Company Legal Opinion - Explained
What is the Legal Opinion Required in an Equity Funding Deal?
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What is the Company Legal Opinion?
As part of the funding process (particularly the due diligence process), investors will require that the attorney for the startup venture deliver a legal opinion concerning certain organization and governance requirements. This opinion letter allows for counsel to make certifications regarding aspects that may or may not be included in the stock purchase agreement. This also allows for an additional level of protection from the counsels professional liability insurance.
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What is Covered in the Legal Opinion?
The counsel legal opinion generally covers the following certifications:
- Incorporation - The company is validly incorporated and in good standing in the state of incorporation.
- Registration - The corporation is registered as a foreign entity in jurisdictions where it is not registered and has authority to carry on business in those jurisdictions.
- Authority - The corporation, through its agents, has the authority to carry out the subject funding transaction, such authority is authorized in the governing documents, and the governance procedures necessary to carry out such transaction has been completed.
- Capital Structure - The representations made regarding the capital structure structure and total capitalization is accurate.
- Issuance of Shares - The shares sold in the transaction have been appropriately issued pursuant to state law and corporate governance procedure.
- Corporate Action - The individuals acting on behalf of the corporation are duly authorized.
- Documentation - The individuals executing the documents on behalf of the company have authority to do so and to effectively bind the company in the subject transaction.
- Governmental Approval - The stated transaction, as completed, does not conflict with state or government laws (or require government approval).
- Federal Registration - The company is exempt from registration under federal and state securities laws.
- Litigation - All matters of litigation either initiated by, contemplated by, initiated against, or threatened against the corporation have been disclosed.
Legal opinions are less common in seed funding transaction involving angel investors. It is universally expected in deals involving venture capitalists. The expectation of the legal opinion letter will vary depending upon the size and nature of the deal.
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