[Federal Register Volume 70, Number 31 (Wednesday, February 16, 2005)]
[Notices]
[Pages 7974-7977]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-637]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26759; 812-13103]


The Adams Express Company, et al.; Notice of Application

February 10, 2005.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under sections 6(c), 17(d) and 23(c) 
of the Investment Company Act of 1940 (the ``Act'') and rule 17d-1 
under the Act.

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Summary of Application: The Adams Express Company (``Adams'') and 
Petroleum & Resources Corporation (``Petroleum'') request an order to 
permit applicants to adopt an equity-based employee compensation plan.

Applicants: Adams and Petroleum.

Filing Dates: The application was filed on June 25, 2004 and amended 
February 9, 2005.

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 applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on March 7, 2005, 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 
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. Applicants, c/o Lawrence L. Hooper, Jr., Vice President, 
General Counsel and Secretary, The Adams Express Company, 7 Saint Paul 
Street, Baltimore, MD 21202.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior Counsel, at (202) 
551-6813, or Mary Kay Frech, Branch Chief, at (202) 551-6814 (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 
Commission's Public Reference Branch, 450 5th Street, NW., Washington, 
DC 20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. Adams and Petroleum, which are both Maryland corporations, are 
registered under the Act as closed-end management investment companies. 
Each company is internally managed. Each company's stock is listed on 
the New York Stock Exchange and the Pacific Exchange.
    2. Adams has twelve directors and seventeen employees and Petroleum 
has twelve directors and fourteen employees. The boards of Adams and 
Petroleum are comprised of the same individuals. There are thirteen 
employees who serve both Adams and Petroleum.
    3. In 1985, the Commission issued an order (the ``1985 Order'') to 
permit internally-managed, closed-end investment company members of the 
Association of Publicly Traded Investment Funds (``APTIF'') to offer 
their employees deferred equity compensation in the form of stock 
options and stock appreciation rights.\1\ Both Adams and Petroleum were 
members of APTIF, which voluntarily dissolved subsequent to the 
issuance of the 1985 Order, and are currently members of the Closed-End 
Division of the Investment Company Institute, into which the operations 
of APTIF were consolidated. At their respective annual meetings held in 
March 1986, the stockholders of the applicants approved the Adams Stock 
Option Plan (the ``Old Adams Plan'') and the Petroleum Stock Option 
Plan (the ``Old Petroleum Plan,'' and together with the Old Adams Plan, 
the ``Old Stock Plans''). The Old Stock Plans were adopted in reliance 
on the 1985 Order.
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    \1\ Association of Publicly Traded Investment Funds, Investment 
Company Act Release No. 14541 (May 28, 1985) (notice) and 14594 
(June 21, 1985) (order).
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    4. Because the investment management business is highly 
competitive, the applicants believe that their successful operation 
will depend on their ability to attract, motivate and retain their 
professional staffs with competitive compensation packages similar to 
those offered by their competitors. Applicants are requesting relief to 
permit the adoption of The Adams Express Company 2005 Equity Incentive 
Compensation Plan and Petroleum & Resources Corporation 2005 Equity 
Incentive Compensation Plan (each, a ``Plan'' and together, the 
``Plans''). Each Plan will be administered by a compensation committee 
(the ``Committees'') composed of three or more directors who (a) are 
not ``interested persons'' of the relevant applicant as defined in 
section 2(a)(19) of the Act, (b) are ``non-employee directors'' within 
the meaning of rule 16b-3 under the Securities Exchange Act of 1934 
(the ``Exchange Act''), and (c) are ``outside directors'' as defined 
under section 162(m) of the Internal Revenue Code of 1986 (the 
``Code''). [p. 10-11] The Plans would permit the applicants to issue 
stock options (``Options''), stock appreciation rights,\2\ restricted 
stock,\3\ restricted stock units,\4\ deferred stock units,\5\ dividend 
equivalents \6\ and performance awards \7\ (``Performance Awards'') 
(each referred to individually as an ``Award'' and, collectively, as 
``Awards'') to key employees and to directors who are not interested 
persons as defined in section

[[Page 7975]]

2(a)(19) of the Act (``disinterested directors''). The exercise price 
of Options must be at least 100% of the Fair Market Value \8\ of a 
share of an applicant's stock on the date of the grant. Options issued 
under the Plans will expire no later than 10 years from the date of 
grant. The Old Stock Plans will be terminated following approval by 
stockholders of the Plans. Existing awards made under the Old Stock 
Plans would remain outstanding and would remain subject to the terms 
and conditions of the Old Stock Plans.
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    \2\ A stock appreciation right is a right to receive, upon 
exercise, the excess of (i) the Fair Market Value (as defined below) 
of one share of an applicant's stock on the date of exercise over 
(ii) the stock appreciation right's grant price. Stock appreciation 
rights issued under the Plans will expire no later than ten years 
from the date of grant. [p. 20]
    \3\ Restricted stock is stock that is subject to restrictions on 
transferability, risk of forfeiture, or other restrictions. [p. 21]
    \4\ Restricted stock units are rights to receive stock and are 
subject to certain restrictions and a risk of forfeiture. [p. 21]
    \5\ A deferred stock unit is a right to receive stock, cash or a 
combination thereof at the end of a specified deferral period. [p. 
22]
    \6\ If and to the extent provided for in the applicable Award 
agreement, recipients of Options, stock appreciation rights, 
restricted stock units and deferred stock units will be entitled to 
receive dividend equivalents equal to the amount or value of any 
cash or other dividends or distributions payable on an equivalent 
number of shares of stock. Dividend equivalents will be paid in 
shares of common stock, cash or a combination thereof. [p. 23]
    \7\ Performance Awards, which are payable in cash or stock of 
the applicants, are conditioned upon satisfaction of performance 
criteria established by the relevant Committee. [p. 23]
    \8\ For purposes of the Plans, ``Fair Market Value'' equals the 
mean of the high and low sale prices per share of the stock of the 
applicant as reported on the New York Stock Exchange-Composite 
Transactions (or such other national securities exchange or 
automated inter-dealer quotation system on which the stock has been 
duly listed and approved for quotation and trading) on the date on 
which the value is to be determined, or if no sale of the stock is 
reported for such date, the next preceding day for which there is a 
reported sale. [fn. 4, pp. 15-16]
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    5. Each Plan has been approved by the applicable applicant's board 
of directors (``Board''), including a majority of the disinterested 
directors of each applicant. Subject to receipt of the order, each 
applicant's Board is expected to approve the submission of the 
respective Plan to stockholders for approval at each applicant's annual 
meeting.
    6. Grants under each Plan may be made only to the applicable 
applicant's disinterested directors and employees, or to the employees 
of such applicant's subsidiaries where such employees provide 
management, administrative or advisory services to the applicant (the 
``Participants''). Employees who serve both Adams and Petroleum on a 
combined full-time basis would be eligible to receive Awards under both 
Plans.
    7. Immediately following each annual meeting of stockholders, each 
disinterested director who is elected a director at, or who was 
previously elected and continues as a director after, that annual 
meeting shall receive an award of 750 restricted stock units of Adams 
and 400 restricted stock units of Petroleum, as applicable. In 
addition, at the effective date of any disinterested director's initial 
election to the Board, the disinterested director will be granted 750 
restricted stock units of Adams and 400 restricted stock units of 
Petroleum, as applicable. Disinterested directors will also receive 
dividend equivalents in respect of such restricted stock units equal to 
the amount or value of any cash or other dividends or distributions 
payable on an equivalent number of shares of common stock. The 
restricted stock units and related dividend equivalents will vest (and 
become non-forfeitable) and be paid (in the form of shares of common 
stock) one year from the date of grant. In addition, disinterested 
directors may elect each year, not later than December 31 of the year 
preceding the year as to which the annual grant of restricted stock 
units is to be applicable, to defer to a fixed date or pursuant to a 
specified schedule payment of all or any portion of the annual grant of 
restricted stock units. Under the Plans, disinterested directors may 
also elect each year, not later than December 31 of the year preceding 
the year as to which deferral of fees is to be applicable, to defer to 
a fixed date or pursuant to a specified schedule all or any portion of 
the cash retainer to be paid for Board service in the following 
calendar year through the issuance of deferred stock units, valued at 
the Fair Market Value of the relevant applicant's stock on the date 
when each payment of such retainer amount would otherwise be made in 
cash.
    8. The total number of shares of each applicant's stock reserved 
and available for delivery in connection with Awards under the 
applicable Plan (other than any shares of Adams Stock or Petroleum 
Stock issued in payment of dividend equivalents) is 4% of the 
outstanding shares of the applicable applicant as of the effective time 
of the Plan. As of December 31, 2004, this represents 3,445,411 shares 
of Adams stock and 879,187 shares of Petroleum stock.
    9. In the event that a dividend, capital gain distribution or other 
distribution, recapitalization, forward or reverse stock split, 
reorganization, merger, consolidation, spin-off, combination, 
repurchase, share exchange, liquidation, dissolution or other similar 
corporate transaction affects the common stock of an applicant, then 
the relevant Committee will, in such manner as it may deem equitable, 
adjust any or all of (i) the aggregate number of shares subject to the 
relevant Plan; (ii) the number and kind of shares which may be 
delivered under the relevant Plan; (iii) the number and kind of shares 
by which per-person Award limitations are measured; (iv) the number and 
kind of shares subject to or deliverable in respect of outstanding 
Awards; and (v) the exercise price or grant price relating to any 
Award. In addition, after the occurrence of any such corporate 
transaction, the relevant Committee will also have the authority to 
make provision for payment of cash or other property in respect of an 
Award. In the event a capital gains distribution is made to the 
applicant's stockholders, the exercise price of outstanding Options and 
the grant price of outstanding stock appreciation rights issued under 
the Plan may be reduced to reflect any such distribution made after the 
date of grant (provided that no such reduction will be made that would 
reduce the exercise price or grant price below zero).

Applicants' Legal Analysis

Sections 18(d), 23(a) and 23(b) of the Act

    1. Section 18(d) of the Act generally prohibits a registered 
management investment company from issuing rights to purchase the 
company's shares.\9\ The applicants state that section 18(d) would 
prohibit the issuance of Options and stock appreciation rights under 
the Plans.
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    \9\ Section 18(d) permits a fund to issue only warrants or 
rights, ratably to a class of stockholders, that have an exercise 
period of no more than 120 days or in exchange for warrants in 
connection with a reorganization.
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    2. Section 23(a) of the Act generally prohibits a registered 
closed-end investment company from issuing securities for services. The 
applicants state that this provision would prohibit the issuance of 
Awards under the Plans as compensation for employees' services.
    3. Section 23(b) of the Act prohibits a registered closed-end 
investment company from selling common stock at below its current net 
asset value. The applicants state that, since Adams stock and Petroleum 
stock have often traded at a discount to their net asset value and 
Awards under the Plans will be valued at the current market price of 
the stock, section 23(b) would in most cases prohibit the issuance of 
the Awards.
    4. Section 6(c) of the Act provides, in part, that the Commission 
may, by order upon application, conditionally or unconditionally exempt 
any person, security or transaction, or any class or classes thereof, 
from any provision of the Act, if and to the extent that 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. The applicants request an exemption 
under section 6(c) from section 18(d) and sections 23(a) and (b) of the 
Act to the extent necessary to implement the Plans.
    5. The applicants state that the concerns underlying those sections 
include (i) the possibility that Options could be granted to persons 
whose interests might be contrary to the interests of stockholders; 
(ii) the potential dilutive impact of Awards on stockholders; (iii) the 
possibility that

[[Page 7976]]

Options might facilitate a change of control; (iv) the introduction of 
complexity and uncertainty into the investment company's financial 
structure, thereby making it more difficult to appraise the value of 
their stock; (v) possible obfuscation of the extent of management 
compensation; and (vi) encouragement of speculative portfolio 
investments at the insistence of the Option holders (to increase the 
possibility of a rise in market price from which they might benefit).
    6. The applicants state that, because Awards under each Plan are 
issuable only to the applicable applicant's directors, officers and 
other key employees, Awards will not be granted to individuals with 
interests contrary to those of the applicant's stockholders. The 
applicants also assert that the Plans would not become a means for 
insiders to obtain control of Adams or Petroleum because the number of 
shares of stock issuable under the Plans would be limited to 4% of the 
outstanding shares of Adams or Petroleum. Moreover, as a condition to 
the requested order, no individual Participant could be issued more 
than 35% of the shares reserved for issuance under the Plans. In 
addition, in no event may the total number of shares of Adams stock or 
Petroleum stock, with respect to which all types of Awards may be 
granted to a Participant under the applicable Plan, exceed 300,000 
shares of stock within any thirty-six month period during which the 
applicable Plan is in effect.
    7. The applicants further state that each Plan will be submitted to 
stockholders for their approval. The applicants represent that a 
concise, ``plain English'' description of the Plans, including their 
potential dilutive effect, will be provided in the proxy materials that 
will be submitted to their respective stockholders. The applicants also 
state that they will comply with the proxy disclosure requirements in 
Item 10 of Schedule 14A under the Exchange Act. The applicants further 
note that the Plans will be disclosed to investors in accordance with 
the requirements of Item 18 of Form N-2, and pursuant to the standards 
and guidelines adopted by the Financial Accounting Standards Board for 
operating companies. In addition, as a condition to the requested 
order, Adams and Petroleum will comply with the disclosure requirements 
for executive compensation plans applicable to operating companies 
under the Exchange Act. The applicants conclude that the Plans will be 
adequately disclosed to investors and appropriately reflected in the 
market value of their stock.
    8. The applicants acknowledge that, while Awards granted under the 
Plans would have a dilutive effect on the stockholders' equity in Adams 
and Petroleum, as the case may be, that effect would not be significant 
and would be outweighed by the anticipated benefits of the Plans to 
Adams, Petroleum and their stockholders. The applicants assert that 
they need the flexibility to provide equity-based employee compensation 
in order to be able to compete effectively with investment management 
companies for talented professionals. The applicants also assert that 
equity-based compensation would more closely align the interests of 
Adams and Petroleum directors, officers and employees with those of the 
applicants' stockholders.
    9. In addition, the applicants state that stockholders will be 
further protected by the conditions to the requested order that assure 
continuing oversight of the operation of the Plans by the applicable 
Board. Under these conditions, each applicant's Board will review the 
relevant Plan at least annually. In addition, the applicable Committee 
periodically will review the potential impact that the grant, exercise 
or vesting of Awards could have on an applicant's earnings and net 
asset value per share, such review to take place prior to any decisions 
to grant Awards, but in no event less frequently than annually. 
Adequate procedures and records will be maintained to permit such 
review. The relevant Committee will be authorized to take appropriate 
steps to ensure that neither the grant nor the exercise or vesting of 
Awards would have an effect contrary to the interests of the 
stockholders of the applicant. This authority will include the 
authority to prevent or limit the grant of additional Awards.

Section 17(d) of the Act

    10. Section 17(d) of the Act and rule 17d-1 under the Act generally 
prohibit an affiliated person of a registered investment company, or an 
affiliated person of such a person, from participating in a joint 
enterprise, joint arrangement or profit-sharing plan in which the 
company is a participant, unless the Commission by order approves the 
transaction. Rule 17d-1(c) defines a joint enterprise to include any 
stock option or stock purchase plan. Rule 17d-1(b) provides that, in 
considering relief pursuant to the rule, the Commission will consider 
(i) whether the participation of the registered investment company in a 
joint enterprise is consistent with the Act's policies and purposes and 
(ii) the extent to which that participation is on a basis different 
from or less advantageous than that of other participants.
    11. The applicants request an order pursuant to section 17(d) and 
rule 17d-1 to permit the Plans. The applicants state that the Plans, 
although benefiting the Participants and Adams and Petroleum in 
different ways, are in the interests of stockholders of Adams and 
Petroleum because the Plans will help them attract, motivate and retain 
talented professionals and help align the interests of employees with 
those of their stockholders. Thus, the applicants assert that the Plans 
are consistent with the policies and purposes of the Act and that the 
applicants' participation in the Plans will be on a basis no less 
advantageous than that of other participants.

Section 23(c) of the Act

    12. Section 23(c) of the Act generally prohibits a registered 
closed-end investment company from purchasing any securities of which 
it is the issuer except in the open market, pursuant to tender offers 
or under other circumstances as the Commission may permit to insure 
that the purchase is made on a basis that does not unfairly 
discriminate against any holders of the class or classes of securities 
to be purchased.
    13. The applicants state that a purchase by Adams or Petroleum of 
Adams or Petroleum stock from a Participant in connection with an 
Award, or where shares are withheld by the applicants in payment of the 
exercise price, might be prohibited by section 23(c) and request an 
order under section 23(c) to permit these purchases. The applicants 
state that these purchases will be made on a basis which does not 
unfairly discriminate against the stockholders of Adams and Petroleum 
because Adams and Petroleum will purchase their shares from the 
Participants at their Fair Market Value, as defined in the Plans, on 
the date of the repurchase, which would not be significantly different 
from the price at which all other Adams and Petroleum stockholders 
could sell their shares on the New York Stock Exchange.

Applicants' Conditions

    The applicants agree that any order of the Commission granting the 
requested relief will be subject to the following conditions:
    1. Each Board will maintain a Committee, none of the members of 
which will be ``interested persons'' of the applicants as defined in 
the Act. Each Committee will administer the

[[Page 7977]]

relevant Plan and will be composed of three or more directors of the 
relevant applicant who (i) are not ``interested persons'' of the 
relevant applicant, (ii) are ``non-employee directors'' within the 
meaning of rule 16b-3 under the Exchange Act and (iii) are ``outside 
directors'' as defined under section 162(m) of the Code.
    2. A Plan will not be implemented unless it is approved by a 
majority of the votes cast by stockholders at a meeting called to 
consider the Plan. Any amendment to a Plan will be subject to the 
approval of the applicable applicant's stockholders to the extent such 
approval is required by applicable law or regulation or the applicable 
Board otherwise determines. Unless terminated or amended, during the 
fifth year of each Plan (and each fifth year thereafter), the Plan 
shall be submitted for reapproval to the relevant applicant's 
stockholders and all Awards made during that year shall be contingent 
upon stockholder reapproval.
    3. Awards are not transferable or assignable, except as the 
Committees will specifically approve to facilitate estate planning or 
to a beneficiary upon a Participant's death or by will or the laws of 
descent and distribution. Awards may also be transferred pursuant to a 
qualified domestic relations order.
    4. The existence and nature of the Awards granted will be disclosed 
in accordance with standards or guidelines adopted by the Financial 
Accounting Standards Board for operating companies and the requirements 
of the Commission under Item 402 of Regulation S-K, Item 8 of Schedule 
14A under the Exchange Act and Item 18 of Form N-2.
    5. The maximum number of shares of stock available for delivery in 
connection with Awards under a Plan (other than any shares of Adams 
Stock or Petroleum Stock, as applicable, issued in payment of Dividend 
Equivalents) will be 4% of the relevant applicant's stock outstanding 
on the effective date of the relevant Plan, subject to adjustment for 
corporate transactions.
    6. Each applicant's Board will review the relevant Plan at least 
annually. In addition, the applicable Committee periodically will 
review the potential impact that the grant, exercise, or vesting of 
Awards could have on an applicant's earnings and net asset value per 
share, such review to take place prior to any decisions to grant 
Awards, but in no event less frequently than annually. Adequate 
procedures and records will be maintained to permit such review, and 
the relevant Committee will be authorized to take appropriate steps to 
ensure that neither the grant nor the exercise or vesting of Awards 
would have an effect contrary to the interests of investors in the 
applicant. This will include the authority to prevent or limit the 
grant of additional Awards. All records maintained pursuant to this 
condition will be subject to examination by the Commission and its 
staff.
    7. The Old Stock Plans will be terminated pursuant to their terms 
following approval by stockholders of the Plans. No further grants 
would be made under the Old Stock Plans beyond those already made as of 
the date hereof. Existing awards made under the Old Stock Plans would 
remain outstanding and would remain subject to the terms and conditions 
of the Old Stock Plans.
    8. Awards under the Plans are issuable only to directors, officers, 
employees of the relevant applicant and employees of certain of its 
subsidiaries. No person will be granted Awards relating to more than 
35% of the shares reserved for issuance under the relevant Plan. 
Subject to the immediately preceding limitation, in any thirty-six 
month period during which a Plan is in effect, no person may be granted 
under that Plan more than 300,000 shares of stock in respect of 
Options, 300,000 shares of stock in respect of stock appreciation 
rights, 300,000 shares of stock in respect of restricted stock, 300,000 
shares of stock in respect of restricted stock units or 300,000 shares 
of stock in respect of deferred stock units. In addition, in no event 
may the total number of shares of stock with respect to which all types 
of Awards may be granted to an eligible person under the applicable 
Plan exceed 300,000 shares of stock within any thirty-six month period 
during which the applicable Plan is in effect, which amount may be 
adjusted to reflect certain corporate transactions or events that 
affect the applicant's stock. Grants to disinterested directors are 
limited to those described in paragraph 2 below.
    9. In each fiscal year, a disinterested director will be granted 
750 restricted stock units of Adams and 400 restricted stock units of 
Petroleum, as applicable, which amounts may be adjusted to reflect 
certain corporate transactions. At the effective date of any 
disinterested director's initial election to the Board of an applicant, 
such disinterested director will be granted 750 restricted stock units 
of Adams and 400 restricted stock units of Petroleum, as applicable, 
which amounts may be adjusted to reflect certain corporate 
transactions. Disinterested directors will also receive dividend 
equivalents in respect of such restricted stock units equal to the 
amount or value of any cash or other dividends or distributions payable 
on an equivalent number of shares of common stock. The restricted stock 
units and related dividend equivalents will vest (and become non-
forfeitable) and be paid (in the form of shares of common stock) one 
year from the date of grant. In addition, disinterested directors may 
elect each year, not later than December 31 of the year preceding the 
year as to which the annual grant of restricted stock units is to be 
applicable, to defer to a fixed date or pursuant to a specified 
schedule payment of all or any portion of the annual grant of 
restricted stock units. Any modification of the deferral election may 
be made only upon satisfaction of any conditions that the relevant 
Committee may impose. Disinterested directors may also elect each year, 
not later than December 31 of the year preceding the year as to which 
deferral of fees is to be applicable, to defer to a fixed date or 
pursuant to a specified schedule all or any portion of the cash 
retainer to be paid for Board or other service related to Board 
activities in the following calendar year through the issuance of 
deferred stock units, valued at the Fair Market Value of the relevant 
applicant's stock on the date when each payment of such retainer amount 
would otherwise be made in cash.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E5-637 Filed 2-15-05; 8:45 am]
BILLING CODE 8010-01-P