, app. 8, at 7–8. Back
61. Absent express qualifications or assumptions, a remedies opinion covers the enforceability of the choice-of-law clause in each agreement covered by the opinion. See TriBar Remedies Opinion Report, supra note 8, at 1495 (“The remedies opinion addresses the enforceability of the provision in most agreements that chooses the law of a particular jurisdiction as the governing law.”). When California
law is chosen (i.e., an “inbound” choice of law), that choice is effective under California’s choice-of-law rules in most commercial transactions involving at least $250,000. CAL. CIV. CODE § 1646.5 (West 2004). However, consistent with the trend toward Delaware incorporation is a trend toward the selection of Delaware law as the law governing the stock purchase agreement and other transactional documents in a Venture Financing. An opinion giver faced with a request for a remedies opinion on agreements that choose another state’s law as their governing law must decide how to respond. Although the Committee notes that some opinion givers are of the view that no remedies opinion should be given when the documents in question select the law of a state other than California as the governing law, the Committee believes that, in general, practice “now greatly favors permitting the primary opinion giver to give an opinion to the effect that, if the law of the State of California were held to apply to the agreement, notwithstanding the choice of law of another jurisdiction, the agreement would be enforceable.” 2007 REMEDIES REPORT, supra note 6, app. 10, at B-1 (endnote 1); see also 2007 REMEDIES REPORT, supra note 6, app. 4, at 12 (also supporting the use of this so-called “as if ” approach). If such an opinion is given (assuming, for illustrative purposes, that the relevant Transaction Documents are governed by Delaware law), the lead-in to the enforceability opinion would be modified to read substantially as follows:
See also NVCA FORM, supra note 5, at 1 n.5. The Committee notes that the foregoing language differs slightly from the language recommended in the 2009 Venture Capital Report but no difference in meaning is intended. Rather, the additional sentence at the end is intended merely to provide further clarification of the meaning of an “as if ” remedies opinion. See 2009 Venture Capital Report, supra
note 2, at 167.
62. In the case of a “consents and approvals” opinion, the opinion preparers may rely on the qualifications in Section E (“Certain Qualifications”), which, among other things, exclude from the coverage
of the opinion securities laws and many other laws (Section E (“Certain Qualifications”), first paragraph, last two sentences). Back
64. The Committee has intentionally not included an exception for notice filings required by Regulation D under the Securities Act. Except for the “no registration” opinion (see opinion 9), the Venture Opinion does not cover securities laws. See infra note 78. The Venture Opinion expressly excludes coverage of securities laws (except for opinion 9), but that express exclusion would be implied even if not expressly stated. Compare NVCA FORM, supra note 5, at 2 n.8 (“Securities law approvals and filings are understood as a matter of customary practice not to be covered by this opinion unless referred to specifically. Some lawyers, however, choose to make this explicit by including [the articulated exception
regarding the notice filings pursuant to Regulation D of the Securities Act and the California Corporate Securities Law of 1968, as amended], or a statement indicating that the only opinion covering securities laws is [the no registration opinion]. Such an exclusion does not mean that other laws customarily understood to be excluded are covered.”).
65. The formulation of this opinion (and opinion 7) often refers to “performance of the Company’s obligations,” “the consummation of the transactions,” or “sale and issuance of the Shares [and Warrants]” under the Purchase Agreement. Although some bar association reports have taken the view that these formulations “may” be different (suggesting, of course, that they also may not be), the Committee believes that in most contexts they are different, and that “performance” adds a future element to the opinion when the Company has obligations to be performed after the closing, while “consummation” or “sale and issuance of the Shares [and Warrants]” covers only matters through the closing of the transaction. See GLAZER & FITZGIBBON, supra note 41, § 15.5, at 572; 1998 TriBar Report, supra note 8, at 662–63; supra note 63 (discusses similar issue regarding “consents and approvals” opinion 7). As it relates to opinion 8(d), coverage of “performance,” although common, requires the opinion preparers to consider compliance with many laws (i.e., those Covered Laws (as defined in Section E (“Certain Qualifications”) below) of either (or both) California and Delaware) because the Transaction Documents often require the Company to perform numerous obligations after the closing. In contrast to the “due authorization” opinion, which “only” requires a review of the Company’s constituent documents, minute books, and similar corporate records and the applicable corporation law (i.e., Delaware or California or both), opinion 8 (and opinion 7) covers many more potentially applicable laws. As discussed elsewhere (see, e.g., supra notes 41 & 48), to reduce the opinion preparers’ factual and legal diligence in a Venture Financing when legal budgets are limited and time is critical, opinion givers often use a narrower formulation that does not add a future element to the opinion. The formulation of the “no violation” opinion in the Venture Opinion focuses on the execution and delivery of the Transaction Documents and the performance of the obligations the Company is required to perform at the closing: the sale and issuance of the Shares at the closing and,
where applicable, the sale of the Warrants at the closing (or, the functional equivalent: “the consummation of the transactions”) under the Purchase Agreement. If the opinion giver agrees to give a “no violation” opinion on the Company’s performance in the future of specific obligations, it normally should address the Company’s performance of those obligations in a separate opinion (as is done with respect to securities laws in Section C (“Opinions”), paragraph 9). See 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 61–62.
Finally, if the opinion giver agrees to give an opinion on the “performance” of all of the Company’s obligations under the Transaction Documents, the opinion will cover not only “performance” by the Company of its obligations under the Transaction Documents as of the closing but also the performance of its obligations after the closing, for example, post-closing issuances of Shares and Warrants in installments pursuant to the Transaction Documents. The analysis required to support an opinion covering the performance of future obligations can be difficult. See generally GLAZER & FITZGIBBON,supra note 41, §§ 13.2.3, 16.3.7, at 548–52, 602–07; 1998 TriBar Report, supra note 8, at 657–58 (general discussion of coverage of obligations to be performed in the future); see also 2007 BUSINESS
TRANSACTIONS REPORT, supra note 6, at 48–56 (discussing the diligence required to deliver a “no violation” opinion that covers the performance of future obligations under the Transaction Documents). As the foregoing reports and treatise generally state, certain assumptions and limitations on coverage of the opinion are understood as a matter of customary practice to apply, whether or not expressly stated in the opinion. See GLAZER & FITZGIBBON, supra note 41, § 13.2.3, at 548–52 (opinion only covers facts at the time of delivery but, if an agreement obligates the Company to take actions in specified circumstances, an exception is necessary if those actions are prohibited; further, the opinion only covers required actions, not voluntary ones). Back
69. See generally TRANSACTIONAL OPINION, supra note 3, at 14 n.28. This opinion is limited to the law of the jurisdiction(s) whose law is expressly covered by the opinion letter. As a matter of customary usage, it is understood not to cover local laws and certain regulatory laws (such as securities laws). 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 55–57; 2007 REMEDIES REPORT, supra note 6, app. 10, at 13. In addition, customary usage limits the coverage of the opinion to laws a lawyer would reasonably recognize to apply to transactions of the type covered by the opinion and excludes from the coverage of the opinion laws, such as securities and tax laws, that even when applicable are
understood to be covered only when referred to expressly. 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 56 n.168; Principles, supra note 7. Consequently, although language stating that only laws “typically applicable” to transactions of the type addressed by the opinion letter is unnecessary, some lawyers include language to that effect in their opinion letters. To resolve any doubt as to the law covered by the opinion, the Venture Opinion uses the term “Covered Law” and defines it to incorporate the foregoing understandings. Finally, the “no violation” opinion should be understood to mean that neither the execution and delivery by the Company of the Transaction Documents nor sale and issuance of the Shares [and Warrants] under the Purchase Agreement will result in a fine, penalty, or other similar sanction against the Company under Covered Law. See 2007 BUSINESS TRANSACTIONS REPORT, supra note 6, at 55. The opinion does not cover the enforceability of the Transaction Documents. Rather, that is a matter covered by the remedies opinion in opinion 6. Back
71. In many Venture Financings, No Registration Opinions are requested and given with respect to the issuance of Common Stock (or other securities) upon conversion of a convertible security or the exercise of Warrants (as has been done above in opinion 9). A No Registration Opinion can be problematic to the extent it covers Warrant Shares, Conversion Shares, or Warrant Conversion Shares because further consideration may or may not be payable for the underlying shares when they are issued. Because the transaction to which the Venture Opinion is directed involves the issuance of
Warrants, the Venture Opinion adopts the approach described in a note to the NVCA Form, i.e., that an opinion on Shares issuable upon exercise of warrants (as well as options and other rights) may be given based on an express assumption that the warrants, options, or other rights were exercised and the underlying shares issued at the closing of the transaction. See NVCA FORM, supra note 5, at 4 n.16 (“When warrants, options or other rights to acquire Company stock are exercisable upon the payment of cash, the no registration opinion can raise difficult issues because the exemption under Section 3(a)(9) of the Securities Act would not be available (other than possibly if the warrants, options or other rights are exercised on a net exercise basis) and the availability of another exemption, such as under Section 4(2) of the Securities Act, would depend on the facts at the time of exercise. Accordingly, many firms will not give a no registration opinion on the issuance of shares upon the future exercise of warrants, options or other rights. Some firms, however, will give the opinion based on an express assumption that the warrants, options or other rights were exercised and the underlying shares issued at the closing [of the Venture Financing that is the subject of the opinion].”).
See NVCA FORM, supra note 5, at 3–4; see also No Registration Report, supra note 7, at 188 (“In cases where the securities being sold are convertible into Common Stock . . . some lawyers refer in the
opinion letter to the conditions of the Section 3(a)(9) exemption from registration, for example by expressly assuming that no commission or other remuneration will be paid or given directly or indirectly
for soliciting conversion. Others, regarding these conditions to be so well understood that they need not be stated or for other reasons, do not refer to these conditions.”). Back
75. Many of the opinions in the Venture Opinion will cover the Delaware General Corporation Law as a consequence of the issuer being a Delaware corporation. See 2009 Venture Capital Report, supra note 2, at 166. In particular, the following opinions, among others, will require the opinion preparers to consider the Delaware General Corporation Law: (i) corporate status in opinion 1, (ii) corporate power to perform each of the Transaction Documents in opinion 2, (iii) all necessary corporate action has been taken in opinion 3, (iv) the authorized and outstanding capitalization of the Company in opinion 4, (v) shares of common and preferred stock are duly authorized, validly issued, fully paid, and nonassessable in opinion 5; (vi) consents and approvals under the Delaware General Corporation Law in opinion 7, and (vii) no violation of the Restated Charter, Bylaws, or laws applicable to the Company in opinion 8. Under the internal affairs doctrine, which provides that the corporation law of the state in which a corporation is incorporated regulates the corporation’s internal affairs, the Delaware General Corporation Law will govern many of the matters covered by the opinions given in a Venture Financing. Section 2115 of the California Corporations Code (“Section 2115”), however, provides that specified provisions of California corporaion law apply to certain internal affairs of foreign corporations that have sufficient nexus to California to justify their application. CAL. CORP. CODE § 2115 (West 1990 & Supp. 2012). Generally, for a foreign corporation to be subject to Section 2115, more than half of its holders of voting securities must have addresses in California and the average of the property, sales, and payroll factors used in California state tax determinations applicable to a foreign corporation must exceed 50 percent. While the Delaware Supreme Court has held that the application of Section 2115 to a Delaware corporation is unconstitutional, see VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108 (Del. 2005), California has no definitive authority to the same effect. Opinion givers are therefore cautioned to consider the potential application of Section 2115 and its impact on the opinions in the Venture Opinion. See 2009 Venture Capital Report, supra note 2, at 166 n.8 (describes recent case law developments regarding Section 2115); supra note 48 (for further discussion of the interaction of Delaware corporation law and Section 2115).
84. See TRANSACTIONAL OPINION, supra note 3, at 18 n.39 (citing 2007 REMEDIES REPORT, supra note 6, app. 10, at B-22 to B-24 (endnote 20 discusses arbitration provisions)). The Committee notes that many recent judicial decisions have considered challenges to the enforceability of arbitration clauses. Both federal and California case law make clear that public policy strongly favors enforcement of arbitration agreements. In the past, California courts often held that particular arbitration clauses were unenforceable
because they were unconscionable. See, e.g., Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal. 4th 83, 87 (Cal. 2000); Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005). The Federal Arbitration Act generally provides that an agreement to arbitrate is enforceable, except on grounds that may exist for the revocation of any contract, such as unconscionability or fraud. In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the U.S. Supreme Court concluded that the Arbitration Act preempted state law where the unconscionability was based on the terms of an arbitration clause itself and, therefore, held that the Arbitration Act preempted the holding in Discover Bank. Subsequently, the U.S. Supreme Court held that where the pro-arbitration policy of the Arbitration Act conflicts with the enforcement of another federal law (such as the antitrust law) under the terms of a particular
arbitration agreement, the policies of the other law must give way so long as the other law does not otherwise provide. See, e.g., American Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013). Applying Concepcion, California courts have upheld arbitration clauses and have not allowed class arbitrations in the absence of an agreement permitting class arbitration. See Truly Nolen of Am. v. Superior Court, 208 Cal. App. 4th 487 (2012); see also Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (2013) (under the Arbitration Act, courts applying state unconscionability principles cannot mandate procedural rules that are inconsistent with fundamental attributes of arbitration; however, a court applying an unconscionability analysis may consider the value of benefits provided to employees by state statutes in determining whether a particular arbitral scheme provides an accessible, affordable process for resolving wage disputes); see also Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348 (2014) (class action waivers in labor contracts are enforceable due to preemption of state law public policy by the Arbitration Act; however, waivers of California’s Private Attorney General Act (“PAGA”), permitting aggrieved persons to bring actions to enforce civil penalties for state Labor Code violations, are unenforceable as a violation of public policy; and the Arbitration Act does not preempt state law that provides for unenforceability of waivers of the rights of aggrieved persons to bring court actions as deputized actors for the state under the PAGA). As a result of the U.S. Supreme Court decisions, the Committee believes that as a general rule opinion givers need not include an exception for the enforceability of arbitration clauses in agreements among sophisticated parties in Venture Financings. Nevertheless, many opinion givers are not comfortable giving opinions on the enforceability of arbitration clauses because they believe that: (1) the law is not completely settled,
(2) they do not closely follow developments in the law in this area, or (3) although arbitration clauses may be generally enforceable, they are unsure whether certain provisions of the arbitration clause are enforceable such that unenforceability of the particular provision might render the entire arbitration clause unenforceable because the unenforceable provision “permeates” the entire arbitration provision.
In the case of such uncertainty, opinion givers may consider including this qualification (and may find that in many cases opinion recipients are willing to accept it). Back
86. The 2009 Venture Capital Report provides two forms of qualification for the capitalization opinion: one form when the opinion giver maintains the Company’s stock records and a second form
when the Company or a third party maintains the Company’s stock records. See 2009 Venture Capital Report, supra note 2, at 168–69. Because opinion givers in many cases do not maintain the Company’s stock records, the Venture Opinion uses only the second form of qualification. If the opinion giver maintains the Company’s stock records, the first form of qualification may be appropriate and that qualification, modified to adopt the definitions and style of the Venture Opinion, is as follows:
88. 2007 REMEDIES REPORT, supra note 6, app. 10, at B-26 to B-31 (endnotes 23 and 25 discuss indemnities). Both the U.S. Securities and Exchange Commission and federal court decisions have
taken the position that corporate indemnification for liabilities arising under the Securities Act is against public policy. Such limitations may apply regardless of whether indemnification is permissible under applicable state laws. See, e.g., 2007 REMEDIES REPORT, supra note 6, app. 10, at B-31 (“The public policy against permitting one party to shift liability for breaches of the securities laws to another party, the conflicting judicial policies applicable to indemnities by buyers in securities purchase transactions, and the absence of decisive relevant case law make it difficult to render an opinion regarding the enforceability of such contractual provisions. Thus, it is customary practice to include an exception in a remedies opinion relating to the enforceability of those provisions.”).
The first bracketed language in the qualification may be deleted if Section E (“Certain Qualifications”), first paragraph, last sentence limits the coverage of securities laws to only Section C (“Opinions”),
paragraph 9 (the “no registration opinion”).
89. Some lawyers believe that an opinion regarding compliance by the directors, officers, or principal stockholders with their fiduciary duties is appropriate as a stand-alone opinion or is implicit in
the duly authorized opinion, the validly issued opinion (Section C (“Opinions”), paragraphs 4 and 5), or the enforceability opinion (Section C (“Opinions”), paragraph 6). The Committee believes that
such a belief is inconsistent with customary practice. Prior published opinion reports make clear that compliance with fiduciary duties is covered by an opinion letter only if addressed expressly
and that no such opinion should be implied. To avoid misunderstanding, some opinion givers may choose to state expressly that the opinions they are giving do not cover compliance with fiduciary duties. See 2009 Venture Capital Report, supra note 2, at 189; see also supra note 34. Back
90. Regarding voting agreements see supra note 59. If the Transaction Documents provide for a special mandatory conversion feature, often known as a “pay-to-play” provision, the opinion giver
should also consider whether a qualification is appropriate. See supra notes 57 & 75 (third paragraph). The analysis (and conclusion) may differ depending upon whether the Company is a California
or Delaware corporation. See 2009 Venture Capital Report, supra note 2, at 185–87. Back