[Federal Register Volume 64, Number 76 (Wednesday, April 21, 1999)] [Notices] [Pages 19570-19572] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 99-9910] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Release No. 23785; 812-11218] American Capital Strategies, Ltd.; Notice of Application April 14, 1999. AGENCY: Securities and Exchange Commission (the ``Commission''). ACTION: Notice of an application for an order under section 61(a)(3)(B) of the Investment Company Act of 1940 (the ``Act''). ----------------------------------------------------------------------- SUMMARY OF APPLICATION: Applicant, American Capital Strategies, Ltd., requests an order approving its 1997 Disinterested Director Stock Option Plan (the ``Plan'') and the grant of certain stock options under the Plan. FILING DATES: The application was filed on July 10, 1998 and amended on November 12, 1998. Applicant has agreed to file an amendment to the application during the notice period, the substance of which is reflected in this notice. Hearing or Notification of Hearing: An order granting the application will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission's Secretary and serving applicant with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on May 10, 1999, and should be accompanied by proof of service on applicant, 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 who wish to be notified of a hearing may request notification by writing to the Commission's Secretary. ADDRESSES: Secretary, Commission, 450 5th Street, NW, Washington, DC 20549-0609. Applicant, c/o Samuel A. Flax, Esquire, Arnold & Porter, 555 Twelfth Street, NW, Washington, DC 20004-1206. FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Sr., Senior Counsel, at (202) 942-0714, or George J. Zornada, 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 is available for a fee at the Commission's Public Reference Branch, 450 Fifth Street, NW, Washington, DC 20549-0102 (Tel. 202-942-8090). Applicant's Representations 1. Applicant is a business development company (``BDC'') within the meaning of section 2(a)(48) of the Act.\1\ Applicant's primary business is making loans and investments in small and medium-sized companies. Applicant's investment decisions are made by a board of directors (``Board'') based on recommendations of a loan approval committee comprised of senior management. Applicant does not have an external investment adviser within the meaning of section 2(a)(20) of the Act. --------------------------------------------------------------------------- \1\ Section 2(a)(48) defines a BDC to be any closed-end investment company that operates for the purpose of making investments in securities described in sections 55(a)(1) through 55(a)(3) of the Act and makes available significant managerial assistance with respect to the issuers of such securities. --------------------------------------------------------------------------- 2. Applicant requests an order under section 61(a)(3)(B) of the Act approving the Plan, which provides for the grant of options to purchase shares of applicant's common stock to directors who are neither officers nor employees of applicant (``Non-Employee Directors'').\2\ Applicant has a nine member Board, the majority of whom are not ``interested persons'' as defined in section 2(a)(19) of the Act. On November 6, 1997, the Board adopted the Plan subject to approval by the Commission and applicant's shareholders. On May 14, 1998, applicant's shareholders approved the Plan. The Plan will not become effective until the date that a Commission order is issued on the application. --------------------------------------------------------------------------- \2\ Each Non-Employee Director receives $10,000 per year for each year they serve as a director and $1,000 for each Board or committee meeting attended, plus reimbursement of related expenses. --------------------------------------------------------------------------- 3. The Plan provides that each Non-Employee Director will receive an initial grant of options (together with any options issued later under the Plan, ``Options'') to acquire 15,000 shares of applicant's common stock. The Options will vest over a three-year period in 5,000 share increments. Five of the Non-Employee Directors were directors when the Board adopted the Plan. These five Non-Employee Directors will have 5,000 Options vest on November 6 of each of the three years following November 6, 1997. The sixth Non-Employee Director became a director and received an initial grant of 15,000 Options on August 8, 1998. The sixth director's Options will vest in 5,000 increments on August 8th of each of the three following years. Any Options granted prior to the issuance of a Commission order that otherwise would have vested [[Page 19571]] will vest on the date that the Commission issues an order on the application. The Plan provides that a maximum of 150,000 shares of applicant's common stock may be issued to Non-Employee Directors as a group. Following the initial grants, 60,000 shares of applicant's stock would remain eligible for grants under the Plan. Future grants would be made by a committee of the Board, none of whose members are eligible to participate in the Plan (``Committee''). The Committee has plenary authority to determine, subject to the Plan, the granting of future Options. Under the Plan, no single Non-Employee Director may receive Options to purchase more than 25,000 shares of applicant's common stock. 4. Under the terms of the Plan, the exercise price of the initial grants will be the current market price of applicant's common stock on the date that a Commission order is issued on the application, and on the date of issuance of any Options thereafter. The Options expire ten years from the date of grant and may not be assigned or transferred other than by the laws of descent and distribution. In the event of the death or disability of a Non-Employee Director during the Director's service, unexercised Options immediately become exercisable and may be exercised for a period of three years following the date of death (by the Director's personal representative) or one year following the date of disability, but in no event after the respective expiration dates of such Options. In the event of the termination of a Non-Employee Director for cause, any unexercised Options terminate immediately. If a Non-Employee Director's service is terminated for any reason other than by death, disability, or for cause, the Options may be exercised within one year immediately following the date of termination, but in no event later than the expiration date of such Options. 5. As of March 16, 1999, applicant had outstanding 11,106,105 shares of common stock. Applicant's officers and employees, including employee directors, are eligible to receive options under Applicant's other stock option plan (under which Non-Employee Directors are not entitled to participate) (``Other Plan''). A maximum of 1,800,252 shares, or 16.2% of applicant's outstanding common stock, may be issued under the Other Plan, of which 1,637,778 shares, representing 14.7% of applicant's outstanding common stock, are subject to granted options. Applicant also has outstanding 442,751 warrants issued to Friedman, Billings, Ramsey & Co. in connection with applicant's initial public offering. Each warrant is exercisable for one share of applicant's common stock, representing 4% of applicant's outstanding common stock. Applicant's Legal Analysis 1. Section 63(3) of the Act permits a BDC to sell its common stock at a price below current net asset value upon the exercise of any option issued in accordance with section 61(a)(3) of the Act. Section 61(a)(3)(B) of the Act provides, in pertinent part, that a BDC may issue to its non-employee directors options to purchase its voting securities pursuant to an executive compensation plan, provided that: (a) The options expire by their terms within ten years; (b) the exercise price of the options is not less than the current market value of the underlying securities at the date of the issuance of the options, or if no market exists, the current net asset value of the voting securities; (c) the proposal to issue the options is authorized by the BDC's shareholders, and is approved by order of the Commission upon application; (d) the options are not transferable except for disposition by gift, will or intestacy; (e) no investment adviser of the BDC receives any compensation described in section 205(1) of the Investment Advisers Act of 1940, except to the extent permitted by clause (A) or (B) of that section; and (f) the BDC does not have a profit-sharing plan as described in section 57(n) of the Act. 2. In addition, section 61(a)(3)(C) of the Act provides that the amount of the BDC's voting securities that would result from the exercise of all outstanding warrants, options, and rights at the time of issuance may not exceed 25% of the BDC's outstanding voting securities, except that if the amount of voting securities that would result from the exercise of all outstanding warrants, options, and rights issued to the BDC's directors, officers, and employees pursuant to an executive compensation plan would exceed 15% of the BDC's outstanding voting securities, then the total amount of voting securities that would result from the exercise of all outstanding warrants, options, and rights at the time of issuance will not exceed 20% of the outstanding voting securities of the BDC. 3. Applicant represents that the Plan would comply with all of the requirements of section 61(a)(3)(B) of the Act. Applicant states in support of its application that the Board actively oversees applicant's affairs, applicant relies extensively on the judgment and experience of the Board, and that Non-Employee Directors provide advice to applicant on operational issues, underwriting policies, credit policies and asset valuation and strategic direction, as well as serving on committees. Applicant believes that the Plan will provide additional incentives to Non-Employee Directors to remain on the Board and devote their best efforts to ensure applicant's success. Applicant also believes that the Options will provide significant at-risk incentives to the Non-Employee Directors, thereby further ensuring close identification of their interests with those of the applicant and its shareholders. Applicant asserts that by providing incentives such as Options, applicant will be able to maintain continuity in the Board's membership and to attract and retain the highly experienced and skilled professionals who are critical to applicant's success as a BDC. 4. Applicant submits that the terms of the Plan are fair and reasonable and do not involve overreaching of applicant or its shareholders. Applicant states that the Options would not be immediately exercisable and that they vest over a three-year period. Applicant asserts that if the current Non-Employee Directors remain in office for a period of three years and exercise all of the Options granted to them under the Plan, applicant would issue 90,000 shares of common stock representing .81% of the applicant's outstanding common stock. Applicant also states that the total number of shares of common stock issuable under the Plan to Non-Employee Directors represents approximately 1.4% of applicant's outstanding common stock. Applicant asserts that the Options will have value only to the extent that applicant's market value increases above the exercise price of the Options and that, given the small amount of common stock issuable upon exercise of the Options, the exercise of the Options pursuant to the Plan would not have a substantial dilutive effect on the net asset value of applicant's common stock. Applicant states that the total amount of voting securities that would result from the exercise of all outstanding warrants, options and rights upon approval of the Plan would represent 19.6% of applicant's outstanding voting securities. To the extent that applicant has authorized a number of options for future issuance that, if granted currently, would exceed the limits imposed by section 61(a)(3)(C) of the Act, applicant represents that no grants will be made in excess of the [[Page 19572]] percentage limitations set forth in section 61(a)(3)(C) of the Act. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Jonathan G. Katz, Secretary. [FR Doc. 99-9910 Filed 4-20-99; 8:45 am] BILLING CODE 8010-01-M