[Federal Register Volume 73, Number 41 (Friday, February 29, 2008)]
[Notices]
[Pages 11164-11167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-3845]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28168; 812-13367]


Kohlberg Capital Corporation; Notice of Application

February 25, 2008.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
sections 23(a), 23(b) and 63 of the Act, and under sections 57(a)(4) 
and 57(i) of the Act and rule 17d-1 under the Act permitting certain 
joint transactions otherwise prohibited by section 57(a)(4) of the Act.

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Summary of the Application: Applicant, Kohlberg Capital Corporation 
(``Kohlberg Capital'') requests an order to permit it to issue 
restricted shares of its common stock to its officers and employees 
under the terms of its equity incentive plan.

Filing Dates: The application was filed on February 27, 2007, and 
amended on February 13, 2008 and February 22, 2008. Applicants have 
agreed to file an amendment 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 March 21, 2008, 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 Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090. Applicant, 295 Madison Avenue, 
6th Floor, New York, NY 10017.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at 
(202) 551-6817, or Julia Kim Gilmer, Branch Chief, at (202) 551-6821, 
(Division of Investment Management, Office of Investment Company 
Regulation).

[[Page 11165]]


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 Desk, 100 F Street, NE., Washington, DC 
20549-1520 (tel. 202-551-5850).

Applicant's Representations

    1. Kohlberg Capital, a Delaware corporation, is an internally 
managed, non-diversified, closed-end investment company that has 
elected to be regulated as a business development company (``BDC'') 
under the Act.\1\ Kohlberg Capital provides debt and equity growth 
capital to privately-held middle market companies and its investment 
objective is to generate current income and capital appreciation from 
the investments made by those companies in senior secured term loans, 
mezzanine debt and selected equity investments. Kohlberg Capital may 
also invest in loans to larger, publicly traded companies, high-yield 
bonds, distressed debt securities and debt and equity securities issued 
by collateralized debt obligation funds. Shares of Kohlberg Capital's 
common stock are traded on the NASDAQ Global Select Market under the 
symbol ``KCAP.'' As of September 30, 2007, there were 17, 997,611 
shares of Kohlberg Capital's common stock outstanding. As of that date, 
Kohlberg Capital had 26 employees, including the employees of its 
wholly-owned consolidated subsidiaries.\2\
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    \1\ Kohlberg Capital was organized on August 8, 2006. On 
December 4, 2006, Kohlberg Capital filed with the Commission its 
registration statement on Form N-2 under the Securities Act of 1933, 
as amended, in connection with its initial public offering of common 
stock (the ``IPO''). On December 5, 2006, Kohlberg Capital elected 
to be regulated as a BDC. 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. Kohlberg Capital completed its IPO on December 15, 2006.
    \2\ Kohlberg Capital does not currently have any wholly-owned 
consolidated subsidiaries.
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    2. Kohlberg Capital currently has a seven-member board of directors 
(the ``Board'') of whom three are ``interested persons'' of Kohlberg 
Capital within the meaning of section 2(a)(19) of the Act and four are 
not interested persons (the ``non-interested directors''). The four 
non-interested directors are neither employees nor officers of Kohlberg 
Capital (``Non-employee Directors''). Currently, Kohlberg Capital's 
Non-employee Directors are all non-interested Directors, but it is 
possible that Kohlberg Capital may have Non-employee Directors in the 
future who are interested persons of Kohlberg Capital.
    3. Kohlberg Capital believes that its successful operation depends 
on its ability to offer compensation packages to its professionals that 
are competitive with those offered by its competitors. Kohlberg Capital 
believes its ability to adopt a compensation plan providing for the 
periodic issuance of shares of restricted stock (i.e., stock that, at 
the time of issuance, is subject to certain forfeiture restrictions, 
and thus is restricted as to its transferability until such forfeiture 
restrictions have lapsed) (the ``Restricted Stock'') is vital to its 
future growth and success. Kohlberg Capital wishes to adopt an equity-
based compensation plan (the ``Plan'') for its officers and employees 
(``Employees''), as well as employees of its wholly owned consolidated 
subsidiaries (together with the Employees, the ``Participants'').
    4. The Plan will authorize the issuance of shares of Restricted 
Stock subject to certain forfeiture restrictions. These restrictions 
may relate to continued employment, the performance of Kohlberg 
Capital, or other restrictions deemed by the Board to be appropriate. 
The Restricted Stock will be subject to restrictions on transferability 
and other restrictions as required by the Board. Except to the extent 
restricted under the terms of the Plan, a Participant granted 
Restricted Stock will have all the rights of any other shareholder, 
including the right to vote the Restricted Stock and the right to 
receive dividends. During the restriction period, the Restricted Stock 
generally may not be sold, transferred, pledged, hypothecated, 
margined, or otherwise encumbered by the Participant. Except as the 
Board otherwise determines, upon termination of a Participant's 
employment during the applicable restriction period, Restricted Stock 
for which forfeiture restrictions have not lapsed at the time of such 
termination shall be forfeited.
    5. The maximum amount of Restricted Stock that may be issued under 
the Plan will be 10% of the outstanding shares of Kohlberg Capital's 
common stock on the effective date of the Plan plus 10% of the 
outstanding shares of Kohlberg Capital's common stock issued or 
delivered by Kohlberg Capital (other than pursuant to compensation 
plans) during the term of the Plan.\3\ The Plan limits the total number 
of shares that may be awarded to any single Participant in a single 
year to 500,000 shares. In addition, no Restricted Stock Participant 
may be granted more than 25% of the shares reserved for issuance under 
the Plan. The Plan will be administered by the Board, which will award 
shares of Restricted Stock to the Participants from time to time as 
part of the Participants' compensation based on a Participant's actual 
or expected performance and value to Kohlberg Capital.
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    \3\ For purposes of calculating compliance with this limit, 
Kohlberg Capital will count as Restricted Stock all shares of its 
common stock that are issued pursuant to the Plan less any shares 
that are forfeited back to Kohlberg Capital and cancelled as a 
result of forfeiture restrictions not lapsing.
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    6. Each issuance of Restricted Stock under the Plan will be 
approved by the required majority, as defined in section 57(o) of the 
Act,\4\ of Kohlberg Capital's directors on the basis that the issuance 
is in the best interests of Kohlberg Capital and its shareholders. The 
date on which the required majority approves an issuance of Restricted 
Stock will be deemed the date on which the subject Restricted Stock is 
granted.
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    \4\ The term ``required majority,'' when used with respect to 
the approval of a proposed transaction, plan, or arrangement, means 
both a majority of a BDC's directors or general partners who have no 
financial interest in such transaction, plan, or arrangement and a 
majority of such directors or general partners who are not 
interested persons of such company.
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    7. The Plan was approved by the Board on February 5, 2008, 
including by a majority of the non-interested directors and the 
required majority as defined in section 57(o) of the Act. The Plan will 
be submitted for approval to Kohlberg Capital's shareholders, and will 
become effective upon such approval, subject to and following receipt 
of the order.

Applicant's Legal Analysis

Sections 23(a) and (b), Section 63

    1. Under section 63 of the Act, the provisions of section 23(a) of 
the Act generally prohibiting a registered closed-end investment 
company from issuing securities for services or for property other than 
cash or securities are made applicable to BDCs. This provision would 
prohibit the issuance of Restricted Stock as a part of the Plan.
    2. Section 23(b) generally prohibits a closed-end management 
investment company from selling its common stock at a price below its 
current net asset value (``NAV''). Section 63(2) makes section 23(b) 
applicable to BDCs unless certain conditions are met. Because 
Restricted Stock that would be granted under the Plan would not meet 
the terms of section 63(2), sections 23(b) and 63 prohibit the issuance 
of the Restricted Stock.
    3. Section 6(c) provides that the Commission may, by order upon 
application, conditionally or

[[Page 11166]]

unconditionally exempt any person, security, or transaction, or any 
class or classes of persons, securities or transactions, 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.
    4. Kohlberg Capital requests an order pursuant to section 6(c) of 
the Act granting an exemption from the provisions of sections 23(a) and 
(b) and section 63 of the Act. Kohlberg Capital states that the 
concerns underlying those sections include: (a) Preferential treatment 
of investment company insiders and the use of options and other rights 
by insiders to obtain control of the investment company; (b) 
complication of the investment company's structure that makes it 
difficult to determine the value of the company's shares; and (c) 
dilution of shareholders' equity in the investment company. Kohlberg 
Capital states that the Plan does not raise the concern about 
preferential treatment of Kohlberg Capital's insiders because the Plan 
is bona fide compensation plan of the type that is common among 
corporations generally. In addition, section 61(a)(3)(B) of the Act 
permits a BDC to issue to its officers, directors and employees, 
pursuant to an executive compensation plan, warrants, options and 
rights to purchase the BDC's voting securities, subject to certain 
requirements. Kohlberg Capital states that, for reasons that are 
unclear, section 61 and its legislative history do not address the 
issuance by a BDC of restricted stock as incentive compensation. 
Kohlberg Capital states, however, that the issuance of Restricted Stock 
is substantially similar, for purposes of investor protection under the 
Act, to the issuance of warrants, options, and rights as contemplated 
by section 61. Kohlberg Capital also asserts that the Plan would not 
become a means for insiders to obtain control of Kohlberg Capital 
because the number of shares of Kohlberg Capital issuable under the 
Plan would be limited as set forth in the application. Moreover, no 
individual Restricted Stock Participant could be issued more than 25% 
of the shares reserved for issuance under the Plan.
    5. Kohlberg Capital further states that the Plan will not unduly 
complicate Kohlberg Capital's capital structure because equity-based 
compensation arrangements are widely used among corporations and 
commonly known to investors. Kohlberg Capital notes that the Plan will 
be submitted to its shareholders for their approval. Kohlberg Capital 
represents that a concise, ``plain English'' description of the Plan, 
including its potential dilutive effect, will be provided in the proxy 
materials that will be submitted to Kohlberg Capital's shareholders. 
Kohlberg Capital also states that it will comply with the proxy 
disclosure requirements in Item 10 of Schedule 14A under the Securities 
Exchange Act of 1934 (the ``Exchange Act''). Kohlberg Capital further 
notes that the Plan will be disclosed to investors in accordance with 
the requirements of the Form N-2 registration statement for closed-end 
investment companies, and pursuant to the standards and guidelines 
adopted by the Financial Accounting Standards Board for operating 
companies. In addition, Kohlberg Capital will comply with the 
disclosure requirements for executive compensation plans applicable to 
operating companies under the Exchange Act.\5\ Kohlberg Capital thus 
concludes that the Plan will be adequately disclosed to investors and 
appropriately reflected in the market value of Kohlberg Capital's 
shares.
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    \5\ Kohlberg Capital will comply with the amendments to the 
disclosure requirements for executive and director compensation, 
related party transactions, director independence and other 
corporate governance matters, and security ownership of officers and 
directors to the extent adopted and applicable to BDCs. See 
Executive Compensation and Related Party Disclosure, Securities Act 
Release No. 8655 (Jan. 27, 2006) (proposed rule); Executive 
Compensation and Related Party Disclosure, Securities Act Release 
No. 8732A (Aug. 29, 2006) (final rule and proposed rule), as amended 
by Executive Compensation Disclosure, Securities Act Release No. 
8765 (Dec. 22, 2006) (adopted as interim final rules with request 
for comments).
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    6. Kohlberg Capital acknowledges that, while awards granted under 
the Plan would have a dilutive effect on the shareholders' equity in 
Kohlberg Capital, that effect would be outweighed by the anticipated 
benefits of the Plan to Kohlberg Capital and its shareholders. Kohlberg 
Capital asserts that it needs the flexibility to provide the requested 
equity-based employee compensation in order to be able to compete 
effectively with other financial services firms for talented 
professionals. These professionals, Kohlberg Capital suggests, in turn 
are likely to increase Kohlberg Capital's performance and shareholder 
value. Kohlberg Capital also asserts that equity-based compensation 
would more closely align the interests of Kohlberg Capital's Employees 
with those of its shareholders. In addition, Kohlberg Capital states 
that its shareholders will be further protected by the conditions to 
the requested order that assure continuing oversight of the operation 
of the Plan by Kohlberg Capital's Board.

Section 57(a)(4), Rule 17d-1

    7. Section 57(a) proscribes certain transactions between a BDC and 
persons related to the BDC in the manner described in section 57(b) 
(``57(b) persons''), absent a Commission order. Section 57(a)(4) 
generally prohibits a 57(b) person from effecting a transaction in 
which the BDC is a joint participant absent such an order. Rule 17d-1, 
made applicable to BDCs by section 57(i), proscribes participation in a 
``joint enterprise or other joint arrangement or profit-sharing plan,'' 
which includes a stock option or purchase plan. Employees and directors 
of a BDC are 57(b) persons. Thus, the issuance of shares of Restricted 
Stock could be deemed to involve a joint transaction involving a BDC 
and a 57(b) person in contravention of section 57(a)(4). Rule 17d-1(b) 
provides that, in considering relief pursuant to the rule, the 
Commission will consider (i) whether the participation of the 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.
    8. Kohlberg Capital requests an order pursuant to section 57(a)(4) 
and rule 17d-1 to permit the Plan. Kohlberg Capital states that the 
Plan, although benefiting the Participants and Kohlberg Capital in 
different ways, are in the interests of Kohlberg Capital's shareholders 
because the Plan will help Kohlberg Capital attract and retain talented 
professionals, help align the interests of Kohlberg Capital's employees 
with those of its shareholders, and in turn help produce a better 
return to Kohlberg Capital's shareholders.

Applicant's Conditions

    Applicant agrees that the order granting the requested relief will 
be subject to the following conditions:
    1. The Plan will be authorized by Kohlberg Capital's shareholders.
    2. Each issuance of Restricted Stock to an Employee will be 
approved by the required majority, as defined in section 57(o) of the 
Act, of Kohlberg Capital's directors on the basis that such issuance is 
in the best interest of Kohlberg Capital and its shareholders.
    3. The amount of voting securities that would result from the 
exercise of all of Kohlberg Capital's outstanding warrants, options, 
and rights, together with any Restricted Stock issued pursuant to the 
Plan at the time of

[[Page 11167]]

issuance shall not exceed 25% of the outstanding voting securities of 
Kohlberg Capital, except that if the amount of voting securities that 
would result from the exercise of all of Kohlberg Capital's outstanding 
warrants, options, and rights issued to Kohlberg Capital's directors, 
officers, and employees, together with any Restricted Stock issued 
pursuant to the Plan, would exceed 15% of the outstanding voting 
securities of Kohlberg Capital, then the total amount of voting 
securities that would result from the exercise of all outstanding 
warrants, options, and rights, together with any Restricted Stock 
issued pursuant to the Plan, at the time of issuance shall not exceed 
20% of the outstanding voting securities of Kohlberg Capital.
    4. The maximum amount of shares of Restricted Stock that may be 
issued under the Plan will be 10% of the outstanding shares of common 
stock of Kohlberg Capital on the effective date of the Plan plus 10% of 
the number of shares of Kohlberg Capital's common stock issued or 
delivered by Kohlberg Capital (other than pursuant to compensation 
plans) during the term of the Plan.
    5. The Board will review the Plan at least annually. In addition, 
the Board will review periodically the potential impact that the 
issuance of Restricted Stock under the Plan could have on Kohlberg 
Capital's earnings and NAV per share, such review to take place prior 
to any decisions to grant Restricted Stock under the Plan, but in no 
event less frequently than annually. Adequate procedures and records 
will be maintained to permit such review. The Board will be authorized 
to take appropriate steps to ensure that the grant of Restricted Stock 
under the Plan would not have an effect contrary to the interests of 
Kohlberg Capital's shareholders. This authority will include the 
authority to prevent or limit the granting of additional Restricted 
Stock under the Plan. All records maintained pursuant to this condition 
will be subject to examination by the Commission and its staff.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-3845 Filed 2-28-08; 8:45 am]
BILLING CODE 8011-01-P