[Federal Register Volume 59, Number 202 (Thursday, October 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26058]
[[Page Unknown]]
[Federal Register: October 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20620; 812-8984]
ML Venture Partners II, L.P., et al.; Notice of Application
October 14, 1994.
agency: Securities and Exchange Commission (``SEC'').
action: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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applicants: ML Venture Partners II, L.P. (``MLVP II''), Merrill Lynch
Venture Capital Inc. (the ``Management Company''), and DLJ Capital
Corporation (``DLJ Capital'').
relevant act sections: Order requested under sections 17(d) and
57(a)(4) of the Act and rule 17d-1 thereunder authorizing transactions
that are otherwise prohibited under section 57(a)(4), under section
57(c) exempting applicants from section 57(a)(1) of the Act, and under
section 6(c) of the Act to amend a prior SEC order.
summary of application: Applicants request an order that would permit
MLVP II to co-invest with DLJ Capital in shares of Corporate Express,
Inc. and amend a prior order (the ``Prior Order'')\1\ by modifying a
condition of that order.
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\1\Investment Company Act Release Nos. 16525 (Aug. 12, 1988)
(notice) and 16551 (Sept. 7, 1988) (order).
filing date: The application was filed on May 5, 1994, and amended on
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October 14, 1994.
hearing or notification of hearing: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on November 7,
1994, and should be accompanied by proof of service on applicants, in
the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons may request
notification of a hearing by writing to the SEC's Secretary.
addresses: Secretary, SEC, 450 5th Street N.W., Washington, D.C. 20549.
Applicants, MLVP II and Management Company, World Financial Center,
North Tower, New York, NY 10281; and DLJ Capital, 140 Broadway, New
York, NY 10005.
for further information contact: Elaine M. Boggs, Staff Attorney, at
(202) 942-0572, or Robert A. Robertson, Branch Chief, at (202) 942-0564
(Division of Investment Management, Office of Investment Company
Regulation).
supplementary information: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch.
Applicants' Representations
1. MLVP II, a limited partnership organized under the laws of
Delaware, is a business development company under the Act. MLVP II has
five general partners, consisting of four individuals (the ``Individual
General Partners'') and one managing general partner, MLVP II Co., L.P.
(the ``Managing General Partner''). The Individual General Partners
include three independent general partners (defined to be individuals
who are not ``interested persons'' of MLVP II within the meaning of
section 2(a)(19) of the Act) (the ``Independent General Partners'') and
one general partner who is an individual and who is an affiliated
person of the Managing General Partner.
2. The Management Company is an indirect subsidiary of Merrill
Lynch & Co., Inc. (``ML & Co.''). The Management Company performs or
arranges for management and administrative services for MLVP II. MLVP
II, the Managing General Partner, and the Management Company have
retained DLJ Capital Management Corporation (the ``Sub-Manager'') to
provide management services in connection with the venture capital
investments of MLVP II. The Sub-Manager is a wholly-owned subsidiary of
DLJ Capital, which in turn is a wholly-owned subsidiary of Donaldson,
Lufkin & Jenrette, Inc. (``DLJ''). DLJ is a subsidiary of the Equitable
Companies Inc. The Managing General Partner, the Management Company,
and the Sub-Manager are registered under the Investment Advisers Act of
1940.
A. The Corporate Express Transactions
1. Corporate Express is a privately held distributor of office
supplies and products. In 1991, the Management Company, on behalf of
MLVP II, and certain entities managed by DLJ Capital (the ``DLJ
Companies'') acquired shares of Corporate Express. MLVP II could not
hold shares of Corporate Express at that time since co-investments with
the DLJ Companies may have violated certain provisions of the Act. In
1992, the SEC issued an exemptive order (the ``Blanket Order'')\2\ that
permitted co-investments between MLVP II and the DLJ Companies. After
receiving the Blanket Order, MLVP II made its initial investment in
Corporate Express by acquiring from the Management Company the
Corporate Express shares held on its behalf.
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\2\Investment Company Act Release Nos. 18652 (Apr. 13, 1992)
(notice) and 18700 (May 11, 1992) (order).
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2. In November 1993, Corporate Express purchased Hanson Office
Products, a division of Hanson Industries, Inc., for $163 million. DLJ
Securities Corporation (``DLJ Securities''), a wholly-owned subsidiary
of DLJ, participated in structuring the terms of the acquisition on
behalf of Corporate Express. Corporate Express financed the acquisition
through the sales of senior subordinated notes and equity securities.
In connection with this financing, Corporate Express approached its
existing shareholders regarding follow-on equity investments, including
MLVP II and the DLJ Companies. In addition, because of the services DLJ
Securities provided in the acquisition, Corporate Express offered DLJ
Securities a portion of the financing on the same terms as MLVP II and
the DLJ Companies. DLJ Capital subsequently acquired the investment in
Corporate Express on behalf of DLJ Securities.
3. Consistent with the Blanket Order, the Sub-Manager reviewed MLVP
II's funds available for investment and its current investment in
Corporate Express. Following the review, the Sub-Manager recommended
that MLVP II invest $1.07 million in Corporate Express, bringing MLVP
II's aggregate investment in it to $3 million. At the same time, DLJ
Capital reviewed the funds available for investment by the DLJ
Companies. DLJ Capital determined that the DLJ Companies should invest
an additional $11 million. Corporate Express subsequently informed DLJ
Capital and the Sub-Manager that the aggregate equity investment
available to MLVP II and the DLJ Companies would be $9 million. Of this
$9 million, MLVP II was allocated the entire amount is sought to invest
and the DLJ Companies were allocated the remaining $7.3 million.
4. On January 24, 1994, consistent with the terms of the Blanket
Order, the Individual General Partners unanimously approved the follow-
on investment by MLVP II in Corporate Express. However, MLVP II was not
able to acquire the Corporate Express securities at that time because
the terms of the Blanket Order do not permit MLVP II to co-invest with
DLJ Capital, which currently holds DLJ Securities' investment in
Corporate Express. Accordingly, the Management Company agreed to
purchase and hold the 194,545 shares of series B convertible preferred
stock offered to MLVP II. The Management Company will sell these shares
to MLVP II if the requested exemptive relief is granted.
B. Amendment of the Prior Order
1. As a separate condition made applicable to MLVP II under the
Prior Order, MLVP II may not have more than 45% of its assets invested
jointly with all affiliates, except as expressly permitted in an order
issued by the SEC or as a higher percentage may result from
appreciation rather than acquisition of assets the ``45% Limit''). The
Blanket Order exempts co-investments made pursuant to that order from
the 45% Limit.
2. MLVP II requests an amendment to the 45% Limit to clarify that
the limit does not impact its disposition of portfolio securities and
the distribution of proceeds to MLVP II partners. MLVP II is in the
seventh year of its ten year term and is actively considering exit
strategies for its portfolio investments.
Applicants' Legal Analysis
A. Corporate Express Transactions
1. Section 57(a)(4) of the Act prohibits certain affiliated persons
specified in section 57(b) from participating in joint transactions
with a business development company in contravention of rules and
regulations prescribed by the SEC. Rule 17d-1 under the Act applies to
section 57(a)(4) transactions through section 57(i). Rule 17d-1
prohibits affiliated persons of a registered investment company from
entering into joint transactions with the investment company unless the
SEC has granted an order permitting such transaction.
2. The persons listed in section 57(b)(2) include a person who is,
within the meaning the section 2(a)(3)(C) of the Act, an affiliated
person of an investment adviser of a business development company. DLJ
Capital owns 100% of the capital stock of the Sub-Manager, which is an
investment adviser to MLVP II. MLVP II believes that the Sub-Manager is
controlled by DLJ Capital. Thus, DLJ Capital is a person specified in
section 57(b)(2) and may not engage in a joint investment with MLV II.
3. Section 57(a)(1) of the Act prohibits certain persons specified
in section 57(b) from selling securities to a business development
company. Section 57(c) of the Act provides that the SEC may exempt a
person from section 57(a)(1) under certain circumstances. The
Management Company may be a person specified in section 57(b) and thus,
sales of securities on a principal basis by the Management Company to
MLVP II are prohibited by section 57(a)(1) and cannot be effected
unless an order is obtained pursuant to section 57(c).
4. Applicants believe that the proposed co-investment with DLJ
Capital and the acquisition by MLVP II of the Corporate Express
securities held by the Management Company on MLVP II's behalf meet the
statutory standards set forth in the Act.
B. Amendment to the Prior Order
1. Section 6(c) permits the SEC to exempt any person, security, or
transaction from any provisions of the Act if and to the extent the
exemption is necessary or appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act.
2. The Prior Order does not indicate whether upon the disposition
of portfolio securities MLVP II must observe the 45% Limits. The
requested amendment would clarify that the 45% Limit does not impact
its disposition of portfolio securities. MLVP II believes that the
requested amendment would place a limit on the extent that capital of
MLVP II can be committed to joint transactions as of the time of an
investment while recognizing that the liquidation of investments should
occur in a manner so as to maximize returns to investors. MLVP II
believes the requested relief meets the section 6(c) standards. The
requested amendment would not affect condition 2(b) of the Blanket
Order which limits co-investments with ``DLJ Investors'' to 25% of MLVP
II's initial capital.
Applicants' Conditions
Applicants agree that the terms of relief are subject to the
following conditions:
1. The Sub-Manager will review the proposed investment by MLVP II.
The Sub-Manager will provide a written report to the Independent
General Partners setting forth its valuation of the investment and its
recommendations as to the acquisition of the investment, based upon its
analysis of all factors it considers relevant.
2. Upon issuance of the order requested, MLVP II may acquire the
Corporate Express securities held by the Management Company on MLVP
II's behalf (the ``Securities'') from the Management Company provided
that all of the findings and other actions required in subsections
(d)(i) through (iv) of condition one of the Blanket Order\3\ are met
after receipt of the order and before the purchase of the Securities.
The purchase price to be paid by MLVP II for the Securities shall be
carrying costs (as described below) plus the lesser of (a) the fair
value of the securities on the date acquired by MLVP II (as determined
by the Independent General Partners, who may rely for this purpose on
information proved by the Sub-Manager), or (b) the cost to the
Management Company of purchasing the Securities (``Cost''). To the
extent the value of the Securities is determined by the Independent
General Partners to be less than Cost plus carrying costs, the
Management Company may determine not to sell the Securities to MLVP II.
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\3\For the purposes of this condition and subsections (d)(iii)
and (iv) of condition one of the Blanket Order, DLJ Capital shall be
considered a ``DLJ Investor'' as such term is used in the Blanket
Order.
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3. Carrying costs shall be calculated from the date the Management
Company acquired the proposed investment on behalf of MLVP II to the
date of the acquisition of the proposed investment by MLVP II from the
Management Company and shall consist of interest charges computed at
the lower of (a) the prime commercial lending rate charged by Citibank,
N.A., during the period for which carrying costs are permitted to be
paid until MLVP II acquires the Securities or (b) the effective costs
of borrowings by ML & Co. during such period. The effective costs of
borrowings by ML & Co. is its actual ``average costs of funds,'' which
it calculates on a monthly basis by dividing its consolidated financing
expenses by the total amount of borrowings during this period.
4. For the purpose of conditions 2(b), 5, and 6 of the Blanket
Order, DLJ Capital shall be considered a DLJ Investor so long as MLVP
II and DLJ Capital both hold securities of Corporate Express.
5. MLVP II will maintain at its office written records concerning
the purchase of Corporate Express series B convertible preferred stock,
including a copy of the written report prepared by the Sub-Manager and
written records of the factors considered by the Independent General
Partners in approving such investment.
6. MLVP II will not have at the time of acquisition of a joint
investment more than 45 percent of its assets invested jointly with all
affiliates unless otherwise permitted by an order of the SEC. In
addition, MLVP II will not make any new venture capital investments,
other than follow-on investment in existing portfolio companies.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-26058 Filed 10-19-94; 8:45 am]
BILLING CODE 8010-01-M