**Exhibit 10.1**

 

**INVESTMENTADVISORY AND MANAGEMENT AGREEMENTBETWEENGLADSTONE INVESTMENT CORPORATIONANDGLADSTONE 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**, aDelaware corporation (the ***“Adviser”***).

 

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

 

**WHEREAS,**theAdviser is an investment adviser that has registered under the InvestmentAdvisers Act of 1940 (the ***“AdvisersAct”***); and

 

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

 

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

 

**1.**     **DUTIES OF THE ADVISER**.

 

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

 

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

 

**(b) **TheAdviser hereby accepts such employment and agrees during the term hereof torender the services described herein for the compensation provided herein.

 

**(c) **Subjectto the requirements of the Investment Company Act, the Adviser is herebyauthorized to enter into one or more sub-advisory agreements with otherinvestment advisers (each, a ***“Sub-Adviser”***) pursuant to which the Adviser may obtainthe services of the Sub-Adviser(s) to assist the Adviser in fulfilling itsresponsibilities hereunder. Specifically, the Adviser may retain a Sub-Adviserto recommend specific securities or other investments based upon theCorporation’s investment objective and policies, and work, along with theAdviser, in structuring, negotiating, arranging or effecting the acquisition ordisposition of such investments and monitoring investments on behalf of theCorporation, subject to the oversight of the Adviser and the Corporation. TheAdviser, and not the Corporation, shall be responsible for any compensationpayable to any Sub-Adviser. Any sub-advisory agreement entered into by theAdviser shall be in accordance with the requirements of the Investment CompanyAct and other applicable federal and state law and shall contain a provisionrequiring the Sub-Adviser to comply with sections 1(e) and 1(f) below as if itwere the Adviser.

 

**(d) **TheAdviser shall for all purposes herein provided be deemed to be an independentcontractor and, except as expressly provided or authorized herein, shall haveno authority to act for or represent the Corporation in any way or otherwise bedeemed an agent of the Corporation.

 

**(e) **TheAdviser shall keep and preserve for the period required by the InvestmentCompany Act any books and records relevant to the provision of its investmentadvisory services to the Corporation and shall specifically maintain all booksand records with respect to the Corporation’s portfolio transactions and shallrender to the Corporation’s Board of Directors such periodic and specialreports as the Board may reasonably request. The Adviser agrees that allrecords that it maintains for the Corporation are the property of theCorporation and will surrender promptly to the Corporation any such recordsupon the Corporation’s request, provided that the Adviser may retain a copy ofsuch records.

 

**(f) **TheAdviser has adopted and implemented written policies and procedures reasonablydesigned to prevent violation of the Federal Securities laws by the Adviser.The Adviser has provided the Corporation, and shall provide the Corporation atsuch times in the future as the Corporation shall reasonably request, with acopy 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 mayreasonably be required to comply with Rule 38a-1 under the InvestmentCompany Act and to provide reasonable assurance that any material inadequacieswould be disclosed by such examination, and, if there are no such inadequacies,the report shall so state.

 

**2.****     CORPORATION’SRESPONSIBILITIES AND EXPENSES PAYABLE BY THE CORPORATION**.

 

All investment professionals of the Adviserand their respective staffs, when and to the extent engaged in providinginvestment advisory and management services hereunder, and the compensation androutine overhead expenses of such personnel allocable to such services, will beprovided and paid for by the Adviser and not by the Corporation. TheCorporation will bear all other costs and expenses of its operations andtransactions, including (without limitation) those relating to: organizationand offering; calculating the Corporation’s net asset value (including the costand expenses of any independent valuation firm); expenses incurred by theAdviser payable to third parties, including agents, consultants or otheradvisors (such as independent valuation firms, accountants and legal counsel),in monitoring financial and legal affairs for the Corporation and in monitoringthe Corporation’s investments and performing due diligence on its prospectiveportfolio companies; interest payable on debt, if any, incurred to finance theCorporation’s investments; offerings of the Corporation’s common stock andother securities; investment advisory and management fees; administration fees,if any, payable under the Administration Agreement between the Corporation andGladstone Administration, LLC (the ***“Administrator”***), the Corporation’sadministrator; fees payable to third parties, including agents, consultants orother advisors, relating to, or associated with, evaluating and makinginvestments; transfer agent and custodial fees; federal and state registrationfees; all costs of registration and listing the Corporation’s shares on anysecurities exchange; federal, state and local taxes; independent Directors’fees and expenses; costs of preparing and filing reports or other documentsrequired by the Securities and Exchange Commission; costs of any reports, proxystatements or other notices to stockholders, including printing costs; theCorporation’s allocable portion of the fidelity bond, directors andofficers/errors and omissions liability insurance, and any other insurancepremiums; 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 incurredby the Corporation or the Administrator in connection with administering theCorporation’s business, including payments under the Administration Agreement betweenthe Corporation and the Administrator based upon the Corporation’s allocableportion of the Administrator’s overhead in performing its obligations under theAdministration Agreement, including rent and the allocable portion of the costof the Corporation’s chief compliance officer and chief financial officer andtheir respective staffs.

 

**3.****     COMPENSATIONOF THE ADVISER**.

 

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

 

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

 

**(a)****  **Base Management Fee.

 

**(i) **Forservices rendered during the period from the date of the closing of theCorporation’s initial public offering of its common stock (the “***IPO***”) throughMarch 31, 2006, the Base Management Fee shall be payable monthly inarrears, and shall be calculated at an annual rate of 2.00% of the value of theCorporation’s total assets, less the cash proceeds and cash equivalentinvestments from the IPO that are not invested in debt or equity securities ofportfolio companies in accordance with the Corporation’s investment objectivesdescribed in the Registration Statement (the “***Gross Invested Assets***”), valued as ofthe end of each month during the period.

 

**(ii) **Forservices rendered during the period from the date that is six months after thedate of the closing of the IPO through March 31, 2006, the Base ManagementFee shall be payable quarterly in arrears, and shall be calculated at an annualrate 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) **Forservices rendered after March 31, 2006, the Base Management Fee shall bepayable quarterly in arrears, and shall be calculated at an annual rate of2.00% of the average value of the Corporation’s total assets, includinginvestments made with proceeds of borrowings, less any uninvested cash or cashequivalents resulting from borrowings (the “***Gross Assets***”), valued as of the end ofthe two most recently completed calendar quarters, and appropriately adjustedfor any share issuances or repurchases during the current calendar quarter.

 

**(iv) **BaseManagement Fees payable for any partial month or quarter will be appropriatelyprorated.

 

**(b)****  **The Incentive Fee shall consist of two parts, asfollows:

 

**(i) **One partwill be calculated and payable quarterly in arrears based on the pre-IncentiveFee net investment income for the immediately preceding calendar quarter. Forthis purpose, pre-Incentive Fee net investment income means interest income,dividend income and any other income (including any other fees, such ascommitment, origination, structuring, diligence, consulting fees that theCorporation receives from portfolio companies, but excluding fees for providingmanagerial assistance) accrued by the Corporation during the calendar quarter,minus the Corporation’s operating expenses for the quarter (including the BaseManagement Fee, expenses payable under the Administration Agreement, and anyinterest expense and dividends paid on any issued and outstanding preferredstock, but excluding the Incentive Fee). Pre-Incentive Fee net investmentincome includes, in the case of investments with a deferred interest feature(such as original issue discount, debt instruments with payment-in-kindinterest and zero

 

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couponsecurities), accrued income that the Corporation has not yet received in cash.Pre-Incentive Fee net investment income does not include any realized capitalgains, realized capital losses or unrealized capital appreciation ordepreciation. Pre-Incentive Fee net investment income, expressed as a rate ofreturn on the value of the Corporation’s net assets at the end of theimmediately preceding calendar quarter, will be compared to a “hurdle rate” of1.75% per quarter (7% annualized). The Corporation will pay the Adviser anIncentive Fee with respect to the Corporation’s pre-Incentive Fee netinvestment income in each calendar quarter as follows: (1) no IncentiveFee in any calendar quarter in which the Corporation’s pre-Incentive Fee netinvestment income does not exceed the hurdle rate; (2) 100% of theCorporation’s pre-Incentive Fee net investment income with respect to thatportion of such pre-Incentive Fee net investment income, if any, that exceedsthe 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-IncentiveFee net investment income, if any, that exceeds 2.1875% in any calendar quarter(8.75% annualized). These calculations will be appropriately pro rated for anyperiod of less than three months and adjusted for any share issuances orrepurchases during the current quarter.

 

**(ii) **The secondpart of the Incentive Fee (the ***“Capital Gains Fee”***) will be determined and payable inarrears as of the end of each fiscal year (or upon termination of thisAgreement as set forth below), commencing on March 31, 2006, and willequal 20.0% of the Corporation’s realized capital gains for the calendar year,if any, computed net of all realized capital losses and unrealized capitaldepreciation at the end of such year; provided that the Capital Gains Feedetermined as of March 31, 2006 will be calculated for a period of shorterthan twelve calendar months to take into account any net realized capitalgains, if any, computed net of all realized capital losses and unrealizedcapital depreciation for the period ending March 31, 2006. The amount ofcapital gains used to determine the Capital Gains Fee shall be calculated atthe end of each applicable year by subtracting the sum of the Corporation’sCumulative Aggregate Realized Capital Losses and Aggregate Unrealized CapitalDepreciation from the Corporation’s Cumulative Aggregate Realized Capital Gains(each as defined in Section below. If this number is positive at the end ofsuch year, then the Capital Gains Fee for such year will be equal to 20.0% ofsuch amount, less the aggregate amount of any Capital Gains Fees paid in allprior years. In the event that this Agreement shall terminate as of a date thatis not a calendar year end, the termination date shall be treated as though itwere a calendar year end for purposes of calculating and paying a Capital GainsFee.

 

**(iii) **Forpurposes of this Section 3:

 

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

 

**(2) **”***Cumulative Aggregate RealizedCapital Losses***” shall mean the sum of the amounts by which thenet sales price of each investment in the Corporation’s portfolio when sold isless than the original cost of such investment since inception.

 

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

 

**4.****     COVENANTSOF THE ADVISER**.

 

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

 

**5.****     EXCESSBROKERAGE COMMISSIONS**.

 

The Adviser is hereby authorized, to thefullest extent now or hereafter permitted by law, to cause the Corporation topay a member of a national securities exchange, broker or dealer an amount ofcommission for effecting a securities transaction in excess of the amount ofcommission another member of such exchange, broker or dealer would have chargedfor effecting that transaction, if the Adviser determines in good faith, takinginto account such factors as price (including the applicable brokeragecommission or dealer spread), size of order, difficulty of execution, andoperational facilities of the firm and the firm’s risk and skill in positioningblocks of securities, that such amount of commission is reasonable in relationto 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 itsoverall responsibilities with respect to the Corporation’s portfolio, andconstitutes the best net results for the Corporation.

 

**6.****     LIMITATIONSON THE EMPLOYMENT OF THE ADVISER**.

 

The services of the Adviser to theCorporation are not exclusive, and the Adviser may engage in any other businessor render similar or different services to others including, withoutlimitation, the direct or indirect sponsorship or management of otherinvestment based accounts or commingled pools of capital, however structured,having investment objectives similar to those of the Corporation, so long asits services to the Corporation hereunder are not impaired thereby, and nothingin 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 devotehis or her time and attention in part to any other business, whether of a similaror dissimilar nature, or to receive any fees or compensation in connectiontherewith (including fees for serving as a director of, or providing consultingservices to, one or more of the Corporation’s portfolio companies, subject toapplicable law). So long as this Agreement or any extension, renewal oramendment remains in effect, the Adviser shall be the only investment adviserfor the Corporation, subject to the Adviser’s right to enter into sub-advisoryagreements. The Adviser assumes no responsibility under this Agreement otherthan to render the services called for hereunder. It is understood thatdirectors, officers, employees and stockholders of the Corporation are or maybecome interested in the Adviser and its affiliates, as directors, officers,

 

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

 

**7.**     **RESPONSIBILITY OF DUAL DIRECTORS, OFFICERS AND/OREMPLOYEES.**

 

If any person who is a manager, partner,officer or employee of the Adviser or the Administrator is or becomes adirector, officer and/or employee of the Corporation and acts as such in anybusiness of the Corporation, then such manager, partner, officer and/oremployee of the Adviser or the Administrator shall be deemed to be acting insuch capacity solely for the Corporation, and not as a manager, partner,officer or employee of the Adviser or the Administrator or under the control ordirection of the Adviser or the Administrator, even if paid by the Adviser orthe 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 theAdviser, including without limitation the Administrator) shall not be liable tothe Corporation for any action taken or omitted to be taken by the Adviser inconnection with the performance of any of its duties or obligations under thisAgreement or otherwise as an investment adviser of the Corporation, except tothe extent specified in Section 36(b) of the Investment Company Act concerningloss resulting from a breach of fiduciary duty (as the same is finallydetermined by judicial proceedings) with respect to the receipt of compensationfor services, and the Corporation shall indemnify, defend and protect theAdviser (and its officers, managers, partners, agents, employees, controllingpersons, members and any other person or entity affiliated with the Adviser,including without limitation its general partner and the Administrator, each ofwhom shall be deemed a third party beneficiary hereof) (collectively, the ***“Indemnified Parties”***)and hold them harmless from and against all damages, liabilities, costs andexpenses (including reasonable attorneys’ fees and amounts reasonably paid insettlement) 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 itssecurity holders) arising out of or otherwise based upon the performance of anyof the Adviser’s duties or obligations under this Agreement or otherwise as aninvestment adviser of the Corporation. Notwithstanding the preceding sentenceof this Paragraph 8 to the contrary, nothing contained herein shallprotect or be deemed to protect the Indemnified Parties against or entitle orbe deemed to entitle the Indemnified Parties to indemnification in respect of,any liability to the Corporation or its security holders to which theIndemnified Parties would otherwise be subject by reason of willfulmisfeasance, bad faith or gross negligence in the performance of the Adviser’sduties or by reason of the reckless disregard of the Adviser’s duties andobligations under this Agreement (as the same shall be determined in accordancewith the Investment Company Act and any interpretations or guidance by theSecurities and Exchange Commission or its staff thereunder).

 

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**9.****     EFFECTIVENESS,DURATION AND TERMINATION OF AGREEMENT**.

 

This Agreement shall become effective as ofthe first date above written. This Agreement shall remain in effect for twoyears, and thereafter shall continue automatically for successive annualperiods, provided that such continuance is specifically approved at leastannually by (a) the vote of the Corporation’s Board of Directors, or by thevote 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 notparties to this Agreement or “interested persons” (as such term is defined inSection 2(a)(19) of the Investment Company Act) of any such party, inaccordance with the requirements of the Investment Company Act. This Agreementmay be terminated at any time, without the payment of any penalty, upon60 days’ written notice, by the vote of a majority of the outstandingvoting securities of the Corporation, or by the vote of the Corporation’sDirectors or by the Adviser. This Agreement will automatically terminate in theevent 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 thisAgreement shall remain in full force and effect, and the Adviser and itsrepresentatives shall remain entitled to the benefits thereof, notwithstandingany termination or expiration of this Agreement. Further, notwithstanding thetermination or expiration of this Agreement as aforesaid, the Adviser shall beentitled to any amounts owed under Section 3 through the date oftermination or expiration.

 

**10.****  NOTICES**.

 

Any notice under this Agreement shall begiven in writing, addressed and delivered or mailed, postage prepaid, to theother party at its principal office.

 

**11.****  AMENDMENTS**.

 

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

 

**12.****  ENTIREAGREEMENT: GOVERNING LAW**.

 

This Agreement contains the entire agreementof the parties and supersedes all prior agreements, understandings andarrangements with respect to the subject matter hereof. This Agreement shall beconstrued in accordance with the laws of the State of Delaware and theapplicable provisions of the Investment Company Act. To the extent theapplicable laws of the State of Delaware, or any of the provisions herein,conflict with the provisions of the Investment Company Act, the latter shallcontrol.

 

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##### **IN WITNESS WHEREOF, the parties hereto have causedthis 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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