[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]
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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'').
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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.
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\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.
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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.
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\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.
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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
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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