Legality Opinion in Registered Offerings - Assumptions Prohibited by Staff Legal Bulletin No. 19 (Bad Sample Opinion of Clifford Chance LLP)

A. Legality Opinions are required in Registered Offerings

1. Securities Act 

Paragraph 23 of Schedule A to the Securities Act requires disclosure in the registration statement of “the names and addresses of counsel who have passed on the legality of the issue.” Paragraph 29 of Schedule A requires the filing of “a copy of the opinion or opinions of counsel in respect to the legality of the issue….”

2. Regulation S-K 

Item 601(b)(5)(i) of Regulation S-K requires that all Securities Act filings include an opinion of counsel regarding the legality of the securities being offered and sold pursuant to the registration statement. As a general rule, counsel’s signed legality opinion must be filed as an exhibit to the registration statement before it becomes effective, and the opinion may not be subject to any unacceptable qualifications, conditions or assumptions.

When a U.S. corporation issues shares of capital stock in a registered offering, the Regulation S-K Item 601(b)(5)(i) requires an opinion of counsel with respect to whether the securities will be, when sold:

• legally (or validly) issued;
   
• fully paid; and
   
• non-assessable.

B. Commonly Neglected Rule Check - SLB No. 19

II.B.2.a of SLB No. 19 provides that as a general rule, counsel’s signed legality opinion must be filed as an exhibit to the registration statement before it becomes effective, and it may not be subject to any unacceptable qualifications, conditions or assumptions. The Division (of CorpFin) permits an exception to this general rule for delayed shelf offerings under Securities Act Rule 415(a)(1)(x). Delayed offerings off the shelf specifically contemplate a delay between the date of effectiveness and any sale of securities. In this situation, and subject to the understanding that an appropriately unqualified opinion will be filed no later than the closing date of the offering of the securities covered by the registration statement, the legality opinion in the shelf registration statement at the time it becomes effective may include assumptions regarding the future issuance of securities that would generally not be acceptable in connection with a non-shelf offering....When a takedown occurs, the registrant must file an updated opinion as an exhibit to the registration statement, unless an appropriately unqualified opinion was filed at the time of effectiveness. The updated opinion cannot include the assumptions recited in the earlier opinion. The registrant can file this updated opinion either pursuant to Securities Act Rule 462(d), which provides for the immediate effectiveness of a post-effective amendment filed solely to add exhibits to a registration statement, or, to the extent such filings are incorporated by reference into the relevant registration statement, under cover of Form 8-K or Form 6-K.

(https://www.sec.gov/interps/legal/cfslb19.htm#sdfootnote1sym)  

C. Big Name Law Firm Filing a Bad Opinion

The SEC staff considers it inappropriate for counsel to include in its opinion assumptions that are overly broad, that “assume away” the relevant issue or that assume any of the material facts underlying the opinion or any readily ascertainable facts. For example, counsel should not assume that the registrant:

• is legally incorporated;
   
• has sufficient authorized shares;
   
• is not in bankruptcy; or
   
• has taken all corporate actions necessary to authorize the issuance of the securities.

In its legality opinion for the Automatic Shelf Registration of Nielsen N.V. (NLSN) filed on March 5, 2015 as Exhibit 5.1 on Form 8-K, Clifford Chance LLP, one of the largest law firms in the world, made the following assumptions among others, which directly violates the staff's guidance under SLB No. 19 and eviscerates the whole purpose of the legality opinion, that is, opine on the legal and valid issuance of the subject securities.

"III.

Assumptions

In examining and in describing the documents listed above and in giving this opinion we have assumed:

(i)	that the General Meeting and the Board have each taken all necessary corporate action to authorize and approve the issuance of the Shares;

(ii)

that the Shares have been validly issued and delivered and an amount at least equal to the nominal value of such Shares has been duly paid to the Company in accordance with the subscription or issue agreement pursuant to which such Shares were issued;" (https://www.sec.gov/Archives/edgar/data/1492633/000119312515078865/d884095dex51.htm)