Exhibit (12)
Seward & Kissel llp ONE BATTERY PARK PLAZA NEW YORK, NEW YORK 10004 | ||
WRITER'S DIRECT DIAL
| TELEPHONE: (212) 574-1200 FACSIMILE: (212) 480-8421 WWW.SEWKIS.COM | 901 K STREET, NW WASHINGTON, D.C. 20001 TELEPHONE: (202) 737-8833 FACSIMILE: (202) 737-5184 |
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| [ ], 2021 |
AB FlexFee™ Large Cap Growth Portfolio — AB Cap Fund, Inc.
1345 Avenue of the Americas
New York, New York 10105
AB Large Cap Growth Fund, Inc.
1345 Avenue of the Americas
New York, New York 10105
| Re: | Acquisition of the Assets and Assumption of the Liabilities of AB FlexFee™ Large Cap Growth Portfolio — AB Cap Fund, Inc. by AB Large Cap Growth Fund, Inc. |
Ladies and Gentlemen:
I. Introduction
We have acted as counsel to AB FlexFee™ Large Cap Growth Portfolio (the “Target”), a series of AB Cap Fund, Inc., a Maryland corporation, and AB Large Cap Growth Fund, Inc., a Maryland corporation (the “Acquirer”), in connection with the Acquisition provided for in the Agreement and Plan of Acquisition and Termination among the Target, the Acquirer and certain other parties, dated as of [•], 2021 (the “Plan”). Pursuant to Section 8(e) of the Plan, Target and Acquirer have requested our opinion as to certain of the United States federal income tax consequences to Acquirer, Target and the shareholders of Target (“Target Shareholders”) in connection with the Acquisition. Each capitalized term not defined herein has the meaning ascribed to that term in the Plan.
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II. Relevant Facts
Target is a series of a registered, open-end management investment company under the Investment Company Act of 1940, as amended (the “Act”). Acquirer is a registered, open-end management investment company under the Act.
The Plan and the Acquisition have been approved by the Board of Directors of Acquirer and the Board of Directors of Target. The terms and conditions of the Acquisition are set forth in the Plan.
Pursuant to the Plan, Target will transfer all of its Assets to Acquirer in exchange for shares (including fractional shares) of Acquirer (“Acquirer Shares”) and the assumption by Acquirer of all the Liabilities of Target existing at the Effective Time of the Acquisition. At the Closing Date or as soon as reasonably practicable thereafter, Target will liquidate and distribute all of the Acquirer Shares that it received in connection with the Acquisition to those then former Target Shareholders in exchange for all of the then outstanding shares of Target (“Target Shares”). Upon completion of the Acquisition, each such former Target Shareholder will be the owner of full and fractional Acquirer Shares equal in net asset value as of the Closing Date to the net asset value of the Target Shares such shareholder held prior to the Acquisition. The Target and the Acquirer will pay the expenses relating to the Acquisition.
The stated investment objective of both Acquirer and Target is long-term growth of capital In order to accomplish this objective, the Acquirer and the Target invest in equity securities of a limited number of large, carefully selected, high-quality U.S. companies selected by the Adviser for their growth potential within various market sectors. The Acquirer and the Target both emphasize investments in large, seasoned companies. Under normal circumstances, both Acquirer and Target will invest at least 80% of their net assets in common stocks of large-capitalization companies. The Target and the Acquirer also have identical top 10 holdings.
In rendering the opinions set forth below, we have examined the Registration Statement on Form N-14 of Acquirer relating to the Acquisition and such other documents and materials as we have deemed relevant. For purposes of rendering our opinions, we have relied exclusively, as to factual matters, upon the statements made in that Registration Statement and, with your approval, upon the following assumptions the correctness of each of which have been verified (or appropriately represented) to us by officers of Target and Acquirer:
(1) Target is a “fund” (as defined in Section 851(g)(2) of the United States Internal Revenue Code of 1986, as amended (the “Code”)). Each of Target and Acquirer: (a) has qualified for treatment as a regulated investment company under Part I of Subchapter M of Subtitle A, Chapter 1, of the Code (a “RIC”) for each taxable year since the commencement of its operations and qualifies for treatment as a RIC during its current taxable year which includes the Effective Time; (b) will invest its assets at all times through the Effective Time in a manner that ensures compliance with the foregoing; and (c) has no earnings and profits accumulated in any taxable year in which it did not qualify as a RIC.
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(2) AllianceBernstein L.P. (the “Adviser”) will operate the business of Target in the ordinary course between the date of the Plan and the Effective Time, including the declaration and payment of customary dividends and other distributions and any other distributions deemed advisable in anticipation of the Acquisition. From the date it commenced operations through the Effective Time, Target will conduct its “historic business” (within the meaning of Section 1.368-1(d)(2) of the Treasury Regulations) in a substantially unchanged manner. Before the Effective Time, Target will not (a) dispose of and/or acquire any assets for any reason except in the ordinary course of its business as a RIC, or (b) otherwise change its historic investment policies, except that Target may dispose of certain assets that do not meet the investment objectives of the Acquirer. Any such assets which are disposed of pursuant to the prior sentence will constitute less than one-third of the Target’s assets.
(3) Following the Acquisition, Acquirer (a) has no plan or intention to sell or otherwise dispose of any of the assets acquired from Target, except for dispositions made in the ordinary course of its business and dispositions necessary to maintain its status as a RIC, and (b) will continue in the same business as it conducted prior to the Acquisition and will continue to invest its assets in accordance with the description of its investment activities set forth in the Prospectus.
(4) The Target Shareholders will receive no consideration pursuant to the Acquisition other than Acquirer Shares.
(5) The Target Shareholders will pay any expenses incurred by them in connection with the Acquisition.
(6) The Liabilities of Target to be assumed by Acquirer in the Acquisition have been incurred in the ordinary course of business of Target or incurred by Target solely and directly in connection with the Acquisition.
(7) During the five-year period ending at the Effective Time, (a) neither Target nor any person “related” (within the meaning of Section 1.368-1(e)(3) of the Treasury Regulations) to it will have acquired Target Shares, either directly or through any transaction, agreement, or arrangement with any other person, with consideration other than Acquirer Shares or Target Shares, except for Target Shares redeemed in the ordinary course of Target’s business as an open-end investment company as required by Section 22(e) of the Act, and (b) no distributions will have been made with respect to Target Shares, other than normal, regular dividend distributions made pursuant to Target’s historic dividend-paying practice and other distributions that qualify for the deduction for dividends paid (within the meaning of Section 561 of the Code) referred to in Sections 852(a)(1) and 4982(c)(1)(A) of the Code.
(8) Acquirer has no plan or intention to issue additional Acquirer Shares following the Acquisition except for Acquirer Shares issued in the ordinary course of its business as an open-end investment company. Neither Acquirer nor any person “related” (within the meaning of Section 1.368-1(e)(3) of the Treasury Regulations) to it has any plan or intention to acquire, during the five-year period beginning at the Effective Time, either directly or through any transaction, agreement, or arrangement with any other person, any Acquirer Shares issued to the Target Shareholders pursuant to the Acquisition, except for redemptions in the ordinary course of such business.
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(9) During the five-year period ending at the Effective Time, neither Acquirer nor any person “related” (within the meaning of Section 1.368-1(e)(3) of the Treasury Regulations) to it will have acquired Target Shares with consideration other than Acquirer Shares.
(10) Without limiting the effect of paragraphs 7, 8, and 9 above, the aggregate value of the acquisitions, redemptions and distributions described in such paragraphs will not exceed fifty percent (50%) of the value (without giving effect to such acquisitions, redemptions, and distributions) of the aggregate value of all of the equity securities issued by Target at the Effective Time.
(11)
(a) There is no plan or intention of the Target Shareholders to redeem, sell or otherwise dispose of (i) any portion of their Target Shares before the Acquisition to any person “related” (within the meaning of Section 1.368-1(e)(3) of the Treasury Regulations) to either Target or Acquirer or (ii) any portion of the Acquirer Shares they receive in the Acquisition to any person “related” (within such meaning) to Acquirer.
(b) It is not anticipated that dispositions of those Acquirer Shares at the time of, or immediately after, the Acquisition will exceed the usual rate and frequency of dispositions of Target Shares as an open-end investment company.
(c) It is expected that the percentage of Target Shares, if any, that will be disposed of as a result of, or at the time of, the Acquisition will be de minimis and that there will be no extraordinary redemptions of Target Shares immediately following the Acquisition.
(12) The fair market value of the Assets of Target transferred to Acquirer will equal or exceed the sum of (a) the amount of Liabilities of Target assumed by Acquirer, and (b) the amount of Liabilities, if any, to which the transferred Assets are subject.
(13) There are no pending or threatened claims or assessments that have been asserted by or against Target, other than any disclosed and reflected in the net asset value of Target.
(14) There are no unasserted claims or assessments against Target that are probable of assertion.
(15) There is no plan or intention for Acquirer to be dissolved or merged into another business trust or a corporation or any “fund” thereof (as defined in Section 851(g)(2) of the Code) following the Acquisition.
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(16) At no time during the five-year period ending at the Effective Time, has the Acquirer directly or indirectly owned any Target Shares.
(17) The fair market value of the Acquirer Shares each Target Shareholder receives in connection with the Acquisition will be approximately equal to the fair market value of the Target Shares it surrenders in exchange therefor.
(18) Pursuant to the Acquisition, Target will transfer to Acquirer, and Acquirer will acquire, at least ninety percent (90%) of the fair market value of the net assets, and at least seventy percent (70%) of the fair market value of the gross assets, that Target held immediately before the Acquisition. For purposes of the foregoing, any amounts Target uses to pay its Acquisition expenses and to make redemptions and distributions immediately before the Acquisition (except (a) redemptions in the ordinary course of its business, and (b) regular, normal dividend distributions made to conform to its policy of distributing all or substantially all of its income and gains to avoid the obligation to pay federal income tax and/or the excise tax under Section 4982 of the Code) will be included as Assets held thereby immediately before the Acquisition.
(19) There is no intercompany indebtedness between Acquirer and Target that was issued or acquired, or will be settled, at a discount.
(20) The sum of (a) the expenses incurred by Target pursuant to the Plan and (b) the Liabilities of Target to be assumed by Acquirer in the Acquisition will not exceed twenty percent (20%) of the fair market value of the assets of Target transferred to Acquirer pursuant to the Acquisition.
III. Relevant Law
A corporation which is a “party to a reorganization” will not recognize gain or loss if it exchanges property pursuant to a plan of reorganization solely for stock or securities of another corporation which is a party to the reorganization.1 Likewise, the shareholders of a corporation will not recognize gain or loss if they exchange stock or securities of a corporation which is a party to a reorganization solely for stock or securities in such corporation or another corporation which is a party to the reorganization in pursuant of the plan of reorganization.2
In order to be a treated as a “reorganization,” a transaction must satisfy certain statutory requirements contained in Code Section 368 as well as certain regulatory requirements contained in the Treasury Regulations thereunder.
Code Section 368(a)(1)(C) provides that a “reorganization” includes the acquisition by one corporation in exchange solely for all or a part of its voting stock of substantially all of the properties of another corporation. Code Section 368(a)(2)(F) provides that two or more investment companies, may engage in a “reorganization” only if each of them is either a RIC, a real estate investment trust or they each meet certain diversification requirements.
1 Code § 361.
2 Code § 354.
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In addition to the statutory language of Code Section 368, there are two significant non-statutory requirements for a reorganization: the continuity of interest (“COI”) requirement, and the continuity of business enterprise (“COBE”) requirement. 3
In order to satisfy the COI requirement, “a substantial part of the value of the proprietary interests in the target corporation must be preserved.”4 This is accomplished “if, in a potential reorganization, [the proprietary interest in the target corporation] is exchanged for a proprietary interest in the issuing corporation…”5 For this purpose, a proprietary interest in the target corporation is not preserved if persons related to the acquiring corporation acquire stock of the target corporation for consideration other than stock of the acquiring corporation.6
In order to satisfy the COBE requirement, a reorganization may satisfy either the “historic business test” or the “historic asset test.” Under the “historic business test,” a taxpayer can establish COBE if it either (i) continues the target’s historic business, or (ii) continues any significant historic line of business of the target if the target has more than one line of business. For this purpose, a line of business entered into as part of the plan of reorganization is not a historic business. Under the “historic asset test,” a taxpayer can establish asset continuity if it uses a “significant” portion of the target’s historic business assets in a business. “Historic business assets” may include stock, securities, or intangible operating assets if they are used in the target’s historic business.7
In interpreting the “historic business test” in the case of a reorganization involving a RIC, the Internal Revenue Service has held that a corporation engaged in the business of investing in a portfolio of corporate stocks and bonds was not in the same business as a diversified open-end RIC investing in high-grade municipal bonds.8
The Acquisition will be a transfer of substantially all of the Assets of Target, a corporation, to Acquirer, a series of a corporation, in exchange solely for Acquirer Shares (including fractional Acquirer Shares, if any), which will then be distributed to the shareholders of Target pursuant to the liquidation of Target. Therefore, the Acquisition will satisfy the statutory language of Section 368(a)(1)(C) to be treated as a “reorganization.”
Since each of Target and Acquirer is a RIC, the Acquisition will satisfy the statutory language of Section 368(a)(2)(F) to be treated as a “reorganization.”
3 Treas. Reg. § 1.368-1(b).
4 Treas. Reg. § 1.368-1(e)(1)(i).
5 Id.
6 Treas. Reg. § 1.368-1(e)(3).
7 Treas. Reg. § 1.368-1(d)(1)-(3).
8 Rev. Rul. 87-76, 1987-2 C.B. 84.
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Based upon the representations made above with respect to acquisitions of Target Shares by persons “related” to Acquirer, each Target Shareholder will receive Acquirer Shares as a result of the Acquisition. Therefore, the Acquisition will satisfy the COI requirement.
Target and Acquirer each have identical investment objectives and strategies as described above.
Based upon the above, we believe that Target and Acquirer are engaged in the same historic business of investing in the equity securities of large capitalization U.S. companies and Acquirer will continue to pursue this historic business after the Acquisition. Therefore, in our view, the Acquisition will satisfy the “historic business test” of the COBE requirement for a “reorganization.” Alternatively, since Acquirer has no plan or intention to sell or otherwise dispose of any of the assets acquired from Target, except for dispositions made in the ordinary course of that business and dispositions necessary to maintain its status as a RIC, we believe Acquirer will use the assets acquired from Target in its historic business so that Acquirer will satisfy the “historic asset test” of the COBE requirement and thus will satisfy the COBE requirement.
IV. Opinions
Based upon the foregoing and upon our consideration of the Code, the Treasury Regulations promulgated under the Code, published Revenue Rulings, Revenue Procedures and other published pronouncements of the Internal Revenue Service, the published opinions of the United States Tax Court and other United States federal courts, and such other authorities as we consider relevant, each as they exist as of the date hereof, we are of the opinion that, for federal income tax purposes:
(1) The Acquisition will constitute a “reorganization” within the meaning of Section 368(a) of the Code, and Acquirer and Target will each be a “party to a reorganization” within the meaning of Section 368(b) of the Code.
(2) No gain or loss will be recognized by the Target upon the transfer of all of the Assets to Acquirer solely in exchange for Acquirer Shares and the assumption by Acquirer of the Liabilities of Target, or upon the distribution of Acquirer Shares to the Target Shareholders.
(3) The tax basis in the hands of the Acquirer of each asset of Target will be the same as the tax basis of such asset in the hands of Target immediately prior to the transfer thereof, increased by the amount of gain (or decreased by the amount of loss), if any, recognized by Target on the transfer.
(4) The holding period of each asset of Target in the hands of the Acquirer, other than assets with respect to which gain or loss is required to be recognized, will include in each instance the period during which such asset was held by Target (except where investment activities of the Acquirer have the effect of reducing or eliminating the holding period with respect to an asset).
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(5) No gain or loss will be recognized by the Acquirer upon its receipt of the assets of Target solely in exchange for Acquirer Shares and the assumption of the Liabilities of Target.
(6) No gain or loss will be recognized by Target Shareholders upon the exchange of the Target Shares for Acquirer Shares as part of the Acquisition.
(7) The aggregate tax basis of the Acquirer Shares that each Target Shareholder receives in the Acquisition will be the same as the aggregate tax basis of the Target Shares exchanged therefor.
(8) Each Target Shareholder’s holding period for the Acquirer Shares received in the Acquisition will include the period for which such Target Shareholder held the Target Shares exchanged therefor, provided that the Target Shareholder held such Target Shares as capital assets on the date of the exchange.
Notwithstanding the above, we express no view with respect to the effect of the transaction on any transferred asset as to which any unrealized gain or loss is required to be recognized at the end of a taxable year (or on the termination or transfer thereof) under federal income tax principles.
Because our opinion is based upon current law, no assurance can be given that existing United States federal income tax laws will not be changed by future legislative or administrative or judicial interpretation, any of which could affect the opinion expressed above. This opinion is provided to you in connection with the Acquisition. This opinion may not be quoted or relied upon by any other person or entity, or for any other purpose, without our prior written consent.
Very truly yours,
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