Company counsel typically delivers a legal opinion to the investors at the closing of a venture financing. The legal opinion in a venture financing generally covers the following:
- Due incorporation, valid existence, good standing, corporate power to carry on its business, and qualification to do business as a foreign corporation;
- Corporate power to execute, deliver and perform the transaction documents and issue and sell the shares;
- Capitalization of the company;
- Shares issued in the financing are validly issued;
- All corporate action has been taken;
- The transaction documents have been duly executed and are enforceable against the company;
- The transaction documents and issuance of shares do not conflict with the company’s charter documents, material contracts and laws applicable to the company;
- No governmental approvals are necessary;
- Exemption from the registration requirements under Federal securities laws; and
- Absence of litigation
Receiving a legal opinion comprises part of an investors’ due diligence, but is not a substitute for it. Delivering a legal opinion requires a certain level of work by company counsel, which increases legal fees. Although legal opinions are typically offered and delivered in financings involving a venture capital fund, they might not be volunteered or requested in a financing involving angel investors, or a typical bridge financing.
Most arguments among attorneys about legal opinions generally relate to the scope of the legal opinion and seem to revolve around what is customary and the amount of time required to deliver the opinion.
The American Bar Association has a collection of articles for attorneys regarding legal opinions. The Business Law Section of the State Bar of California has also published various Opinion Reports.