[Federal Register Volume 71, Number 24 (Monday, February 6, 2006)]
[Notices]
[Pages 6106-6107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-1542]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27220; 812-12818]


American Capital Strategies, Ltd.; Notice of Application

January 31, 2006.
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 2000 Disinterested Director Stock 
Option Plan (the ``Plan'') and the grant of certain stock options under 
the Plan.
    Filing Dates: The application was filed on April 24, 2002 and 
amended on January 24, 2006.
    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 February 27, 2006, 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, U.S. Securities and Commission, 100 F Street, 
NE., Washington, DC 20549-1090; Applicant, 2 Bethseda Metro Center, 
14th Floor, Bethesda, Maryland 20814.

FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, Senior Counsel, at 
(202) 551-6873, or Nadya B. Roytblat, Assistant Director, at (202) 551-
6821 (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 
Public Reference Desk, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-0102 (tel. 202-551-5850).

Applicant's Representations

    1. Applicant, a Delaware corporation, is a business development 
company (``BDC'') within the meaning of section 2(a)(48) of the Act.\1\ 
Applicant's primary business objectives are to increase its net 
operating income and net asset value by investing its assets in senior 
debt, subordinated debt with detachable warrants and equity of small to 
medium sized businesses with attractive current yields and potential 
for equity appreciation. Applicant's investment decisions are either 
made by its board of directors (the ``Board''), based on 
recommendations of an investment committee comprised of senior officers 
of applicant, or, for investments that meet certain objective criteria 
established by the Board, by the investment committee, under authority 
delegated by the Board. 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. Six of the seven current members of 
the Board are not ``interested persons'' (as defined in section 
2(a)(19) of the Act) of the applicant (``Disinterested Directors'').\3\ 
The Board initially approved the Plan at a meeting held on March 30, 
2000 and amended the Plan on October 30, 2003 and July 28, 2005. 
Applicant's stockholders approved the Plan at the annual meeting of 
stockholders held on May 3, 2000. The Plan would become effective on 
the date that the Commission issues an order on the application (the 
``Order Date'').
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    \2\ The Non-employee Directors receive a $50,000 per year 
retainer payment and $1,500 for each Board or committee meeting 
attended, and reimbursement of related expenses. Prior to July 1, 
2005, the retainer payment was set at a rate of $25,000 per year.
    \3\ The Board presently has two vacancies. All of the Non-
employee Directors are Disinterested Directors.
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    3. The Plan provides that on the Order Date, options for 25,000 
shares of applicant's common stock will be granted to each of the six 
Non-employee Directors serving on the Board as of October 20, 2003 (the 
``Initial Grants''). Two-thirds of the options granted under the 
Initial Grants will vest on the Order Date and the remaining one-third 
of such options will vest on the third anniversary of October 20, 2003. 
In the event that any of the six Non-employee Directors are not 
directors on the Order Date or leave the Board before their options 
vest fully, persons who join the Board as Non-employee Directors will 
be eligible to receive options for 15,000 shares of applicant's common 
stock (the ``Other Grants''). The options granted under the Other 
Grants will vest in three equal installments of 5,000 shares on each of 
the three anniversaries of the date of the grant. The Plan provides 
that

[[Page 6107]]

a maximum of 150,000 shares of applicant's common stock may be issued 
to Non-employee Directors as a group. 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 an option 
will not be less than 100% of the current market value of, or if no 
such market value exists, the current net asset value per share of, 
applicant's common stock on the date of the issuance of the option.\4\ 
Options granted under the Plan will expire ten years from the date of 
grant and may not be assigned or transferred other than by will or the 
laws of descent and distribution. In the event of the death or 
disability of a Non-employee Director during such director's service, 
all such director's unexercised options will immediately become 
exercisable and may be exercised for a period of three years following 
the date of death (by such 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 will 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.
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    \4\ Under the Plan, ``current market value'' (defined as ``fair 
market value'') is generally the closing sales price of applicant's 
shares as quoted on the Nasdaq National Market, or alternatively, on 
the exchange where applicant's shares are traded, on the day the 
option is granted.
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    5. Applicant's officers and employees, including employee directors 
are eligible or have been eligible to receive options under applicant's 
six other stock option plans under which Non-employee Directors are not 
entitled to participate (the ``Employee Plans''). Non-employee 
Directors have participated in applicant's prior Disinterested Director 
stock option plan under which options for all available shares have 
been granted (such plan together with the Employee Plans, the ``Other 
Plans''). The maximum number of applicant's voting securities that 
would result from the exercise of all outstanding options issued or 
options issuable to the directors, officers, and employees under the 
Other Plans and the Plan would be 12,240,580 shares, or approximately 
10.3% of the 118,913,029 shares of applicant's common stock outstanding 
as of December 30, 2005. Applicant has no outstanding warrants, 
options, or rights to purchase its voting securities, other than the 
options granted or to be granted to its directors, officers, and 
employees under the Other Plans and the Plan.

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(a)(1) of the 
Investment Advisers Act of 1940, except to the extent permitted by 
clause (b)(1) or (b)(2) 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) 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 terms of the Plan meet all the 
requirements of section 61(a)(3)(B) of the Act. Applicant states that 
the Board is actively involved in the oversight of applicant's affairs 
and that it relies extensively on the judgment and experience of its 
Board. In addition to their duties as Board members generally, 
applicant states that the Non-employee Directors provide guidance and 
advice on operational issues, underwriting policies, credit policies, 
asset valuation and strategic direction, as well as serving on 
committees. Applicant believes that the Plan will provide significant 
at-risk incentives to Non-employee Directors to remain on the Board and 
devote their best efforts to ensure applicant's success. Applicant 
states that the options will provide a means for the Non-employee 
Directors to increase their ownership interests in applicant, thereby 
ensuring close identification of their interests with those of 
applicant and its stockholders. Applicant asserts that by providing 
incentives such as options, applicant will be better able to maintain 
continuity in the Board's membership and to attract and retain the 
highly experienced, successful and dedicated business and professional 
people who are critical to applicant's success as a BDC.
    4. Applicant states that the maximum number of voting securities 
that would result from the exercise of all outstanding options issued 
or options issuable to the directors, officers, and employees under the 
Other Plans and the Plan would be 12,240,580 shares, or approximately 
10.3% of applicant's common stock outstanding as of December 30, 2005, 
which is below the percentage limitations in the Act. Applicant asserts 
that, given the relatively small amount of common stock issuable upon 
the exercise of the options under the Plan, the exercise of options 
would not, absent extraordinary circumstances, have a substantial 
dilutive effect on the net asset value of applicant's common stock.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-1542 Filed 2-3-06; 8:45 am]
BILLING CODE 8010-01-P