The Delaware Court of Chancery published a magnum opus a few days ago that should be required reading for all lawyers who prepare formal legal opinion letters for clients–and whose behavior is subject to review by the Delaware courts.

In Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-VCL (Del. Ch. Nov. 12, 2021), Delaware’s court of equity reviewed in extensive detail the factual background and multi-faceted context within which a large non-Delaware firm provided a formal legal opinion letter on a complex, substantive issue of Delaware law, relating to the existence of a “material adverse effect” (MAE). Importantly, the largest Delaware-based law firm and the Delaware office of one of the nation’s largest law firms refused to provide the requested opinion (with one firm refusing to do so based on a policy of not providing any formal MAE opinion letters.) The Court contrasted the opinion given on a nuanced topic of evolving Delaware law, which depends on a fact-intensive analysis, with a “third-party closing opinion on a routine issue….” Slip op. at 146.

The Court’s thorough analysis in a book-length 194-page opinion referred to the formal legal opinion as “contrived”, unexplained, and a “simulacrum” of a legal opinion. It was given at the request of a major public-company client even though the opinion–which was a condition, based on a limited partnership agreement, to effect a transaction with a controlling party–should not have been given. The result of the Court’s decision was a judgment of over $690 million in favor of the minority unitholders of the master limited partnership involved.

For purposes of this short blog post, I’ll just provide a few bullet points that I hope will entice readers to review carefully the entire opinion hyperlinked above:

  • When parties to a contract provide that a legal opinion letter is necessary to satisfy a condition precedent, that opinion must be given in good faith. See Slip op. at 112-113 and n.16.
  • An opinion giver cannot render an opinion in good faith if the opinion does not “fulfill its basic function.” Id. at 113.
  • That requirement includes the premise that the “opinion giver must have competence in the particular area of law.” Id.
  • The Court explained that an opinion giver “cannot act in good faith by relying on information known to be untrue or which has been provided under circumstances that would make reliance unreasonable.” Id. at 115 and n 19.
  • Notably, the court reasoned that an opinion giver could not establish good faith by relying: “… on factual representations that effectively establish the legal conclusion being expressed.” Id. (citation omitted.)
  • The Court amplified its reasoning by observing that: “If the factual representations are ‘tantamount to the legal conclusions being expressed,’ then the opinion giver is regurgitating facts, not giving an opinion in good faith.” Id. (citation omitted.)
  • Although an opinion giver may establish the factual predicate for an opinion by making assumptions that certain facts are true, the Court cautioned that: “If an assumption or a set of assumptions effectively establishes the legal conclusion being expressed, then the opinion giver cannot properly rely on those assumptions , as doing so vitiates the opinion.” Id. (citations omitted.)