What is the Value of Legal Opinions in Reverse Mergers?

In some reverse merger transactions attorneys resist giving traditional legal opinions. Or in other cases, in particular in Chinese reverse mergers, getting opinions that have any value requires multiple attorneys in multiple jurisdictions to opine (in one recent transaction our client sought an opinion from a British Virgin Islands attorney, another in Hong Kong and another in the PRC). Sometimes the shell’s lawyer feels he or she has not represented the company long enough to opine. In most deals, however, both the private company’s counsel and the shell’s counsel give legal opinions to each other and, if a placement agent and/or investor is also involved, to them as well. Why are legal opinions important? Are they?

Simple answer: they are important. But they are not necessarily essential to get a deal done. Sometimes, for example, attorneys agree that neither side will give an opinion. There are several reasons opinions matter. First, an attorney providing a legal opinion that something is the case is more likely to be truly sure as to that matter. A company may provide a representation in an agreement that, for example, it has XX shares outstanding, but when the lawyer gives an opinion to that effect, he or she will carefully check the stock records or information from a transfer agent to be absolutely sure. Would he do that if he wasn’t giving an opinion? Many will but not all. At a minimum, smart lawyers impress on their client the importance of ensuring that each representation they make is in fact true.

The second, probably more obvious reason that opinions matter is that the recipient of the opinion holds an insurance policy. If it turns out the opinion is wrong, the attorney can be sued. Without the opinion generally only the company could face an action, not the attorney absent alleged fraud or other wrongdoing.

Each transaction is different and there may be valid reasons (cost is sometimes one of them) to complete a deal without opinions. Just make sure you work with your counsel to understand the risks if you go without one.

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