[Federal Register Volume 72, Number 17 (Friday, January 26, 2007)]
[Notices]
[Pages 3880-3882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-1228]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 27669; 812-13308]
American Capital Strategies, Ltd.; Notice of Application
January 19, 2007.
AGENCY: Securities and Exchange Commission (the ``Commission'').
[[Page 3881]]
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 a proposal to grant certain stock
options to directors who are not also employees or officers of the
applicant (the ``Non-employee Directors'') under its 2006 Stock Option
Plan (the ``Plan'').
Filing Dates: The application was filed on June 2, 2006 and amended
on January 19, 2007.
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 15, 2007, 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 Bethesda 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 (telephone 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 and without 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 executive officers of
applicant, 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 its proposal to grant certain stock options under the Plan to
its 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 approved the Plan at a
meeting held on March 23, 2006 and amended the Plan at meetings held on
April 6, 2006 and December 7, 2006. Applicant's stockholders approved
the Plan at the annual meeting of stockholders held on May 11, 2006.
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\2\ The Non-employee Directors receive a $75,000 per year
retainer payment and $2,500 for each Board or committee meeting
attended, and reimbursement for related expenses. Additionally,
under the terms of a disinterested director retention plan that
applicant established in 2006, Non-employee Directors are generally
entitled to receive a payment upon termination of service as a
director equal to a multiple of the number of years of service as a
Non-employee Director and the retainer payment then in effect.
\3\ The Board presently has two vacancies. All of the Non-
employee Director are Disinterested Directors.
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3. Applicant's officers and employees, and Non-employee Directors
are eligible to receive options under the Plan. Under the Plan, a
maximum of 320,000 shares of applicant's common stock, in the
aggregate, may be issued to Non-employee Directors and 40,000 shares of
applicant's common stock may be issued to any one Non-employee
Director. Each of the six Non-employee Directors serving on the Board
as of May 11, 2006 will be granted options to purchase 40,000 shares of
applicant's common stock (the ``Initial Grants'') on the date that the
Commission issues an order on the application (``Order Date''). The
options issued under the Initial Grants will vest in three equal parts
on each of the first three anniversaries of May 11, 2006. Any person
who becomes a Non-employee Director after May 11, 2006 will be entitled
to receive options to purchase 40,000 shares of applicant's common
stock (the ``Other Grants'') on the later of the date such person
becomes a Non-employee Director and the Order Date. The options issued
under the Other Grants will vest in three equal parts on each of the
first three anniversaries of the date such person becomes a Non-
employee Director.
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 Stock 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 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''). The remaining 16,990,212 shares
of applicant's common stock subject to issuance to officers and
employees under the Employee Plans and the Plan represent 11.5% of the
147,613,188 shares of applicant's common stock outstanding as of
December 31, 2006. Non-employee Directors are eligible or have been
eligible to participate in applicant's Disinterested Director stock
option plans (together with the Employee Plans, the ``Other Plans'')
[[Page 3882]]
under which 225,000 shares of applicant's common stock remain for
issuance, representing 0.2% of shares of applicant's common stock
outstanding as of December 31, 2006. The 320,000 shares of applicant's
common stock that may be issued to Non-employee Directors under the
Plan represent 0.2% of shares of applicant's common stock outstanding
as of December 31, 2006. Therefore, the maximum number of applicant's
voting securities that would result from the exercise of all
outstanding options issued and all options issuable to directors,
officers, and employees under the Other Plans and the Plan would be
17,535, 212 shares of applicant's common stock, or approximately 11.9%
of shares of applicant's common stock outstanding as of December 31,
2006. 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). Section 61(a)(3)(B)
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) 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 its proposal to grant certain stock
options to Non-employee Directors under the Plan meets all the
requirements of section 61(a)(3)(B). 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 availability of options under 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 amount of voting securities
that would result from the exercise of all outstanding options issued
to the directors, officers, and employees under the Other Plans and the
Plan would be 14,258,728 shares of applicant's common stock, or
approximately 9.7% of applicant's shares of common stock outstanding as
of December 31, 2006, which is below the percentage limitations in the
Act. Applicant asserts that, given the relatively small amount of
common stock issuable to Non-employee Directors upon their exercise of
options under the Plan, the exercise of such 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.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-1228 Filed 1-25-07; 8:45 am]
BILLING CODE 8011-01-P