Legality and Tax Opinions in Registered Offerings: Staff Legal Bulletin No. 19 (CF)
July 9, 2021
Division of Corporation Finance
Securities and Exchange Commission
Action: Publication of CF Staff Legal Bulletin
Date: October 14, 2011
Summary: This staff legal bulletin provides the views of the Division of Corporation Finance (the “Division”) regarding legality and tax opinions filed in connection with registered offerings of securities.
Supplementary Information: The statements in this legal bulletin represent the views of the Division. This legal bulletin is not a rule, regulation or statement of the Securities and Exchange Commission (the “Commission”). Further, the Commission has neither approved nor disapproved its content.
Contacts: For further information, please contact the Division's Office of Chief Counsel by calling (202) 551-3500 or by submitting a web-based request form at https://www.sec.gov/forms/corp_fin_interpretive.
I. Topics Discussed
The Division is issuing this legal bulletin to provide guidance on preparing legality and tax opinions filed in connection with registered offerings of securities. This legal bulletin discusses:
- the requirements for these opinions;
- the staff’s views regarding the required elements for these opinions and the staff’s practices in reviewing them; and
- the filing of consents to include these opinions in registration statements.
II. Legality Opinions
A. Requirements for Legality Opinions
1. Securities Act Requirement for Legality Opinions
Paragraph 23 of Schedule A to the Securities Act requires disclosure in the registration statement of “the names and addresses of counsel who have passed on the legality of the issue.” Paragraph 29 of Schedule A requires the filing of “a copy of the opinion or opinions of counsel in respect to the legality of the issue….”
2. Regulation S-K Requirement for Legality Opinions
Item 601(b)(5)(i) of Regulation S-K requires that all Securities Act filings include an opinion of counsel regarding the legality of the securities being offered and sold pursuant to the registration statement. As a general rule, counsel’s signed legality opinion must be filed as an exhibit to the registration statement before it becomes effective, and the opinion may not be subject to any unacceptable qualifications, conditions or assumptions, as discussed further below.
B. Substance of Legality Opinions
1. Required Elements
a. Shares of Capital Stock of U.S. Corporate Registrants
When a U.S. corporation issues shares of capital stock in a registered offering, the Commission’s rules require an opinion of counsel with respect to whether the securities will be, when sold:
- legally (or validly) issued;
- fully paid; and
The staff understands the phrase “legally issued” (the opinion may say “validly issued”) to mean that: (1) the registrant is validly existing under the laws of the jurisdiction in which it is incorporated, and the securities are duly authorized; (2) the actions required by applicable state corporation law to approve the issuance of the securities have been taken; and (3) the securities have been or will be issued in compliance with the requirements of that law, the registrant’s certificate or articles of incorporation and bylaws, and the resolutions approving the issuance of those securities. The staff understands the phrase “duly authorized” to mean that the corporation, under applicable law, its certificate or articles of incorporation and its bylaws, has the power to issue the shares and has taken all corporate actions necessary to create that power.2
The staff understands the phrase “fully paid” to mean that the consideration received by the registrant satisfies, in both type and amount, the requirements of applicable state corporation law, the registrant’s certificate or articles of incorporation and bylaws, the resolutions approving the issuance, and any other applicable agreement.3 Because the opinion must be filed before the registration statement becomes effective, the staff does not object if counsel assumes that the registrant will receive the required consideration.
The staff understands the term “non-assessable” to mean that the security holder is not liable, solely because of security holder status, for additional assessments or calls on the security by the registrant or its creditors.
If counsel does not opine that the securities will be legally issued, the Division will not accelerate the effectiveness of the registration statement. On the other hand, if counsel opines that the securities are not fully paid4 or are assessable, the effectiveness of the registration statement may be accelerated so long as the disclosures about partial payment or assessability are adequate.5
b. Equity Securities of Non-Corporate Registrants
When a limited liability company, limited partnership or statutory trust issues equity securities in a registered offering, the staff interprets the Commission’s rules to require the legal opinion to address whether:
- the securities will be, when sold, legally (or validly) issued; and
- purchasers of the securities will have any obligation to make payments to the registrant or its creditors (other than the purchase price for the securities) or contributions to the registrant or its creditors solely by reason of the purchasers' ownership of the securities.
For non-corporate registrants, the staff understands the phrase “legally issued” (the opinion may say “validly issued”) to mean that: (1) the registrant is validly existing6 under the laws of the jurisdiction in which it is organized (the “applicable statute”) and has the power under the applicable statute and its governing documents7 to create the specific securities issued; (2) the steps taken by the registrant to create and issue the securities satisfied any procedural requirements of the applicable statute and any applicable provision of the registrant’s governing documents; (3) the terms of the securities, and their issuance, do not violate the applicable statute or the registrant’s governing documents; and (4) the issuance has complied with any conditions on issuance in the resolution or other action approving the issuance, including any requirement of receipt of the kind or amount of consideration specified in the applicable statute, governing documents, resolution or other action adopted pursuant to the governing documents.8
The staff understands the corporation law term “non-assessable” to have no statutory equivalent in the case of equity securities of limited liability companies, limited partnerships or statutory trusts.9 Nevertheless, the legality opinion for these types of entities must address whether purchasers of securities of these entities will have any obligation to make payments to the registrant or its creditors (other than the purchase price for the securities) or contributions to the registrant or its creditors solely by reason of the purchasers' ownership of the securities. The staff understands an opinion that purchasers have no such obligation to mean that (1) upon completion of the offering, the registrant will have received the full consideration, in both type and amount, for the securities as called for by the applicable statute, the registrant’s governing documents, and any resolution or other action taken under those governing documents approving the issuance of the securities, and (2) under the applicable statute, the registrant’s governing documents and any resolution or other action taken under those governing documents approving the issuance of the securities, neither the registrant nor any of its creditors has the right to require the holders of the securities to pay it anything more solely because they own the securities.10
In the event that purchasers of these securities may be obligated to make future payments or contributions to the registrant solely because they own the securities, then the legality opinion may specifically exclude such potential payments to the registrant required by the registrant’s governing documents or any other agreements, and the registrant should describe the possibility of future payments or obligations in the registration statement.
Similarly, the staff understands the corporation law phrase “fully paid” to have no statutory equivalent in the case of equity securities of limited liability companies, limited partnerships or statutory trusts.11 Because both the “legally issued” opinion as well as the “no obligation to make payments” opinion address whether the registrant will have received the full consideration, in both type and amount, for the securities as called for by the applicable statute, the registrant’s governing documents, and any resolution or other action taken under those governing documents approving the issuance of the securities, the staff does not expect counsel to render a separate opinion as to whether equity securities issued by limited liability companies, limited partnerships or statutory trusts are “fully paid.”
c. Shares of Capital Stock of Foreign Corporate Registrants
When a foreign corporate registrant registers the offer and sale of shares of capital stock, foreign counsel, or U.S. counsel that is competent to opine on the applicable foreign law, must provide and file a legal opinion in the same manner as for a U.S. registrant.12 In the opinion, counsel must opine on the laws of the registrant’s jurisdiction of incorporation.13
When opining on shares of capital stock issued by a foreign corporate registrant, counsel must opine on whether such shares are “legally issued,” “fully paid” and “non-assessable,” as those terms are understood under U.S. law.14 For example, if the laws of the registrant’s jurisdiction do not use the term “non-assessable,” counsel must nevertheless opine as to whether an equity security is non-assessable based on the meaning of that term as understood under U.S. law. Counsel need not use the term “non-assessable,” however. If the term “non-assessable” has a meaning under the laws of the registrant’s jurisdiction that is different from the meaning of that term under U.S. law, the prospectus should disclose any material information with respect to that meaning, but the legality opinion is required to address only whether the shares of capital stock are non-assessable based on the meaning of that term under U.S. law. If the legality opinion also addresses whether the shares are non-assessable based on the meaning under the laws of the registrant’s jurisdiction, then the opinion should explain the meaning of that term under applicable foreign law and how the term “non-assessable” is being used in the opinion.
d. American Depositary Shares
U.S. investors frequently hold equity securities of foreign issuers in the form of American depositary shares (“ADSs”) as evidenced by American depositary receipts (“ADRs”). The ADRs and ADSs represent an ownership interest in a specified number of the foreign issuer’s equity securities that have been deposited with a depositary (“deposited securities”).15 Typically, the depositary is a U.S. bank or trust company. ADSs may be issued solely by the depositary (through an unsponsored facility) or jointly by the depositary and foreign issuer (through a sponsored facility), in either case, pursuant to the terms of a deposit agreement.
For purposes of Securities Act registration, ADSs are considered separate securities from the deposited securities, with each requiring separate registration or exemption from Securities Act registration. Form F-6 is the form used to register a public offering of ADSs, both for an unsponsored and sponsored facility, regardless of whether the offer and sale of the deposited securities are also being registered under the Securities Act. Form F-6 requires the registrant of the ADSs, which is represented by the depositary, to file an opinion of counsel regarding the legality of the ADSs. The legality opinion is required to state that, in the opinion of counsel, the ADSs will, when sold, be legally issued and will entitle their holders to the rights specified in the deposit agreement and the ADR.16 While counsel for the Form F-6 registrant may assume in the legality opinion regarding the ADSs that the deposited securities have been legally issued, counsel may not make any assumptions regarding the legality of the issuance of the ADSs.
When the Form F-6 is accompanied by a Securities Act registration statement for the offer and sale of the deposited securities, it is the responsibility of counsel to the foreign issuer to provide the opinion about the legality of the deposited securities as part of the separate registration statement. As a result, in this situation, there will be two legal opinions: one from the depositary’s counsel with respect to the ADSs on the Form F-6, and the other from the foreign issuer’s counsel with respect to the deposited securities on the accompanying registration statement.
e. Debt Securities and Guarantees
When a registrant – be it a corporation, limited liability company, limited partnership or statutory trust – issues debt securities, counsel must opine that the debt securities will be “binding obligations of the registrant.”17 When debt securities are guaranteed, counsel must also opine that each guarantee will be the binding obligation of its guarantor since the guarantee is a separate security. The staff does not object if the binding obligation opinion is subject to certain limited exceptions, such as bankruptcy and equitable principles limitations.18 Counsel need not expressly state in the opinion that the agreement or instrument pursuant to which the debt security or guarantee is issued, such as an indenture, is enforceable in accordance with its terms, although the opinion may include such language.
As debt securities and guarantees are contractual obligations, counsel must opine on the law of the jurisdiction governing the agreement or instrument pursuant to which the debt security or guarantee is issued to determine whether or not it is an enforceable contract and, therefore, a binding obligation.19 Thus, for debt issued under an indenture governed by U.S. law, a U.S. legal opinion will be required, even if the issuer is a foreign issuer.
The Division shares the generally accepted view that an opinion that a debt security or guarantee is a binding obligation of the registrant necessarily encompasses the opinion that the registrant is validly existing, has the power to create the obligation, and has taken the required steps to authorize entering into the obligation.20 Accordingly, while counsel’s filed opinion will refer to the law of the jurisdiction governing the agreement or instrument pursuant to which the debt security or guarantee is issued, counsel must also consider the law of the jurisdiction under which the registrant is organized in order to provide the binding obligation opinion. If the registrant is organized in a jurisdiction outside of primary counsel’s area of expertise, the registrant may engage local counsel to provide the opinion that the registrant is validly existing, has the power to create the obligation and has taken the required steps to authorize entering into the obligation under the law of the jurisdiction of organization. In turn, primary counsel may assume that the registrant is validly existing, has the power to create the obligation and has taken the required steps to authorize entering into the obligation under the law of the jurisdiction of organization. Both opinions must be filed as exhibits and comply with all applicable requirements. Both primary counsel and local counsel would be named in the registration statement as having prepared or certified an opinion for purposes of Item 509(b) of Regulation S-K and would be required to file consents pursuant to Securities Act Rule 436(a).21
f. Options, Warrants and Rights
When the registrant registers the offer and sale of options, warrants or rights to purchase securities, counsel must opine on the legality of the options, warrants or rights. As these securities are contractual obligations issued pursuant to agreements, counsel must opine 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, respectively.22 In addition, to the extent that the registrant registers the offer and sale of securities underlying the options, warrants or rights, the legal opinion also must opine on the legality of the underlying securities.23
g. Rights under Shareholder Rights Plans (“poison pills”)
A legality opinion is required for rights issued under a shareholder rights plan (also known as a “poison pill”) when a registration statement is filed for the common stock to which the rights relate. Rights issued under shareholder rights plans may pose some difficulty to the opinion giver because the determination of whether the rights will be binding in any given situation will be subject to the fiduciary duties of the board of directors and will depend on the specific facts and circumstances, which cannot be predicted as a matter of law.
Because there may be a significant level of uncertainty under state law that makes it difficult for counsel to render a “binding obligation” opinion, counsel’s opinion may acknowledge the uncertainties involved and discuss the possibility of a determination that would question the legality of the rights at a later date. Thus, the staff does not object if counsel includes language in the opinion to the effect that:
- the opinion does not address the determination a court of competent jurisdiction may make regarding whether the board of directors would be required to redeem or terminate, or take other action with respect to, the rights at some future time based on the facts and circumstances existing at that time;
- board members are assumed to have acted in a manner consistent with their fiduciary duties as required under applicable law in adopting the rights agreement; and
- the opinion addresses the rights and the rights agreement in their entirety, and it is not settled whether the invalidity of any particular provision of a rights agreement or of rights issued thereunder would result in invalidating such rights in their entirety.
When the registrant registers the offer and sale of units comprised of two or more underlying securities (as opposed to units of limited partnership interests or units of beneficial interest in a trust), the opinion must address the legality of each component of the unit, as well as the unit itself. For example, if the registrant registers the offer and sale of units comprised of common stock and warrants, the opinion should address the legality of the common stock, warrants and units.
The Division has traditionally asked for a binding obligation opinion with respect to the legality of the units. To the extent counsel believes the units should be treated in a similar fashion as shares of capital stock under applicable state law, the Division may permit an opinion of counsel that provides that the units are legally issued, fully paid and non-assessable.
2. Opinion Issues in Specific Transactions
a. Shelf Offerings
As a general rule, counsel’s signed legality opinion must be filed as an exhibit to the registration statement before it becomes effective, and it may not be subject to any unacceptable qualifications, conditions or assumptions. The Division permits an exception to this general rule for delayed shelf offerings under Securities Act Rule 415(a)(1)(x). Delayed offerings off the shelf specifically contemplate a delay between the date of effectiveness and any sale of securities. In this situation, and subject to the understanding that an appropriately unqualified opinion will be filed no later than the closing date of the offering of the securities covered by the registration statement,24 the legality opinion in the shelf registration statement at the time it becomes effective may include assumptions regarding the future issuance of securities that would generally not be acceptable in connection with a non-shelf offering.25 When this process is followed, however, counsel must nevertheless file a signed opinion prior to effectiveness, not an unsigned or draft form of opinion.
When a takedown occurs, the registrant must file an updated opinion as an exhibit to the registration statement, unless an appropriately unqualified opinion was filed at the time of effectiveness.26 The updated opinion cannot include the assumptions recited in the earlier opinion. The registrant can file this updated opinion either pursuant to Securities Act Rule 462(d), which provides for the immediate effectiveness of a post-effective amendment filed solely to add exhibits to a registration statement, or, to the extent such filings are incorporated by reference into the relevant registration statement, under cover of Form 8-K or Form 6-K.27
b. Medium-Term Note Programs
The staff accepts an alternative opinion practice in connection with medium-term note (“MTN”) programs, which enable issuers to offer debt securities on a continuous or episodic basis. In MTN programs, the issuer will typically file a registration statement that would permit sales of securities through a variety of methods, and then file a prospectus supplement for the MTN program, describing the range of possible terms for the securities and plans of distribution. The terms of the securities issued in a takedown and the method of distribution are subsequently set forth in a pricing supplement that is filed separately from the MTN prospectus supplement. The issuer may file a qualified opinion when the registration statement is filed and an updated and unqualified opinion when the takedown occurs, as described above.
In the alternative, an issuer may file an opinion that assumes that the securities to be offered and sold in the MTN program will be legally issued (a “forward-looking” opinion) with the MTN prospectus supplement and subsequently provide counsel’s appropriately unqualified opinion as to a specific takedown in the text of the pricing supplement itself,28 thereby avoiding a separate filing of an unqualified opinion as an exhibit to the registration statement or on Form 8-K or Form 6-K. Because counsel must consent to the inclusion of this appropriately unqualified opinion, the staff expects the forward-looking opinion filed with the MTN prospectus supplement to include counsel’s consent to its opinion being issued in a future pricing supplement and to being named as providing that opinion.29 The staff considers counsel to be responsible under Securities Act Section 11(a)(4) for a specific opinion attributed to it in a pricing supplement, unless and until the registrant files a Form 8-K stating that counsel’s consent has been withdrawn.30
c. Acquisition Shelf Transactions
A signed legality opinion must be filed as an exhibit to an acquisition shelf registration statement before it is declared effective. That opinion, however, 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. For example, counsel may assume that the number of shares to be offered and sold under the registration statement will not exceed the number of shares authorized in the registrant’s certificate or articles of incorporation, and that the board will adopt resolutions in appropriate form and content authorizing the issuance and sale of such shares.
For those situations where a post-effective amendment must be filed and declared effective before sales can be made, the staff expects the appropriately unqualified opinion to be filed as an exhibit to that post-effective amendment. For those situations where no post-effective amendment is otherwise required to be filed, the opinion may be filed by post-effective amendment or on Form 8-K or Form 6-K, to the extent such filings are incorporated by reference into the relevant registration statement.
d. Exchange Offers
In some cases, a registrant may be required under its state corporation law or applicable securities exchange listing requirement (or for foreign registrants, under the law of their home country) to obtain shareholder approval prior to issuing shares in an exchange offer. In these cases, if the registrant determines to seek shareholder approval at or after the time of the mailing of the Form S-4, the staff does not object if the legality opinion is subject to the assumption that the required shareholder approval for the exchange offer will be obtained. The staff expects the registrant to file an appropriately unqualified opinion by post-effective amendment or on Form 8-K or Form 6-K, to the extent such filings are incorporated by reference into the relevant registration statement, no later than the closing date of the exchange offer. The prospectus should disclose that shareholder approval is a condition to the issuance of shares in the exchange offer.
e. Reincorporation Before Closing of Offering
When a registrant seeks to reincorporate before closing an offering of securities, the legality opinion should address the laws of the registrant’s new jurisdiction of incorporation. The staff does not object if the legality opinion is 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. The staff expects the registrant to file an appropriately unqualified opinion by post-effective amendment or on Form 8-K or Form 6-K, to the extent such filings are incorporated by reference into the relevant registration statement, no later than the closing date of the offering. The prospectus should disclose that shareholder approval and subsequent effectiveness of the reincorporation are conditions to the issuance of shares in the offering.
f. Offerings Conditioned on Charter Amendments
A registrant may need to amend its certificate or articles of incorporation in order to increase the number of, or to create a class of, authorized shares of capital stock so as to be able to issue such shares in a registered offering. The staff does not object if the solicitation of proxies to seek shareholder approval of the charter amendment occurs contemporaneously with an offering of the securities that are the subject of the charter amendment. The form of charter amendment to be filed with the state authority may be filed as an exhibit to the registration statement.31 The staff does not object if the legality opinion submitted with the registration statement is subject to the assumptions that the required shareholder approval will be obtained and any necessary filings will be made in accordance with state law so that the amendment to the articles or certificate of incorporation becomes effective. The staff expects the registrant to file an appropriately unqualified opinion by post-effective amendment or on Form 8-K or Form 6-K, to the extent such filings are incorporated by reference into the relevant registration statement, no later than the closing date of the offering. The prospectus should disclose that shareholder approval and subsequent effectiveness of the charter amendment are conditions to the issuance of shares in the offering.
g. Securities Act Rule 462(b) Registration Statements
If the legality opinion in a registration statement contains a statement that any additional securities registered in reliance on Securities Act Rule 462(b) are also covered by such legality opinion, the registrant may incorporate by reference that legality opinion into a Rule 462(b) registration statement used to register the offer and sale of additional shares. Otherwise, the Rule 462(b) registration statement must include a new legality opinion.
h. Resale Registration Statements
For registration statements that register the resale of shares that are already outstanding (and not subject to conversion or exercise), the legality opinion should recognize that these securities are already outstanding and fully paid. In these situations, the opinion should state that the shares “are” – and not “will be” – legally issued, fully paid and non-assessable.
3. Additional Considerations
The staff considers it inappropriate for counsel to include in its opinion assumptions that are overly broad, that “assume away” the relevant issue or that assume any of the material facts underlying the opinion or any readily ascertainable facts. For example, counsel should not assume that the registrant:
- is legally incorporated;
- has sufficient authorized shares;
- is not in bankruptcy; or
- has taken all corporate actions necessary to authorize the issuance of the securities.
On the other hand, the staff generally believes certain assumptions or qualifications in legality opinions are necessary or may be appropriate,32 such as:
- the documents reviewed and relied upon in giving the opinion are true and correct copies of the original documents, and the signatures on such documents are genuine;
- the representations of officers and employees are correct as to questions of fact;
- the persons identified as officers are actually serving as such and that any certificates representing the securities will be properly executed by one or more such persons;
- the persons executing the documents examined by counsel have the legal capacity to execute such documents;
- the registration statement has been declared effective pursuant to the Securities Act, or the trust indenture has been qualified pursuant to the Trust Indenture Act;
- a pricing committee of the board of directors will have taken action necessary to set the sale price of the securities;33 and
- the investors will actually pay in full all amounts that they have agreed to pay to purchase the securities.
The assumptions outlined above are included as examples and are not intended to be comprehensive. The staff may ask counsel to explain and support supplementally any assumption that is unusual or appears to be overly broad or otherwise inappropriate.
b. Counsel’s Expertise
Counsel may opine on the laws of the states in which they are admitted to practice. In addition, the Division does not object to the view that counsel not admitted to practice in Delaware is generally deemed capable of opining on Delaware law.34 Also, an opinion of counsel with respect to a jurisdiction in which counsel is not admitted to practice is nevertheless acceptable so long as the opinion is not qualified as to jurisdiction. In other words, counsel cannot provide the appropriate opinion, but then exclude or “carve out” the law of the relevant jurisdiction or indicate that he or she is not qualified to opine on that law. For example, if counsel admitted to practice in Massachusetts writes a legality opinion under New York law for debt securities in which the indenture is governed by New York law, counsel may not indicate in the opinion that he or she is not admitted to practice in New York or is admitted to practice only in Massachusetts.
c. Qualifications Regarding the Scope of the Opinion
In drafting legality opinions for shares of capital stock issued by a Delaware corporation, it is customary practice for counsel to limit the legality opinion to the “Delaware General Corporation Law.” This reference to the “Delaware General Corporation Law” is an opinion drafting convention that is understood to include all applicable Delaware statutory provisions and reported judicial decisions interpreting these laws.35 In light of this understanding, where a legality opinion is limited to the Delaware General Corporation Law, it is not necessary for counsel to confirm to us in writing that they concur with the understanding that the reference and limitation to the “Delaware General Corporation Law” includes the statutory provisions and reported judicial decisions interpreting these laws. On the other hand, the staff does not accept an opinion that explicitly excludes consideration of such reported judicial decisions. This position applies to the corporation and other entity statutes of all jurisdictions.
The opinion requirement relates only to the legality of the registrant’s actions under state law, and not to federal regulatory compliance. Therefore, counsel may exclude federal law, including the federal securities laws, from the scope of the opinion as long as counsel clearly opines on the required state law matters. Counsel may also exclude state blue sky securities law matters.
d. Limitations on Reliance
Sometimes an opinion will state that the opinion is “only” or “solely” for the company or its board of directors or another counsel. The staff does not accept any limitation on reliance. Purchasers of the securities in the offering are entitled to rely on the opinion.
III. Tax Opinions
A. Requirements for Tax Opinions
1. Regulation S-K Requirements for Tax Opinions
Item 601(b)(8) of Regulation S-K requires opinions on tax matters for:
- filings on Form S-11;
- filings to which Securities Act Industry Guide 5 applies;36
- roll-up transactions; and
- other registered offerings where “the tax consequences are material to an investor and a representation as to tax consequences is set forth in the filing” (emphasis added).
Either legal counsel or an independent public or certified accountant (collectively, “counsel or accountant”) can give an Item 601(b)(8) tax opinion supporting the tax matters and consequences to shareholders described in the filing. A revenue ruling from the Internal Revenue Service (“IRS”) also will satisfy this requirement.37
2. When a Tax Consequence Is “Material” to Investors
Information is “material” if there is a substantial likelihood that a reasonable investor would consider the information to be important in deciding how to vote or make an investment decision or, put another way, to have significantly altered the total mix of available information.38 Examples of transactions generally involving material tax consequences include:
- mergers or exchange transactions where the registrant represents that the transaction is tax-free (e.g., spin-offs, stock for stock mergers); and
- transactions offering significant tax benefits or where the tax consequences are so unusual or complex that investors would need to have the benefit of an expert’s opinion to understand the tax consequences in order to make an informed investment decision (e.g., debt offerings with unusual original issue discount issues, certain rights offerings,39 limited partnership offerings, certain offerings by foreign issuers40).
On the other hand, when a registrant represents that an exchange offer or merger is a taxable transaction, no opinion of counsel or accountant is required. In such cases, while the registrant must provide accurate and complete disclosure concerning the tax consequences to investors, it does not have to expertize the disclosure by providing an opinion of counsel or accountant. If the registrant inserts tax disclosure and names counsel or accountant as the source of the discussion, a consent (but no opinion) is required.41 The registrant may nonetheless provide an opinion of counsel or accountant if it so chooses. If the registrant includes such an opinion, the opinion must comply with all applicable requirements.
B. Long-Form and Short-Form Tax Opinions
Item 601(b)(8) of Regulation S-K expressly allows counsel or accountant to render its opinion in either long or short form.
1. Long-Form Opinion
A “long-form” opinion is the full tax opinion filed as an exhibit and summarized in the prospectus. The opinion and the disclosure in the prospectus must be consistent.
2. Short-Form Opinion
In a “short-form” opinion, the tax disclosure in the prospectus serves as the tax opinion, and the opinion filed as Exhibit 8 to the registration statement confirms this. If the registrant elects to use a short-form opinion, the Exhibit 8 short-form opinion and the tax disclosure in the prospectus both must state clearly that the disclosure in the tax consequences section of the prospectus is the opinion of the named counsel or accountant, and that disclosure must clearly identify and articulate the opinion being rendered.
C. Substance of Tax Opinions
1. Material Federal Tax Consequences
In general, the tax opinion need address only material federal tax consequences. With respect to state tax consequences, the registrant may recommend in the prospectus that investors seek the advice of their tax counsel or advisor.42
It is acceptable for the heading and/or the introductory language in the prospectus’s tax disclosure to state that counsel or accountant is addressing “federal income tax consequences” or the “material federal income tax consequences.” The staff does not accept the use of the terms “certain” or “principal” in either the heading or the introductory language, however, because they raise a concern that the author of the opinion may be omitting a material tax consequence.
The tax opinion should address and express a conclusion for each material federal tax consequence,43 and the staff expects the opinion to identify the applicable Internal Revenue Code provision, regulation or revenue ruling. Regardless of whether the tax opinion is long or short form, it should:
- clearly identify each material tax consequence being opined upon;
- set forth the author’s opinion as to each identified tax item; and
- set forth the basis for the opinion.
If the author of the opinion is unable to opine on a material tax consequence, the opinion should:
- state this fact clearly;
- provide the reason for the author’s inability to opine on a material tax consequence (for example, the facts are currently unknown or the law is unclear); and
- discuss the possible alternatives and risks to investors of that tax consequence.
2. Description of the Law Is Not Sufficient
A description of the law does not satisfy the requirement to provide an opinion on the material tax consequences of the transaction. For example:
- “In the opinion of counsel, a partnership is taxed in the following manner.”
This statement describes the law without applying it to the specific facts of the transaction and is not acceptable as an opinion.
- “In the opinion of counsel, a preponderance of the tax consequences described is likely to occur.”
This statement fails to identify the specific tax consequences on which counsel is rendering an opinion and is not acceptable as an opinion.
- “In the opinion of counsel, the following discussion is a fair and accurate summary of the material tax consequences.”
This statement fails to identify the specific tax issue on which counsel or accountant is opining. The “fairness” or “accuracy” of the prospectus disclosure is not the appropriate subject of the opinion. Counsel or accountant must opine on the tax consequences of the offering, not the manner in which they are described in the prospectus.
3. Assumptions and Qualifications
Item 601(b)(8) of Regulation S-K permits the tax opinion to be conditioned or qualified, provided the conditions or qualifications are adequately described in the registration statement. Counsel or accountant must disclose in the opinion the assumptions upon which the opinion is based, which must be consistent with the proposed transaction. In addition, assumptions as to future facts or conduct, if limited and reasonable, are common and acceptable – for example, in an exchange offer, it is appropriate to assume that the exchange will be conducted in the manner described in the registration statement.
However, the opinion cannot assume the tax consequence at issue. The author of the opinion must opine on the material tax issue – for example, if the question is whether the registrant will be classified as a partnership for tax purposes, it is not acceptable merely to discuss the tax treatment of partnerships generally. It is also inappropriate to assume any legal conclusion underlying the opinion. If, for example, tax treatment depends upon the legal conclusion of whether the registrant is a partnership or whether the merger is a statutory merger, then the author of the opinion must opine on these matters as part of its tax opinion; they cannot be assumed. For example, it would not be an acceptable assumption for an opinion to state, “Assuming the registrant is a partnership, then the tax treatment is….” Finally, it is inappropriate for the tax opinion to assume facts relevant to the particular opinion that are known or readily ascertainable.
4. Opinions Subject to Uncertainty
If there is a lack of authority directly addressing the tax consequences of the transaction, conflicting authority or significant doubt about the tax consequences of the transaction, counsel or accountant may issue a “should” or “more likely than not” opinion to make clear that the opinion is subject to a degree of uncertainty. For example, “In the opinion of counsel, the registrant should be taxed as a partnership.” In such cases, the staff expects counsel or accountant to explain why it cannot give a “will” opinion and to describe the degree of uncertainty in the opinion.44 The registrant should provide risk factor and/or other appropriate disclosure setting forth the risks of uncertain tax treatment to investors.45 The opinion may also state which position the registrant intends to take if challenged by the IRS.
D. Additional Considerations
1. Limitations on Reliance
As with legality opinions, any language that states or implies that the tax opinion is “only” for the benefit of the board or the registrant, or that only the board or the registrant is entitled to rely on the opinion, is unacceptable. Investors are entitled to rely on the opinion expressed. Examples of inappropriate disclaimers include:
- “This discussion is being provided for informational purposes only”; and
- “Investors should seek and rely upon their own tax advisors as to the consequences of this transaction.”
It is common practice, however, for an opinion to recommend that investors consult their own tax advisors or counsel, particularly with respect to the personal tax consequences of the investment, which may vary for investors in different tax situations. The staff does not object to this practice so long as the recommendation does not disclaim reliance for tax matters on which counsel has opined.
In general, when a tax opinion is required, counsel or accountant must render the opinion (or the IRS must give its revenue ruling), and the registrant must file that opinion (or ruling) before the registration statement is declared effective.46 One exception to this general rule arises in the context of a merger transaction that will be treated as a tax-free reorganization,47 where the staff does not object if a tax opinion is not filed before effectiveness, provided:
- the merger agreement includes a non-waivable condition that the transaction will receive an opinion of counsel or accountant at closing that the merger be treated as a tax-free reorganization;
- the prospectus discusses the substance of the opinion that will be provided at closing; and
- the opinion is filed prior to closing as an exhibit in a post-effective amendment or, if the transaction is registered on Form S-3 or Form F-3, in a Form 8-K or Form 6-K that will be incorporated by reference into the filing.
3. Closing Tax Opinions as a Waivable Condition
Frequently, the consummation of a merger or similar transaction will be conditioned on the receipt of a favorable tax opinion by the registrant and/or the other party to the transaction at closing, and both parties may reserve the right to waive the condition. In such cases, the registrant must:
- file an executed opinion of counsel before effectiveness even though the merger agreement is conditioned upon the receipt of one or more favorable tax opinions at closing;48 and
- undertake to recirculate and resolicit if the condition is waived and the change in tax consequences is material.
Section 7 of the Securities Act requires that there be filed with the registration statement the written consent of “any person whose profession gives authority to a statement made by him, [who] is named as having prepared or certified any part of the registration statement.”49
All counsels providing legality or other legal opinions and all counsels and accountants providing tax opinions must consent to the prospectus discussion of such opinion, the reproduction of the opinion as an exhibit, and being named in the registration statement.50 Although counsel or accountant need not expressly admit in the consent that it is an expert within the meaning of Sections 7 and 11 of the Securities Act, it is inappropriate for either of them to deny that it is an expert within the meaning of Sections 7 and 11.51
1 Regulation S-K Item 601(b)(5)(i).
2 “Duly authorized” also confirms that the shares are part of the corporation’s authorized capital.
3 Although unusual, in some states and in offerings by foreign issuers in limited contexts, it is possible to issue shares as partly-paid or as installment stock, and thus, while validly issued, they are not fully paid. See, e.g., Delaware General Corporation Law Section 156. In the case of non-corporate entities, such as limited liability companies, this is more common, although unusual in the context of a public offering.
4 If the registrant is offering partly-paid stock (as some states permit, see note 3, above), then the opinion should state that the shares are partly paid and not fully paid.
5 For example, Section 164 of the Delaware General Corporation Law provides, in relevant part:
When any stockholder fails to pay any installment or call upon such stockholder’s stock which may have been properly demanded by the directors, at the time when such payment is due, the directors may collect the amount of any such installment or call or any balance thereof remaining unpaid, from the said stockholder by an action at law, or they shall sell at public sale such part of the shares of such delinquent stockholder as will pay all demands then due from such stockholder with interest and all incidental expenses, and shall transfer the shares so sold to the purchaser, who shall be entitled to a certificate therefor.
6 The staff understands a limited liability company to be “validly existing” if it has been duly formed (i.e., the steps taken to create it – typically the filing of a certificate of formation and, if required, adoption of an operating agreement by one or more members – satisfied statutory requirements on the date of formation) and has not been terminated due to the passage of time or a voluntary action to dissolve, wind up and terminate the existence of the limited liability company.
7 A limited liability company’s governing documents include its limited liability company agreement and its certificate of formation (or equivalent documents); a limited partnership’s governing documents include its limited partnership agreement and certificate of limited partnership (or equivalent documents); and a statutory trust’s governing documents include its trust agreement and certificate of trust (or equivalent documents).
8 Legality opinions relating to interests in limited liability companies, limited partnerships or statutory trusts sometimes include the opinion that such securities are “duly authorized.” Although the Division does not object to the inclusion of such an opinion, the Division considers “duly authorized,” as applied to entities other than corporations, to be covered by a “legally issued” opinion.
9 Many state corporation statutes use the term “non-assessable.” See, e.g., Delaware General Corporation Law Section 152 (“The capital stock so issued shall be deemed to be fully paid and nonassessable stock upon receipt by the corporation of such consideration….”); Model Business Corporation Act Section 6.21(d) (“When the corporation receives the consideration for which the board of directors authorized the issuance of shares, the shares issued therefor are fully paid and nonassessable.”). As non-assessability does not precisely comport with the legal framework governing the equity securities of a non-corporate registrant, such as a limited liability company, the form of opinion the staff requires with respect to equity securities issued by non-corporate registrants is intended to be the functional equivalent of the form of opinion required for shares of capital stock issued by corporations.
10 The Division will not object if a legality opinion for the issuance of equity securities of non-corporate registrants expressly uses the term “non-assessable,” as it would be read as having the same meaning as an opinion stating that neither the registrant nor any of its creditors has the right to require the holders of the securities to pay it anything more solely because they own the securities.
11 Many state corporation statutes use the term “fully paid.” See, e.g., Delaware General Corporation Law Section 152; Model Business Corporation Act Section 6.21(d); note 9, above.
12 For securities issued by a foreign government, Paragraph 12 of Schedule B of the Securities Act requires disclosure of “the names and addresses of counsel who have passed on the legality of the issue.” In addition, Paragraph 14 of Schedule B requires the filing of:
“[a]n agreement of the issuer to furnish a copy of the opinion or opinions of counsel in respect to the legality of the issue, with a translation, where necessary, into the English language. Such opinion shall set out in full all laws, decrees, ordinances, or other acts of Government that authorize the issue of the securities.”
The Division has interpreted these provisions to require that the registrant file the actual opinion of counsel.
13 We note that foreign issuers may receive legal opinions regarding compliance with local laws or addressing whether certain local laws apply to the issuer. These opinions are not legality opinions and therefore, if filed, should be filed as Exhibit 99 opinions, not Exhibit 5 opinions.
14 See Section II.B.1.b, above, for a discussion about the meaning of non-assessability in situations in which the governing law does not use that term, which may be helpful in guiding the formulation of an appropriate legality opinion under foreign law.
15 An ADR is the physical certificate that evidences ADSs, in much the same way a stock certificate evidences shares of stock. An ADS is the security that represents an ownership interest in deposited securities.
16 See Item 3(d) of Form F-6 (“An opinion of counsel as to the legality of the securities being registered, indicating whether they will when sold be legally issued, and entitle the holders thereof to the rights specified therein.”).
17 Item 601(b)(5)(i) of Regulation S-K.
18 The equitable principles limitation encompasses numerous potential defenses based on the lack of good faith, unfair dealing and unreasonable conduct of the party seeking enforcement, including concepts of coercion, duress, unconscionability, undue influence, laches and estoppel. The Division does not require that these potential defenses be identified in the opinion with particularity, but does not object if they are included in the express limitations of the opinion.
19 The opinion may not assume that the law of the jurisdiction governing the agreement or instrument pursuant to which the debt security is issued is the same as the law of the jurisdiction in which counsel is admitted to practice.
20 See TriBar Opinion Committee, Special Report of the TriBar Opinion Committee: The Remedies Opinion – Deciding When to Include Exceptions and Assumptions, 59 Bus. Law. 1483, n.22 (2004) (noting that “to give a remedies [binding obligation] opinion, the opinion preparers normally need to satisfy themselves that the agreement has been properly authorized and executed, even if a separate opinion is not rendered on those matters”). The TriBar Opinion Committee’s stated mission is to provide guidance on giving closing opinions to third parties in a manner that is fair to both the giver and the recipient. Its members currently are affiliated with the following organizations: Special Committee on Legal Opinions in Commercial Transactions, New York County Lawyers’ Association; Corporation Law Committee, New York City Bar; and Special Committee on Legal Opinions of the Business Law Section, New York State Bar Association. Members of the state bars of California, Delaware, Georgia, North Carolina, Pennsylvania, and Texas and of the Allegheny County (Pittsburgh, PA), Boston, Chicago, and District of Columbia Bar Associations are also members of the TriBar Opinion Committee.
21 Alternatively, pursuant to Securities Act Rule 436(f), if primary counsel is expressly relying on the local counsel’s opinion, the local counsel’s opinion would be filed as an exhibit, but the local counsel’s consent would not be needed and the local counsel would not be named in the registration statement as having prepared or certified an opinion for purposes of Item 509(b) of Regulation S-K. In this situation, primary counsel’s opinion must cover the law of the jurisdiction of organization and cannot assume valid existence, power to create the obligation, or due authorization. Primary counsel may note that its opinion as to these matters is subject to the same qualifications, assumptions and limitations as are set forth in the local counsel’s opinion.
22 The discussion in Section II.B.1.e, above, regarding how the binding obligation opinion can be provided for issuances of debt securities and guarantees when the registrant is organized in a jurisdiction outside of primary counsel’s area of expertise applies equally to issuances of options, warrants and rights.
23 This position is equally applicable with respect to convertible and exchangeable securities.
24 See Securities Act Rules CDI 212.05 [Aug. 14, 2009].
25 Such assumptions may include, for example, that the number of shares to be offered and sold under the registration statement will not exceed the number of shares authorized in the registrant’s certificate or articles of incorporation; that the board will have taken all actions, passed all resolutions, etc., necessary to authorize the issuance and sale of the securities; that the specific terms of the securities will have been determined in accordance with all board resolutions or other authorization requirements; and that all required state approvals will have been received (e.g., if the registrant is a state regulated utility).
26 This is required for every takedown on all shelf offerings, no matter how many or how frequently takedowns occur.
27 Forms 6-K are not automatically incorporated by reference into a registration statement. A foreign private issuer seeking to incorporate such filing should include a statement to that effect on the cover page of the Form 6-K.
28 For example, the form of opinion set forth in the pricing supplement could read as follows: “In the opinion of [Name of Counsel], as counsel to the Company, when the notes offered by this prospectus supplement have been executed and issued by the Company and authenticated by the trustee pursuant to the indenture, and delivered against payment as contemplated herein, such notes will be valid and binding obligations of the Company. This opinion is given as of the date hereof and is limited to Federal law, [jurisdiction governing the agreement or instrument pursuant to which the debt security is issued] and [jurisdiction of organization]. In addition, this opinion is subject to customary assumptions about the trustee’s authorization, execution and delivery of the indenture and the genuineness of signatures and to such counsel’s reliance on the Company and other sources as to certain factual matters, all as stated in the [forward-looking opinion filed with the MTN prospectus supplement, dated ____], which has been filed as exhibit no. _____ to the registration statement.” Such customary assumptions would not include any assumptions related to delayed offerings, such as those described in note 25, above.
29 For example, the consent could read as follows: “If a prospectus supplement relating to the offer and sale of any particular note or notes is prepared and filed by the Company with the Securities and Exchange Commission on a future date and the prospectus supplement contains our opinion, substantially in the form set forth below, this consent shall apply to our opinion and to the reference to us as providing such opinion.” The pricing supplement for the takedown would then include the text of counsel’s legality opinion, in substantially the form included in the opinion filed with the MTN prospectus supplement, see note 28, above.
30 This is one example of an acceptable alternative opinion practice. Counsel may contact the Division’s Office of Chief Counsel with other suggested alternatives that similarly result in the provision of appropriately unqualified legal opinions in connection with shelf takedowns.
31 Item 601(b)(3)(i) of Regulation S-K provides that, “Where it is impracticable for the registrant to file a charter amendment authorizing new securities with the appropriate state authority prior to the effective date of the registration statement registering such securities, the registrant may file as an exhibit to the registration statement the form of amendment to be filed with the state authority. In such a case, if material changes are made after the copy is filed, the registrant must also file the changed copy.”
32 Many assumptions are understood as a matter of customary practice to apply, whether or not stated, although it is acceptable if these assumptions are stated expressly. See, e.g., TriBar Opinion Committee, Third-Party “Closing” Opinions: A Report of the TriBar Opinion Committee, 53 Bus. Law. 592, § 2.3(a) at 615 (1998) (“1998 TriBar Report”).
33 This assumption is typically made when the registration statement is declared effective before pricing occurs, in reliance on Securities Act Rule 430A.
34 See 1998 TriBar Report, § 5.3 at 638-39.
35 See TriBar Opinion Committee, Third-Party Closing Opinions: Limited Liability Companies, 61 Bus. Law. 679, 681-82 (2006). This reference formerly also included applicable provisions of the Delaware Constitution, namely Article IX, Section 3, which provided that stock must be issued for cash, labor or property. In 2004, that section was repealed. As the Delaware Constitution no longer addresses stock issuances, it is no longer necessary, in the context of legality opinions, to confirm that a reference to the Delaware General Corporation Law encompasses the Delaware Constitution.
36 Securities Act Industry Guide 5 (available at http://www.sec.gov/about/forms/industryguides.pdf ) is a guide for preparing registration statements relating to interests in real estate limited partnerships.
37 An IRS revenue ruling may be substituted for a tax opinion only if it is a specific letter ruling addressed to the registrant and covers all of the material tax consequences of the proposed transaction. Accordingly, a general revenue ruling that does not address the specific facts of the proposed transaction would not be sufficient. Also, if there are material tax consequences other than those addressed by the IRS revenue ruling, counsel or accountant must opine as to those other consequences. The IRS revenue ruling must be filed but no consent is required because it is a public official statement within Section 7 of the Securities Act.
38 TSC Industries, Inc. v. Northway, 426 U.S. 438, 449 (1976).
39 The distribution of “poison pill” rights will not require the filing of a tax opinion, based on IRS Revenue Ruling 90-11 (Jan. 1990). In other rights offerings, however, where tax consequences are material – as where the registrant discloses that the transaction is tax-free – a tax opinion should be provided.
40 For example, a foreign issuer may include tax disclosure discussing the application of both foreign and U.S. tax provisions to U.S. purchasers. As a general matter, an opinion on the material foreign tax consequences would be required. However, if the discussion simply states that the transaction is taxable, a tax opinion would not be required.
41 For example, the registrant might provide a general discussion of the tax consequences associated with owning common stock and disclose that such “discussion” is based upon the “advice of counsel.” In such cases, the registrant must name such counsel and file a consent from such counsel.
42 In the case of foreign governments or foreign private issuers, if there are material foreign tax consequences, the staff expects the registrant to discuss in the prospectus whether investors will be subject to foreign tax as the result of their U.S. residence or status as an investor and to identify any tax treaties between the United States and the foreign country.
43 Item 12 to Industry Guide 5 contains useful guidance for tax opinions:
The function of the tax opinion is to inform investors of the tax consequences they can reasonably expect from an investment in the partnership. If, with respect to an intended tax benefit, counsel are unable to express an opinion that such benefit will be available because of uncertainty in the law or for other reasons, the opinion should so state and also disclose that there is or may be a material tax risk the particular benefit will be disallowed on audit. The tax effect of such disallowance should be explained. Each material risk of disallowance of an intended tax benefit should be disclosed in the tax opinion and under the appropriate heading in the prospectus.
44 For example, the registrant’s status as a passive foreign investment company (“PFIC”) may not be capable of determination before the effective date of the registration statement. In this situation, disclosure of potential status as a PFIC, and its tax consequences to investors, may be required in the registration statement.
45 For example, counsel or accountant could state that it is “possible but highly unlikely” that the IRS would disagree, but if it did, the exchange would be treated as a taxable exchange. Counsel or accountant could then explain how holders would be taxed in such circumstances.
46 See Section II.B.2.a, above, for a discussion of when opinions are required to be provided in shelf offerings, which applies equally to tax opinions. For example, to the extent that there are other material tax consequences of a specific takedown that are not addressed in the filed opinion, the registrant must file an updated opinion for each takedown pursuant to Rule 462(d) or on a Form 8-K or Form 6-K that will be incorporated by reference into the filing prior to closing.
47 As noted in Section III.A.2, above, in a merger transaction, a representation that the transaction will be tax free will most likely be material and therefore a tax opinion will be required.
48 Item 601(b)(8) of Regulation S-K provides no exception to the requirement that tax opinions be filed before effectiveness. We do not object to the approach described in Section III.D.2, above, when the condition that a favorable tax opinion be received at closing is non-waivable.
49 Section 7(a) of the Securities Act.
50 See Securities Act Rule 436. The one exception to the consent requirement is Rule 436(f), which addresses the situation in which the local counsel’s opinion is relied upon in the primary counsel’s opinion, as described in note 21, above.
51 See Securities Act Rules CDIs 233.01 and 233.02 [Nov. 26, 2008].