July ___, 1998
Mentor Strategy Portfolio
Mentor Balanced Portfolio
Mentor Funds
000 Xxxx Xxxx Xxxxxx
Xxxxxxxx, Xxxxxxxx 00000
Ladies and Gentlemen:
We have acted as counsel in connection with the Agreement and Plan of
Reorganization dated as of _________, 1998, (the "Agreement"), between Mentor
Funds, a Massachusetts business trust (the "Trust"), on behalf of its Mentor
Strategy Portfolio series (the "Acquired Fund") and the Trust, on behalf of its
Mentor Balanced Portfolio series (the "Acquiring Fund"). The Agreement describes
a proposed transaction (the "Transaction") to occur on ___________, 1998 (the
"Exchange Date"), pursuant to which Acquiring Fund will acquire substantially
all of the assets of Acquired Fund in exchange for shares of beneficial interest
in Acquiring Fund (the "Acquiring Fund Shares") and the assumption by Acquiring
Fund of all of the liabilities of Acquired Fund following which the Acquiring
Fund Shares received by Acquired Fund will be distributed by Acquired Fund to
its shareholders in liquidation and termination of Acquired Fund. This opinion
as to certain federal income tax consequences of the Transaction is furnished to
you pursuant to Sections 10(g) and 11(g) of the Agreement. Capitalized terms not
defined herein are defined in the Agreement.
Acquired Fund is a series of the Trust, which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. Shares of Acquired Fund are redeemable at net
asset value at each shareholder's option. Acquired Fund has elected to be a
regulated investment company for federal income tax purposes under Section 851
of the Internal Revenue Code of 1986, as amended (the "Code").
Acquiring Fund is a series of the Trust. Shares of Acquiring Fund are
redeemable at net asset value at each shareholder's option.
For purposes of this opinion, we have considered the Agreement, the
Proxy Statement, the Registration Statement (including the items incorporated by
reference therein), and such other items as we have deemed necessary to render
this opinion. In addition, you have represented to us the following facts,
occurrences and information upon which you have
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indicated we may rely in rendering this opinion (whether or not contained or
reflected in the documents and items referred to above):
1. Acquired Fund will transfer to Acquiring Fund all of its assets, and
Acquiring Fund will assume all of the liabilities of Acquired Fund, as of the
Exchange Date.
2. The fair market value of the Acquiring Fund Shares received by each
Acquired Fund shareholder will be approximately equal to the fair market value
of the Acquired Fund shares surrendered in exchange therefor. The Acquired Fund
shareholders will receive no consideration other than Acquiring Fund Shares
(which may include fractional shares) in exchange for their shares of beneficial
interest in Acquired Fund (the "Acquired Fund Shares").
3. None of the compensation received by any shareholder-employees of
Acquired Fund, if any, will be separate consideration for, or allocable to, any
of their Acquired Fund Shares; none of the Acquiring Fund Shares received by any
Acquired Fund shareholder- employees will be separate consideration for, or
allocable to, any employment; and the compensation paid to any Acquiring Fund or
Acquired Fund shareholder-employees, if any, will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's length for similar services.
4. There is no plan or intention by any Acquired Fund shareholder who
owns 5% or more of the total outstanding Acquired Fund Shares, and to the best
of the knowledge of the management of Acquired Fund, there is no plan or
intention on the part of the remaining Acquired Fund shareholders to sell,
exchange, or otherwise dispose of a number of Acquiring Fund Shares received in
the Transaction that would reduce Acquired Fund shareholders' ownership of
Acquiring Fund Shares to a number of Acquiring Fund 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 Acquired Fund Shares as of the same date. For purposes of
this representation, Acquiring Fund Shares or Acquired Fund Shares surrendered
by Acquired Fund shareholders in redemption or otherwise disposed of, where such
dispositions, if any, appear to be initiated by Acquired Fund shareholders in
connection with or as a result of the Agreement or the Transaction, will be
treated as outstanding Acquired Fund Shares on the date of the Transaction.
5. Acquiring Fund has no plan or intention to reacquire any of the
Acquiring Fund Shares issued in the Transaction, except for Acquiring Fund
Shares reacquired in the ordinary course of its business as an open-end
investment company.
6. 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 Acquired
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Fund immediately prior to the Transaction. For purposes of this representation,
(a) amounts paid by Acquired Fund, out of the assets of Acquired Fund, to
Acquired Fund shareholders in redemption of Acquired Fund Shares, where such
redemptions, if any, appear to be initiated by Acquired Fund shareholders in
connection with or as a result of the Agreement or the Transaction, (b) amounts
used by Acquired Fund to pay expenses of the Transaction, and (c) amounts used
to effect all redemptions and distributions (except for regular, normal
dividends declared and paid in order to ensure Acquired Fund's continued
qualification as a regulated investment company and to avoid fund-level tax
(including for this purpose any dividends referred to in representation 17
herein)) made by Acquired Fund immediately preceding the transfer will be
included as assets of Acquired Fund held immediately prior to the Transaction.
Further, to the best of the knowledge of the managements of each of Acquiring
Fund and Acquired Fund, this representation will remain true even if the
amounts, if any, that Acquiring Fund pays after the Transaction to Acquiring
Fund shareholders who are former Acquired Fund shareholders in redemption of
Acquiring Fund Shares received in exchange for Acquired Fund Shares, where such
redemptions, if any, appear to be initiated by such shareholders in connection
with or as a result of the Agreement or the Transaction, are considered to be
assets of Acquired Fund that were not transferred to Acquiring Fund.
7. Immediately after the Transaction, the shareholders of Acquired Fund
will be in control of Acquiring Fund within the meaning of Section 304(c) of the
Code.
8. The fair market value of the assets transferred to Acquiring Fund by
Acquired Fund will equal or exceed the sum of the liabilities to be assumed by
Acquiring Fund.
9. The total adjusted basis of the assets of Acquired Fund transferred
to Acquiring Fund will equal or exceed the sum of the liabilities to be assumed
by Acquiring Fund.
10. In the Transaction, Acquired Fund will transfer to Acquiring Fund
at least 50% of its historic business assets (see definition below).
11. Following the Transaction, Acquiring Fund will continue to use a
significant portion (in this case, at least 50%) of the historic business assets
of Acquired Fund. Specifically, Acquiring Fund will use such significant portion
of Acquired Fund's historic business assets in its business by continuing to
hold at least such portion of the total assets transferred to it by Acquired
Fund. That is, Acquiring Fund will continue to hold historic business assets of
Acquired Fund, defined for purposes of this opinion as those assets transferred
to it on the Exchange Date which were either (i) acquired by Acquired Fund prior
to its management's decision to propose to its Trustees that it transfer any or
all of its assets to Acquiring Fund, or (ii) acquired subsequent to such
decision but not with a view to the Agreement or the Transaction, in an amount
equal to at least 50% of the assets in Acquired Fund's portfolio held on the
Exchange Date, as increased by the amounts, if any, that
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Acquired Fund paid to its shareholders in redemption of its shares, where such
redemptions, if any, appear to have been initiated by such shareholders in
connection with or as a result of the Agreement or Transaction. In making this
determination, dispositions made in the ordinary course of Acquiring Fund's
business as an open-end investment company (i.e., dispositions made in the
ordinary course of business and independent of the Transaction) shall not be
taken into account.
12. At the time of the Transaction, Acquiring Fund will not have
outstanding any warrants, options, convertible securities, or any other type of
right pursuant to which any person could acquire stock in Acquiring Fund that,
if exercised or converted, would affect the Acquired Fund shareholders'
acquisition or retention of control of Acquiring Fund as defined in Section
304(c) of the Code.
13. Acquiring Fund has no plan or intention to sell or otherwise
dispose of any of the assets of Acquired Fund acquired in the Transaction,
except for (i) dispositions made in the ordinary course of its business as a
series of an open-end investment company (i.e., dispositions made in the
ordinary course of business and independent of the Transaction) and (ii)
dispositions made by Acquiring Fund to realign its portfolio in order to reflect
its investment objective and conform to its investment restrictions and/or to
maintain its qualification as a "regulated investment company" for federal
income tax purposes under section 851 of the Code ("Realignment Dispositions"),
which Realignment Dispositions shall be limited to the extent required by the
above representation relating to the continued use by Acquiring Fund of the
historic business assets of Acquired Fund. For purposes of this representation,
Realignment Dispositions made by Acquired Fund, if any, will be considered to
have been made by Acquiring Fund.
14. The liabilities of Acquired Fund to be assumed by Acquiring Fund
were incurred by Acquired Fund in the ordinary course of its business and are
associated with the assets transferred to Acquiring Fund. For purposes of this
paragraph, expenses of the Transaction are not treated as liabilities.
15. The Transaction will offer shareholders of the Acquired Fund an
investment opportunity comparable to that currently provided by the Acquired
Fund, but with the potential for lower operating expenses due to economies of
scale.
16. All legal and accounting fees and expenses, printing, filing and
proxy solicitation expenses, portfolio transfer taxes (if any), brokerage and
similar expenses, and other fees and expenses incurred in connection with the
transactions contemplated by the Agreement will be borne equally by the
Acquiring Fund and the Acquired Fund; provided, however, that expenses will be
paid by the party directly incurring such expenses if and to the extent that the
payment by the other party of such expenses would result in the disqualification
of such party
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as a "regulated investment company" within the meaning of Section 851 of the
Code. All such fees and expenses incurred and borne by either of Acquiring
Fund, Acquired Fund and Mentor Investment Advisors, LLC shall be solely and
directly related to the Transaction and shall be paid directly by Acquired Fund,
Acquiring Fund and Mentor Investment Advisors, LLC, as the case may be, to the
relevant providers of services or other payees, in accordance with the
principles set forth in Rev. Rul. 73-54, 1973-1 C.B. 187.
Acquired Fund shareholders will pay their respective expenses, if any,
incurred in connection with the Transaction.
17. For federal income tax purposes, Acquired Fund qualifies as a
regulated investment company, and the provisions of Sections 851 through 855 of
the Code apply to Acquired Fund for its current taxable year beginning October
1, 1997 and will continue to apply to it through the Exchange Date.
In that regard, Acquired Fund will declare to Acquired Fund
shareholders of record on or prior to the Exchange Date a dividend or dividends
which together with all previous such dividends shall have the effect of
distributing all of Acquired Fund's investment company taxable income (see Code
Section 852) (computed without regard to any deduction for dividends paid) and
all of Acquired Fund's net realized capital gain (after reduction for any
capital loss carryover) in each case for both the taxable year ending September
30, 1997 and the short taxable period beginning on October 1, 1997 and ending on
the Exchange Date. Such dividends will be made to ensure continued qualification
of Acquired Fund as a regulated investment company for tax purposes and to
eliminate fund-level tax.
18. For federal income tax purposes, Acquiring Fund qualifies as a
regulated investment company, and the provisions of Section 851 through 855 of
the Code apply to Acquiring Fund for its current taxable year beginning October
1, 1997 and will continue to apply to it through the Exchange Date.
19. There is no intercorporate indebtedness existing between Acquired
Fund and Acquiring Fund.
20. Acquired Fund will distribute the Acquiring Fund Shares it receives
in the Transaction to its shareholders as provided in the Agreement.
21. Acquired Fund is not under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
Based on the foregoing representations and our review of the documents
and items referred to above, we are of the opinion that for federal income tax
purposes:
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(i) No gain or loss will be recognized by Acquired Fund upon the
transfer of Acquired Fund's assets to Acquiring Fund in exchange
for Acquiring Fund Shares and the assumption by Acquiring Fund of
the liabilities of Acquired Fund, or upon the distribution of
Acquiring Fund Shares by Acquired Fund to its shareholders in
liquidation;
(ii) No gain or loss will be recognized by the Acquired Fund
shareholders upon the exchange of their Acquired Fund Shares for
Acquiring Fund Shares;
(iii) The basis of Acquiring Fund Shares an Acquired Fund shareholder
receives in connection with the Transaction will be the same as the
basis of his or her Acquired Fund Shares exchanged therefor;
(iv) An Acquired Fund shareholder's holding period for his or her
Acquiring Fund Shares will be determined by including the period
for which he or she held the Acquired Fund Shares exchanged
therefor, provided that he or she held such Acquired Fund Shares as
capital assets;
(v) No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Acquired Fund in exchange for Acquiring
Fund Shares and the assumption by Acquiring Fund of the liabilities
of Acquired Fund;
(vi) The basis in the hands of Acquiring Fund of the assets of Acquired
Fund transferred to Acquiring Fund in the Transaction will be the
same as the basis of such assets in the hands of Acquired Fund
immediately prior to the transfer; and
(vii) The holding periods of the assets of Acquired Fund in the hands of
Acquiring Fund will include the periods during which such assets
were held by Acquired Fund.
Very truly yours,
Ropes & Gray
