CHAPTER 15.03. Delaware Entity Opinions

• Jurisdiction: United States

15.03. Delaware Entity Opinions

In an opinion letter for a typical real estate financing transaction, the opinion giver is usually asked to opine with respect to the borrower's creation, existence, and current status as a business entity under the laws of the jurisdiction where the borrower is organized. While it is beyond the scope of this chapter to address such opinions in any detail, the following observations are offered for some general guidance, particularly as to the opinions or assumptions that are the necessary building blocks for issuing a remedies opinion.⁶⁵

[1] Status

In most real estate financing transactions where the opinion giver is acting as local counsel with respect to the transaction documents (as opposed to lead counsel with respect to the borrower itself or as local counsel giving entity opinions where the borrower is a Delaware entity), it is unnecessary to opine about initial filings of documents with public authorities to create the borrower entity (e.g., a duly formed opinion) or the initial organizational matters relating to events and circumstances at the time the entity was formed (e.g., a duly organized opinion), as opposed to its current existence.⁶⁶

However, when the Delaware lawyer is acting as lead counsel for the borrower, the lawyer is usually requested to give an opinion as to the borrower's status where the borrower is an entity created under Delaware law. This opinion typically includes three components: the borrower has been formed, incorporated, or otherwise created de jure; the borrower validly exists on the date of the opinion; and the borrower is in good standing under the applicable requirements of the Delaware Secretary of State. An example of a due formation opinion is:

Borrower has been duly formed and is validly existing and in good standing as a limited liability company under the Delaware Uniform Limited Liability Company Act, 6 Del. C. §18-101, et seq.

The first component is the initial creation of the borrower under Delaware law. For example, a corporation will have been incorporated by the filing of a certificate of incorporation.⁶⁷ A limited liability company will have been formed by the filing of a certificate of formation. A limited partnership will have been formed by the filing of a certificate of limited partnership. In each case, the opinion giver needs to check with the Delaware Secretary of State for the initial filing document in order to determine that the document and the filing comply with the requirements of Delaware law.

The "validly existing" opinion also goes beyond that initial creation filing to opine that, as of the date of the opinion, the borrower still exists in a "valid" way. In other words, the opinion giver opines that the borrower has not dissolved, consolidated, or merged with or into another entity. Accordingly, the opinion giver must check with the Delaware Secretary of State for all other filings relating to the borrower to make sure no such event has occurred in the life of the borrower. The constituent docu-ments⁶⁸ of the borrower also must be examined to determine whether the borrower has a limited duration (often the case for limited partnerships). The constituent documents may also identify circumstances under which the borrower can be dissolved by the action of its owners (often the case for limited partnerships). To support its opinion, the opinion giver may obtain from the borrower a certificate stating that the borrower has not dissolved, its owners have not taken any action to dissolve the borrower, and no proceeding for involuntary dissolution has been initiated.⁶⁹

In addition, certain events can occur during the life of the borrower that result in the dissolution of the borrower by operation of law. In a partnership, limited partnership, or limited liability company being treated as a partnership for income tax purposes, prior to changes to the Tax Code in 2017, an assignment of more than 50 percent of the interests of the owners could effect a dissolution for federal income tax purposes.⁷⁰ Of course, the dissolution of a general partnership, limited partnership, or limited liability company does not terminate the borrower, absent a provision to the contrary in its constituent documents. Rather, the borrower continues to exist during a winding up of its affairs.⁷¹ The borrower may therefore continue to validly exist even after dissolution but before its affairs have been wound up. On the other hand, the occurrence of dissolution frequently limits the ability of the borrower to continue certain undertakings, as its activities are then limited to winding up its affairs. Moreover, the constituent documents or applicable laws may direct one of the owners or some other person to be responsible for the winding up, thereby limiting the scope of the authority of the owners.⁷²

For purposes of most of the opinions discussed in this section, the opinion giver may confine the opinion to those constituent documents known to and reviewed by the opinion giver. Otherwise, the opinion giver will want a certificate from the borrower specifically identifying the constituent documents being reviewed for purposes of the opinions and certifying that they have not been amended.

Although the "good standing" of the borrower will have different meanings in different jurisdictions, in Delaware, good standing relates to the status of the borrower's payment of applicable taxes or other fees and not directly to the validity of its existence or its due organization.⁷³ The opinion giver should obtain from the Delaware Secretary of State a certificate of good standing, which will be issued as of a particular date. Because of the nature of the good standing certificate and its source, this only applies to those types of business entities that have made a filing...