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What's An Opinion, Anyway?

Guest post by: Marijo McCarthy

Article Overview: A client called me recently with what she said might sound like an odd request. "I need your 'opinion,'" she said, "and it has to be in writing. Can you do that? And what does that mean, anyway?" After reassuring her that it was not an odd request and that not only could I do it, I would, I gave her an explanation...

What's An Opinion, Anyway?

A client called me recently with what she said might sound like an odd request.

The good news, she said, was that she was talking with a new banker about refinancing her company's term loan and revolving line of credit. The even better news was that her growing business can support increased debt.

The not-so-good news, though, was that while she has been strategizing on ways to thrive in this crushing economy, the standard rules of borrowing have tightened up. There are fewer shortcuts and more need for bankers to paper their files as they review the credit-worthiness of borrowers.

So, back to her "odd request."

"I need your 'opinion,'" she said, "and it has to be in writing. Can you do that? And what does that mean, anyway?"

After reassuring her that it was not an odd request and that not only could I do it, I would, I gave her an explanation…

There are as many forms of "opinions" as there are lawyers [well, not really, but that did sound impressive!]. In this instance, as my client read from the lender's proposal which she had just received, it turned out that she needed a "due organization, authorization, execution and delivery opinion," along with organizational documents, certificates of legal existence and good standing, votes of directors, and other items.

Fortunately, this client and I have a long relationship and I have her corporate record and stock book. [Coincidentally, it was her first financing over 10 years ago that brought us together. When she told her banker at the time that she did not have corporate counsel, he sent her my way and we've worked together ever since.]

So, compiling what she needs now is straightforward and this brings us to "the opinion."

Why, you may ask, does a bank want or need an opinion of counsel when a small business owner enters into a new loan? Well, it's a form of due diligence on the banker's part to ask a company's counsel to give an opinion, since in doing so, counsel must compile and review, at a minimum:

• Articles of Organization, with any amendments
• By-Laws
• Stockholder Agreement [if more than one owner], along with the stock ledger and stock book
• Annual meeting votes
• Any contracts which involve financing of any sort [for example, equipment leases].

Based upon review of these corporate documents, company counsel must then be prepared to state in writing, at a minimum, that:

• The Borrower is a duly organized and validly existing Massachusetts corporation and in good standing in the Commonwealth of Massachusetts.

• The Borrower has all requisite corporate power and authority to own and hold the properties it now purports to own and hold and to conduct business substantially as now conducted.

• The execution and delivery by the Borrower of the Loan Documents and the performance by the Borrower of its obligations thereunder have been duly authorized by all necessary corporate action on the part of the Borrower, including all necessary approval by its stockholders of the transaction contemplated therein, and such authorization is in conformity with the Articles of Organization and By-Laws of the Borrower.

The result, therefore, of an Opinion, is that the banker gets some reassurance of whether the client is duly organized and has the authority to execute and deliver the loan documents which evidence and secure the bank's loan to the company.

It may seem simple, but it requires due diligence on the part of the company's lawyer and therefore carries a certain weight with the company's banker.

All that said, are you ready for your next financing? Knowing what will be expected of you, in advance, in addition to financial statements, cash flows, projections and tax returns will go a long way towards giving you credibility with your banker.

If you are considering talking with your banker in 2012, get a head start on the preparation. Talk with your company counsel before your first meeting with your banker and compile a package of documents guaranteed to show your professionalism at a time when it will count with your banker.

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Article Tags: authorization, banker, corporation, delivery, due organization, execution, layers, legal opinion



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