Exhibit 10.1

 

INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
BETWEEN
GLADSTONE INVESTMENT CORPORATION
AND
GLADSTONE MANAGEMENT CORPORATION

 

AGREEMENT made this 22 day of June, 2005, by and between GLADSTONE INVESTMENT
CORPORATION, a Delaware corporation (the “Corporation”), and GLADSTONE
MANAGEMENT CORPORATION, a Delaware corporation (the “Adviser”).

 

WHEREAS, the Corporation is a newly organized closed-end management investment
company that has elected to be treated as a business development company under
the Investment Company Act of 1940 (the “Investment Company Act”);

 

WHEREAS, the Adviser is an investment adviser that has registered under the
Investment Advisers Act of 1940 (the “Advisers Act”); and

 

WHEREAS, the Corporation desires to retain the Adviser to furnish investment
advisory services to the Corporation on the terms and conditions hereinafter set
forth, and the Adviser wishes to be retained to provide such services.

 

NOW, THEREFORE, in consideration of the premises and for other good and valuable
consideration, the parties hereby agree as follows:

 

1.     DUTIES OF THE ADVISER.

 

(a) The Corporation hereby employs the Adviser to act as the investment adviser
to the Corporation and to manage the investment and reinvestment of the assets
of the Corporation, subject to the supervision of the Board of Directors of the
Corporation, for the period and upon the terms herein set forth, (i) in
accordance with the investment objective, policies and restrictions that are set
forth in the Corporation’s Registration Statement on Form N-2, filed March 29,
2005, as the same shall be amended from time to time (as amended, the
“Registration Statement”), (ii) in accordance with the Investment Company Act
and (iii) during the term of this Agreement in accordance with all other
applicable federal and state laws, rules and regulations, and the Corporation’s
charter and by-laws. Without limiting the generality of the foregoing, the
Adviser shall, during the term and subject to the provisions of this Agreement,
(i) determine the composition of the portfolio of the Corporation, the nature
and timing of the changes therein and the manner of implementing such changes;
(ii) identify, evaluate and negotiate the structure of the investments made by
the Corporation; (iii) close and monitor the Corporation’s investments; (iv)
determine the securities and other assets that the Corporation will purchase,
retain, or sell; (v) perform due diligence on prospective portfolio companies;
and (vi) provide the Corporation with such other investment advisory, research
and related services as the Corporation may, from time to time, reasonably
require for the investment of its funds. The Adviser shall have the discretion,
power and authority on behalf of the Corporation to effectuate its investment
decisions for the Corporation, including the execution and delivery of all
documents relating to the Corporation’s

 

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investments and the placing of orders for other purchase or sale transactions on
behalf of the Corporation. In the event that the Corporation determines to
acquire debt financing, the Adviser will arrange for such financing on the
Corporation’s behalf, subject to the oversight and approval of the Corporation’s
Board of Directors. If it is necessary for the Adviser to make investments on
behalf of the Corporation through a special purpose vehicle, the Adviser shall
have authority to create or arrange for the creation of such special purpose
vehicle and to make such investments through such special purpose vehicle in
accordance with the Investment Company Act.

 

(b) The Adviser hereby accepts such employment and agrees during the term hereof
to render the services described herein for the compensation provided herein.

 

(c) Subject to the requirements of the Investment Company Act, the Adviser is
hereby authorized to enter into one or more sub-advisory agreements with other
investment advisers (each, a “Sub-Adviser”) pursuant to which the Adviser may
obtain the services of the Sub-Adviser(s) to assist the Adviser in fulfilling
its responsibilities hereunder. Specifically, the Adviser may retain a
Sub-Adviser to recommend specific securities or other investments based upon the
Corporation’s investment objective and policies, and work, along with the
Adviser, in structuring, negotiating, arranging or effecting the acquisition or
disposition of such investments and monitoring investments on behalf of the
Corporation, subject to the oversight of the Adviser and the Corporation. The
Adviser, and not the Corporation, shall be responsible for any compensation
payable to any Sub-Adviser. Any sub-advisory agreement entered into by the
Adviser shall be in accordance with the requirements of the Investment Company
Act and other applicable federal and state law and shall contain a provision
requiring the Sub-Adviser to comply with sections 1(e) and 1(f) below as if it
were the Adviser.

 

(d) The Adviser shall for all purposes herein provided be deemed to be an
independent contractor and, except as expressly provided or authorized herein,
shall have no authority to act for or represent the Corporation in any way or
otherwise be deemed an agent of the Corporation.

 

(e) The Adviser shall keep and preserve for the period required by the
Investment Company Act any books and records relevant to the provision of its
investment advisory services to the Corporation and shall specifically maintain
all books and records with respect to the Corporation’s portfolio transactions
and shall render to the Corporation’s Board of Directors such periodic and
special reports as the Board may reasonably request. The Adviser agrees that all
records that it maintains for the Corporation are the property of the
Corporation and will surrender promptly to the Corporation any such records upon
the Corporation’s request, provided that the Adviser may retain a copy of such
records.

 

(f) The Adviser has adopted and implemented written policies and procedures
reasonably designed to prevent violation of the Federal Securities laws by the
Adviser. The Adviser has provided the Corporation, and shall provide the
Corporation at such times in the future as the Corporation shall reasonably
request, with a copy of such

 

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policies and procedures and a report of such policies and procedures. Such
report shall be of sufficient scope and in sufficient detail, as may reasonably
be required to comply with Rule 38a-1 under the Investment Company Act and to
provide reasonable assurance that any material inadequacies would be disclosed
by such examination, and, if there are no such inadequacies, the report shall so
state.

 

2.     CORPORATION’S RESPONSIBILITIES AND EXPENSES PAYABLE BY THE CORPORATION.

 

All investment professionals of the Adviser and their respective staffs, when
and to the extent engaged in providing investment advisory and management
services hereunder, and the compensation and routine overhead expenses of such
personnel allocable to such services, will be provided and paid for by the
Adviser and not by the Corporation. The Corporation will bear all other costs
and expenses of its operations and transactions, including (without limitation)
those relating to: organization and offering; calculating the Corporation’s net
asset value (including the cost and expenses of any independent valuation firm);
expenses incurred by the Adviser payable to third parties, including agents,
consultants or other advisors (such as independent valuation firms, accountants
and legal counsel), in monitoring financial and legal affairs for the
Corporation and in monitoring the Corporation’s investments and performing due
diligence on its prospective portfolio companies; interest payable on debt, if
any, incurred to finance the Corporation’s investments; offerings of the
Corporation’s common stock and other securities; investment advisory and
management fees; administration fees, if any, payable under the Administration
Agreement between the Corporation and Gladstone Administration, LLC (the
“Administrator”), the Corporation’s administrator; fees payable to third
parties, including agents, consultants or other advisors, relating to, or
associated with, evaluating and making investments; transfer agent and custodial
fees; federal and state registration fees; all costs of registration and listing
the Corporation’s shares on any securities exchange; federal, state and local
taxes; independent Directors’ fees and expenses; costs of preparing and filing
reports or other documents required by the Securities and Exchange Commission;
costs of any reports, proxy statements or other notices to stockholders,
including printing costs; the Corporation’s allocable portion of the fidelity
bond, directors and officers/errors and omissions liability insurance, and any
other insurance premiums; direct costs and expenses of administration, including
printing, mailing, long distance telephone, copying, secretarial and other
staff, independent auditors and outside legal costs; and all other expenses
incurred by the Corporation or the Administrator in connection with
administering the Corporation’s business, including payments under the
Administration Agreement between the Corporation and the Administrator based
upon the Corporation’s allocable portion of the Administrator’s overhead in
performing its obligations under the Administration Agreement, including rent
and the allocable portion of the cost of the Corporation’s chief compliance
officer and chief financial officer and their respective staffs.

 

3.     COMPENSATION OF THE ADVISER.

 

The Corporation agrees to pay, and the Adviser agrees to accept, as compensation
for the services provided by the Adviser hereunder, a base management fee (“Base

 

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Management Fee”) and an incentive fee (“Incentive Fee”) as hereinafter set
forth. The Corporation shall make any payments due hereunder to the Adviser or
to the Adviser’s designee as the Adviser may otherwise direct.

 

(a)   Base Management Fee.

 

(i) For services rendered during the period from the date of the closing of the
Corporation’s initial public offering of its common stock (the “IPO”) through
March 31, 2006, the Base Management Fee shall be payable monthly in arrears, and
shall be calculated at an annual rate of 2.00% of the value of the Corporation’s
total assets, less the cash proceeds and cash equivalent investments from the
IPO that are not invested in debt or equity securities of portfolio companies in
accordance with the Corporation’s investment objectives described in the
Registration Statement (the “Gross Invested Assets”), valued as of the end of
each month during the period.

 

(ii) For services rendered during the period from the date that is six months
after the date of the closing of the IPO through March 31, 2006, the Base
Management Fee shall be payable quarterly in arrears, and shall be calculated at
an annual rate of 2.00% of the average value of the Corporation’s Gross Invested
Assets, valued as of the end of the two most recently completed calendar
quarters.

 

(iii) For services rendered after March 31, 2006, the Base Management Fee shall
be payable quarterly in arrears, and shall be calculated at an annual rate of
2.00% of the average value of the Corporation’s total assets, including
investments made with proceeds of borrowings, less any uninvested cash or cash
equivalents resulting from borrowings (the “Gross Assets”), valued as of the end
of the two most recently completed calendar quarters, and appropriately adjusted
for any share issuances or repurchases during the current calendar quarter.

 

(iv) Base Management Fees payable for any partial month or quarter will be
appropriately prorated.

 

(b)   The Incentive Fee shall consist of two parts, as follows:

 

(i) One part will be calculated and payable quarterly in arrears based on the
pre-Incentive Fee net investment income for the immediately preceding calendar
quarter. For this purpose, pre-Incentive Fee net investment income means
interest income, dividend income and any other income (including any other fees,
such as commitment, origination, structuring, diligence, consulting fees that
the Corporation receives from portfolio companies, but excluding fees for
providing managerial assistance) accrued by the Corporation during the calendar
quarter, minus the Corporation’s operating expenses for the quarter (including
the Base Management Fee, expenses payable under the Administration Agreement,
and any interest expense and dividends paid on any issued and outstanding
preferred stock, but excluding the Incentive Fee). Pre-Incentive Fee net
investment income includes, in the case of investments with a deferred interest
feature (such as original issue discount, debt instruments with payment-in-kind
interest and zero

 

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coupon securities), accrued income that the Corporation has not yet received in
cash. Pre-Incentive Fee net investment income does not include any realized
capital gains, realized capital losses or unrealized capital appreciation or
depreciation. Pre-Incentive Fee net investment income, expressed as a rate of
return on the value of the Corporation’s net assets at the end of the
immediately preceding calendar quarter, will be compared to a “hurdle rate” of
1.75% per quarter (7% annualized). The Corporation will pay the Adviser an
Incentive Fee with respect to the Corporation’s pre-Incentive Fee net investment
income in each calendar quarter as follows: (1) no Incentive Fee in any calendar
quarter in which the Corporation’s pre-Incentive Fee net investment income does
not exceed the hurdle rate; (2) 100% of the Corporation’s pre-Incentive Fee net
investment income with respect to that portion of such pre-Incentive Fee net
investment income, if any, that exceeds the hurdle rate but is less than 2.1875%
in any calendar quarter (8.75% annualized); and (3) 20% of the amount of the
Corporation’s pre-Incentive Fee net investment income, if any, that exceeds
2.1875% in any calendar quarter (8.75% annualized). These calculations will be
appropriately pro rated for any period of less than three months and adjusted
for any share issuances or repurchases during the current quarter.

 

(ii) The second part of the Incentive Fee (the “Capital Gains Fee”) will be
determined and payable in arrears as of the end of each fiscal year (or upon
termination of this Agreement as set forth below), commencing on March 31, 2006,
and will equal 20.0% of the Corporation’s realized capital gains for the
calendar year, if any, computed net of all realized capital losses and
unrealized capital depreciation at the end of such year; provided that the
Capital Gains Fee determined as of March 31, 2006 will be calculated for a
period of shorter than twelve calendar months to take into account any net
realized capital gains, if any, computed net of all realized capital losses and
unrealized capital depreciation for the period ending March 31, 2006. The amount
of capital gains used to determine the Capital Gains Fee shall be calculated at
the end of each applicable year by subtracting the sum of the Corporation’s
Cumulative Aggregate Realized Capital Losses and Aggregate Unrealized Capital
Depreciation from the Corporation’s Cumulative Aggregate Realized Capital Gains
(each as defined in Section below. If this number is positive at the end of such
year, then the Capital Gains Fee for such year will be equal to 20.0% of such
amount, less the aggregate amount of any Capital Gains Fees paid in all prior
years. In the event that this Agreement shall terminate as of a date that is not
a calendar year end, the termination date shall be treated as though it were a
calendar year end for purposes of calculating and paying a Capital Gains Fee.

 

(iii) For purposes of this Section 3:

 

(1) ”Cumulative Aggregate Realized Capital Gains” shall mean the sum of the
differences between the net sales price of each investment in the Corporation’s
portfolio when sold, and the original cost of such investment since inception.

 

(2) ”Cumulative Aggregate Realized Capital Losses” shall mean the sum of the
amounts by which the net sales price of each investment in the Corporation’s
portfolio when sold is less than the original cost of such investment since
inception.

 

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(3) ”Aggregate Unrealized Capital Depreciation” shall mean the sum of the
difference, if negative, between the valuation of each investment in the
Corporation’s portfolio as of the applicable Capital Gains Fee calculation date
and the original cost of such investment.

 

4.     COVENANTS OF THE ADVISER.

 

The Adviser covenants that it is registered as an investment adviser under the
Advisers Act. The Adviser agrees that its activities will at all times be in
compliance in all material respects with all applicable federal and state laws
governing its operations and investments.

 

5.     EXCESS BROKERAGE COMMISSIONS.

 

The Adviser is hereby authorized, to the fullest extent now or hereafter
permitted by law, to cause the Corporation to pay a member of a national
securities exchange, broker or dealer an amount of commission for effecting a
securities transaction in excess of the amount of commission another member of
such exchange, broker or dealer would have charged for effecting that
transaction, if the Adviser determines in good faith, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution, and operational facilities of
the firm and the firm’s risk and skill in positioning blocks of securities, that
such amount of commission is reasonable in relation to the value of the
brokerage and/or research services provided by such member, broker or dealer,
viewed in terms of either that particular transaction or its overall
responsibilities with respect to the Corporation’s portfolio, and constitutes
the best net results for the Corporation.

 

6.     LIMITATIONS ON THE EMPLOYMENT OF THE ADVISER.

 

The services of the Adviser to the Corporation are not exclusive, and the
Adviser may engage in any other business or render similar or different services
to others including, without limitation, the direct or indirect sponsorship or
management of other investment based accounts or commingled pools of capital,
however structured, having investment objectives similar to those of the
Corporation, so long as its services to the Corporation hereunder are not
impaired thereby, and nothing in this Agreement shall limit or restrict the
right of any manager, partner, officer or employee of the Adviser to engage in
any other business or to devote his or her time and attention in part to any
other business, whether of a similar or dissimilar nature, or to receive any
fees or compensation in connection therewith (including fees for serving as a
director of, or providing consulting services to, one or more of the
Corporation’s portfolio companies, subject to applicable law). So long as this
Agreement or any extension, renewal or amendment remains in effect, the Adviser
shall be the only investment adviser for the Corporation, subject to the
Adviser’s right to enter into sub-advisory agreements. The Adviser assumes no
responsibility under this Agreement other than to render the services called for
hereunder. It is understood that directors, officers, employees and stockholders
of the Corporation are or may become interested in the Adviser and its
affiliates, as directors, officers,

 

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employees, partners, stockholders, members, managers or otherwise, and that the
Adviser and directors, officers, employees, partners, stockholders, members and
managers of the Adviser and its affiliates are or may become similarly
interested in the Corporation as stockholders or otherwise.

 

7.     RESPONSIBILITY OF DUAL DIRECTORS, OFFICERS AND/OR EMPLOYEES.

 

If any person who is a manager, partner, officer or employee of the Adviser or
the Administrator is or becomes a director, officer and/or employee of the
Corporation and acts as such in any business of the Corporation, then such
manager, partner, officer and/or employee of the Adviser or the Administrator
shall be deemed to be acting in such capacity solely for the Corporation, and
not as a manager, partner, officer or employee of the Adviser or the
Administrator or under the control or direction of the Adviser or the
Administrator, even if paid by the Adviser or the Administrator.

 

8.     LIMITATION OF LIABILITY OF THE ADVISER: INDEMNIFICATION.

 

The Adviser (and its officers, managers, partners, agents, employees,
controlling persons, members and any other person or entity affiliated with the
Adviser, including without limitation the Administrator) shall not be liable to
the Corporation for any action taken or omitted to be taken by the Adviser in
connection with the performance of any of its duties or obligations under this
Agreement or otherwise as an investment adviser of the Corporation, except to
the extent specified in Section 36(b) of the Investment Company Act concerning
loss resulting from a breach of fiduciary duty (as the same is finally
determined by judicial proceedings) with respect to the receipt of compensation
for services, and the Corporation shall indemnify, defend and protect the
Adviser (and its officers, managers, partners, agents, employees, controlling
persons, members and any other person or entity affiliated with the Adviser,
including without limitation its general partner and the Administrator, each of
whom shall be deemed a third party beneficiary hereof) (collectively, the
“Indemnified Parties”) and hold them harmless from and against all damages,
liabilities, costs and expenses (including reasonable attorneys’ fees and
amounts reasonably paid in settlement) incurred by the Indemnified Parties in or
by reason of any pending, threatened or completed action, suit, investigation or
other proceeding (including an action or suit by or in the right of the
Corporation or its security holders) arising out of or otherwise based upon the
performance of any of the Adviser’s duties or obligations under this Agreement
or otherwise as an investment adviser of the Corporation. Notwithstanding the
preceding sentence of this Paragraph 8 to the contrary, nothing contained herein
shall protect or be deemed to protect the Indemnified Parties against or entitle
or be deemed to entitle the Indemnified Parties to indemnification in respect
of, any liability to the Corporation or its security holders to which the
Indemnified Parties would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of the Adviser’s duties or by
reason of the reckless disregard of the Adviser’s duties and obligations under
this Agreement (as the same shall be determined in accordance with the
Investment Company Act and any interpretations or guidance by the Securities and
Exchange Commission or its staff thereunder).

 

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9.     EFFECTIVENESS, DURATION AND TERMINATION OF AGREEMENT.

 

This Agreement shall become effective as of the first date above written. This
Agreement shall remain in effect for two years, and thereafter shall continue
automatically for successive annual periods, provided that such continuance is
specifically approved at least annually by (a) the vote of the Corporation’s
Board of Directors, or by the vote of a majority of the outstanding voting
securities of the Corporation and (b) the vote of a majority of the
Corporation’s Directors who are not parties to this Agreement or “interested
persons” (as such term is defined in Section 2(a)(19) of the Investment Company
Act) of any such party, in accordance with the requirements of the Investment
Company Act. This Agreement may be terminated at any time, without the payment
of any penalty, upon 60 days’ written notice, by the vote of a majority of the
outstanding voting securities of the Corporation, or by the vote of the
Corporation’s Directors or by the Adviser. This Agreement will automatically
terminate in the event of its “assignment” (as such term is defined for purposes
of Section 15(a)(4) of the Investment Company Act). The provisions of
Paragraph 8 of this Agreement shall remain in full force and effect, and the
Adviser and its representatives shall remain entitled to the benefits thereof,
notwithstanding any termination or expiration of this Agreement. Further,
notwithstanding the termination or expiration of this Agreement as aforesaid,
the Adviser shall be entitled to any amounts owed under Section 3 through the
date of termination or expiration.

 

10.  NOTICES.

 

Any notice under this Agreement shall be given in writing, addressed and
delivered or mailed, postage prepaid, to the other party at its principal
office.

 

11.  AMENDMENTS.

 

This Agreement may be amended by mutual consent, but the consent of the
Corporation must be obtained in conformity with the requirements of the
Investment Company Act.

 

12.  ENTIRE AGREEMENT: GOVERNING LAW.

 

This Agreement contains the entire agreement of the parties and supersedes all
prior agreements, understandings and arrangements with respect to the subject
matter hereof. This Agreement shall be construed in accordance with the laws of
the State of Delaware and the applicable provisions of the Investment Company
Act. To the extent the applicable laws of the State of Delaware, or any of the
provisions herein, conflict with the provisions of the Investment Company Act,
the latter shall control.

 

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IN WITNESS WHEREOF, THE PARTIES HERETO HAVE CAUSED THIS AGREEMENT TO BE DULY
EXECUTED ON THE DATE ABOVE WRITTEN.

 

 

GLADSTONE INVESTMENT CORPORATION

 

By:

/s/ David Gladstone

 

 

David Gladstone

 

Chief Executive Officer

 

 

GLADSTONE MANAGEMENT CORPORATION

 

By:

/s/ David Gladstone

 

 

David Gladstone

 

Chief Executive Officer

 

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