[Federal Register Volume 64, Number 76 (Wednesday, April 21, 1999)]
[Pages 19570-19572]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-9910]



[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 

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 

[[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 
    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,
[FR Doc. 99-9910 Filed 4-20-99; 8:45 am]