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 12, 1999
27286.93178
The Montgomery Funds
101 California Street
San Francisco, California 94111
Re: Reorganization of Montgomery Small Cap Opportunities
Fund into Montgomery U.S. Emerging 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 U.S. Emerging Growth Fund (the "Acquiring Fund"), a series of the
Trust, and the Montgomery Small Cap Opportunities 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 15, 1998 (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 12, 1999
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 State of Massachusetts, and is validly existing under the laws of
that State. 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 State of Massachusetts, and is validly existing under the laws of
that State. 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 State 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 12, 1999
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.
(B) There is no plan or intention by any shareholders of the Acquired
Fund who own five percent or more of the Acquired Fund, and to the best
knowledge of the management of the Acquired Fund, there is no plan or intention
on the part of any remaining Acquired Fund shareholders to sell, exchange, or
otherwise dispose of a number of the shares of the Acquiring Fund received in
the transaction that would reduce the Acquired Fund's shareholders' ownership of
the shares of the Acquiring Fund received to a number of shares having a value,
as of the date of the transaction, of less than 50 percent of the value of all
of the formerly outstanding shares of the Acquired Fund as of the same date. For
purposes of this representation, shares of Acquired Fund exchanged for cash or
other property, surrendered by dissenters have been treated as outstanding
shares of the Acquired Fund on the date of the transaction. Further, in making
this representation, the Acquired Fund has considered both shares of the
Acquired Fund and shares of the Acquiring Fund that were sold, redeemed, or
otherwise disposed of by the shareholders of the Acquired Fund (except for
shares which were required to be redeemed by the Acquired Fund or the Acquiring
Fund in the ordinary course of its business as series of an investment company).
The Montgomery Funds
January 12, 1999
Page 4
(C) 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.
(D) The Acquiring Fund has no plan or intention to reacquire any of its
shares issued in the transaction, except for acquisitions made in the ordinary
course of its business as a series of an investment company.
(E) After the transaction, the Acquiring Fund will use the assets
acquired from the Acquired Fund in the Acquiring Fund's business, except that
all or a portion of those assets may be sold or otherwise disposed of in the
ordinary course of the Acquiring Fund=s business, or may mature, and in either
case the proceeds will be reinveted in accordance with the Acquiring Fund=s
investment objectives. The Acquiring Fund has no plan or intention to sell or
otherwise dispose of the assets received in the transaction from the Acquired
Fund, except for dispositions made in the ordinary course of business.
(F) The Acquired Fund will distribute as soon as practicable the shares
of the Acquiring Fund it receives in the transaction.
(G) 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.
(H) 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.
(I) Following the transaction, the Acquiring Fund will continue the
historic business of the Acquired Fund or use a significant portion of the
Acquired Fund's historic business assets in a business.
The Montgomery Funds
January 12, 1999
Page 5
(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) The Acquiring Fund does not own, directly or indirectly, not has it
owned during the past five years, directly or indirectly, any stock of the
Acquired Fund.
(N) No cash will be distributed to shareholders of the Acquired Fund in
lieu of fractional shares of the Acquiring Fund.
(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).
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:
The Montgomery Funds
January 12, 1999
Page 6
(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.
(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, 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 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 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 Montgomery Funds
January 12, 1999
Page 7
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