[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