EXHIBIT 12
Opinion and Consent to Tax Matters - Paul, Hastings, Janofsky & Walker LLP
C-7
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Twenty-Third Floor
Los Angeles, California 90071-2371
January 18, 2000
The Montgomery Funds 27287.82497
101 California Street
San Francisco, California 94111
Re: Reorganization of Montgomery International Small Cap
Fund into Montgomery International Growth Fund
Ladies and Gentlemen:
You have requested our opinion as counsel for The Montgomery Funds, a
Massachusetts business trust (the "Trust"), with respect to certain federal
income tax matters in connection with the reorganization by and between the
Montgomery International Growth Fund (the "Acquiring Fund"), a series of the
Trust, and the Montgomery International Small Cap Fund (the "Acquired Fund"),
also a series of the Trust. This opinion is rendered in connection with the
transaction described in the Agreement and Plan of Reorganization dated as of
December 31, 1999 (the "Reorganization Agreement"), by the Trust for itself and
on behalf of the Acquiring Fund and the Acquired Fund, and adopts the applicable
defined terms therein.
This letter and the opinion expressed herein are for delivery to the
Trust and may be relied upon only by the Trust, the Acquiring Fund and Acquired
Fund, and their shareholders. This opinion also may be disclosed by the Trust,
Acquiring Fund and Acquired Fund, or any of their shareholders in connection
with an audit or other administrative proceeding before the Internal Revenue
Service (the "Service") affecting the Trust, Acquiring Fund and Acquired Fund,
or any of their shareholders or in connection with any judicial proceeding
relating to the federal, state or local tax liability of the Trust, Acquiring
Fund and Acquired Fund or any of their shareholders.
The Montgomery Funds
January 18, 2000
Page 2
For purposes of this opinion we have assumed the truth and accuracy of
the following facts:
The Trust was duly created pursuant to its Agreement and Declaration of
Trust by the Trustees for the purpose of acting as a management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and is validly existing under the laws of the Commonwealth of Massachusetts. The
Trust is registered as an investment company classified as a diversified,
open-end management company, under the 1940 Act.
The Acquiring Fund is a series of the Trust duly established under the
laws of the Commonwealth of Massachusetts, and is validly existing under the
laws of that Commonwealth. The shares of the Acquiring Fund are widely held. The
Acquiring Fund has an authorized capital of an unlimited number of shares and
each outstanding share of the Acquired Fund is fully transferable and has full
voting rights.
The Acquired Fund is a series of the Trust duly established under the
laws of the Commonwealth of Massachusetts, and is validly existing under the
laws of that Commonwealth. The shares of the Acquired Fund are widely held. The
Acquired Fund has an authorized capital of an unlimited number of shares and
each outstanding share of the Acquired Fund is fully transferable and has full
voting rights.
For valid business purposes, the following transaction will take place
in accordance with the laws of the Commonwealth of Massachusetts and pursuant to
the Reorganization Agreement:
(a) On the date of the closing (the "Closing Date"), the Trust will
cause the Acquired Fund to transfer substantially all of its assets to the
Acquiring Fund. Solely in exchange therefor, the Trust will cause the Acquiring
Fund to deliver to the Acquired Fund a number of Class R shares (the "Acquiring
Fund Shares") of voting common stock of the Acquiring Fund and to assume the
liabilities of the Acquired Fund as stated in the Reorganization Agreement.
(b) The Trust will then cause the Acquired Fund to liquidate and
distribute all of the Acquiring Fund Shares to the shareholders of Acquired Fund
in proportion to their respective interests in the Acquired Fund in exchange for
their shares in the Acquired Fund.
The Montgomery Funds
January 18, 2000
Page 3
(c) The Trust will then cause the Acquired Fund to wind up and dissolve
as soon as practicable thereafter.
In rendering the opinions stated below, we have examined and relied
upon the following, assuming the truth and accuracy of any statements contained
therein:
(1) The Reorganization Agreement; and
(2) Such other documents, records and instruments as we have
deemed necessary in order to enable us to render the opinions
referred to in this letter.
For purposes of rendering the opinions stated below, we have in
addition relied upon the following representations by the Trust on behalf of
both the Acquired Fund and the Acquiring Fund, as applicable:
(A) The fair market value of the Acquiring Fund Shares received by each
shareholder of the Acquired Fund will be approximately equal to the fair market
value of the shares of the Acquired Fund surrendered in the exchange. The
shareholders of the Acquired Fund received no consideration other than Acquiring
Fund Shares in exchange for their stock in Acquired Fund.
(B) On the Closing Date and at all times since the Closing, there was
not and there has not been any plan or intention by Acquiring Fund or any person
related (as defined in section 1.368-1(e)(3) of the Treasury Regulations which
generally provides that two corporations are related persons if either (i)
corporations are members of the same affiliated group or (ii) if one corporation
is a subsidiary of the other corporation) to Acquiring Fund to acquire or redeem
any of the stock of Acquiring Fund issued in the transaction either directly or
through any transaction, agreement, or arrangement with any other person, other
than redemptions in the ordinary course of Acquiring's business as an open-end
investment company as required by section 22(e) of the 1940 Act.
(C) During the five-year period ending on the Closing Date, neither
Acquired Fund nor any person related to Acquired Fund (as defined in section
1.368-1(e)(3) of the Treasury Regulations) will have directly or through any
transaction, agreement, or arrangement with any other person, (i) acquired stock
of Acquired Fund with consideration other than shares of Acquiring Fund or
Acquired Fund, except for stock redeemed in the ordinary course of Acquired
Fund's business as an open-end investment company as required by section 22(e)
of the 1940 Act or (ii) made
The Montgomery Funds
January 18, 2000
Page 4
distributions with respect to Acquired Fund stock, except for (a) regular,
normal dividend distributions made to Acquired Fund's shareholders in an amount
equal to 100% of its investment company taxable income and its net capital
gains, and (b) additional distributions, to the extent such distributions do not
exceed 50 percent of the value (without giving effect to such distributions) of
the proprietary interest in Acquired Fund on the effective date of the proposed
transaction.
(D) Prior to or in the transaction, neither Acquiring Fund nor any
person related to Acquiring Fund (as defined in section 1.368-1(e)(3) of the
Treasury Regulations) will have acquired directly or through any transaction,
agreement or arrangement with any other person, stock of Acquired Fund with
consideration other than shares of Acquiring Fund.
(E) The Acquiring Fund will acquire at least 90 percent of the fair
market value of the net assets and at least 70 percent of the fair market value
of the gross assets held by the Acquired Fund immediately prior to the
transaction. For purposes of this representation, amounts used by the Acquired
Fund to pay its reorganization expenses, amounts paid by the Acquired Fund to
shareholders who receive cash or other property, and all redemptions and
distributions (except for distributions and redemptions occurring in the
ordinary course of the Acquired Fund's business as a series of an investment
company) made by the Acquired Fund immediately preceding the transfer have been
included as assets of the Acquired Fund held immediately prior to the
transaction.
(F) On the Closing Date and at all times since the Closing Date, the
Acquiring Fund did not have and has not had any plan or intention to sell or
otherwise dispose of any of the assets of the Acquired Fund acquired in the
Transaction, except for dispositions made in the ordinary course of its business
as a series of an open-end investment company.
(G) The Acquired Fund distributed the Acquiring Fund Shares it received
in the Transaction to its shareholders as provided in the Transaction documents.
(H) The liabilities of the Acquired Fund assumed by the Acquiring Fund
and the liabilities to which the transferred assets are subject were incurred by
the Acquired Fund in the ordinary course of business and were associated with
the assets transferred to the Acquiring Fund.
The Montgomery Funds
January 18, 2000
Page 5
(I) At all times following the Transaction, the Acquiring Fund has
continued and intends to continue to the historic business of the Acquired Fund
or use a significant portion of the Acquired Fund's historic business assets in
a business.
(J) The Acquiring Fund, the Acquired Fund, and the shareholders of the
Acquired Fund will pay their respective expenses, if any, incurred in connection
with the transaction.
(K) There is no intercorporate indebtedness existing between the
Acquired Fund and the Acquiring Fund that was issued, acquired, or will be
settled at a discount.
(L) The Acquired Fund and the Acquiring Fund each meet the requirements
of a regulated investment company as defined in Sections 368(a)(2)(F)(ii) and
(iii) of the Internal Revenue Code of 1986, as amended (the "Code").
(M) On the Closing Date, the Acquiring Fund did not own, directly or
indirectly, nor did it own during the five years preceding the Closing Date,
directly or indirectly, any stock of the Acquired Fund.
(N) The fair market value of the assets of the Acquired Fund
transferred to the Acquiring Fund will equal or exceed the sum of the
liabilities assumed by the Acquiring Fund, plus the amount of liabilities, if
any, to which the transferred assets are subject.
(O) Both the Acquired Fund and the Acquiring Fund has elected to be
taxed as a "regulated investment company" under Section 851 of the Code and, for
all of its taxable periods, (including the last short taxable period ending on
the date of the transaction for the Acquired Fund) has qualified for the special
tax treatment afforded regulated investment companies under the Code, and after
the transaction, the Acquiring Fund intends to continue to so qualify.
(P) The Acquired Fund is not under the jurisdiction of a court in a
case under Title 11 of the United States Code or a receivership, foreclosure, or
similar proceeding in a Federal or state court within the meaning of Code
Section 368(a)(3)(A).
(Q) Neither the Acquired Fund nor one or more of its shareholders, or
any combination thereof, will control (within the meaning of Section 368(c) of
the Code) the Acquiring Fund immediately after the transfer.
The Montgomery Funds
January 18, 2000
Page 6
Our opinions set forth in this letter are based upon the Code,
regulations of the Treasury Department, published administrative announcements
and rulings of the Service and court decisions, all as of the date of this
letter. Based on the foregoing facts and representations, and provided that the
transaction will take place in accordance with the terms of the Reorganization
Agreement, and further provided that the Acquired Fund distributes the shares of
Acquiring Fund received in the transaction as soon as practicable, we are of the
opinion that:
(1) The transfer by the Acquired Fund of substantially all of its
assets to the Acquiring Fund solely in exchange for shares of the Acquiring Fund
and the assumption by the Acquiring Fund of the Acquired Fund's liabilities,
followed by the distribution by the Acquired Fund of the Acquiring Fund Shares
to its shareholders in complete liquidation of the Acquired Fund will be a
reorganization within the meaning of Section 368(a)(1)(C) of the Code. The
Acquiring Fund and the Acquired Fund each are a "party to a reorganization"
within the meaning of Section 368(b) of the Code.
(2) The Acquired Fund will recognize no gain or loss on its transfer of
substantially all of its assets to the Acquiring Fund in exchange solely for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the Acquired
Fund's liabilities, or on distribution of such Acquiring Fund Shares to its
shareholders.
(3) The Acquiring Fund will recognize no gain or loss on its receipt of
substantially all of the assets of the Acquired Fund and the assumption by the
Acquiring Fund of the Acquired Fund's liabilities in exchange solely for the
Acquiring Fund Shares.
(4) The Acquiring Fund's basis in the assets received from the Acquired
Fund in the transaction will equal the basis of such assets in the hands of the
Acquired Fund immediately prior to the transaction.
(5) The Acquiring Fund's holding period for the assets received in the
Reorganization will include the period during which the Acquired Fund held such
assets.
(6) The shareholders of the Acquired Fund will recognize no gain or
loss on the receipt of the Acquiring Fund Shares (including any fractional share
interests to which they may be entitled) solely in exchange for their Acquired
Fund stock.
(7) The basis of the Acquiring Fund Shares received by each of the
Acquired Fund's shareholders in the transaction (including fractional shares to
which
The Montgomery Funds
January 18, 2000
Page 7
they may be entitled) will equal the basis of the Acquired Fund stock
surrendered in exchange therefor.
(8) The holding period of the Acquiring Fund Shares received by each of
the Acquired Fund's shareholders in exchange for their Acquired Fund stock
(including fractional shares to which they may be entitled) will include the
period that the shareholder held the Acquired Fund stock exchange therefor,
provided that the shareholder held such stock as a capital asset on the date of
the exchange.
The opinions set forth above represent our conclusions as to the
application of federal income tax law existing as of the date of this letter to
the transactions described above, and we can give no assurance that legislative
enactments, administrative changes or court decisions may not be forthcoming
which would require modifications or revocations of our opinions expressed
herein. Moreover, there can be no assurance that positions contrary to our
opinions will not be taken by the Service, or that a court considering the
issues would not hold contrary to such opinions. Further, all the opinions set
forth above represent our conclusions based upon the documents and facts
referred to above. Any material amendments to such documents or changes in any
significant facts would affect the opinions referred to herein. Although we have
made such inquiries and performed such investigation as we have deemed necessary
to fulfill our professional responsibilities, we have not undertaken an
independent investigation of the facts referred to in this letter.
We express no opinion as to any federal income tax issue or other
matter except those set forth above.
We hereby consent to the filing of this opinion as an exhibit to the
Trust's Registration Statement on Form N-14 (and our being named therein) filed
by the Trust in connection with the Reorganization.
Very truly yours,
/s/ Paul, Hastings, Janofsky & Walker LLP