Document ID: SEC-2006-0340-0001
Agency: sec
Document Type: Notice
Title: MCG Capital Corporation; Notice of Application
Posted Date: 2006-03-14T05:00Z

[Federal Register: March 14, 2006 (Volume 71, Number 49)]
[Notices]               
[Page 13190-13193]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14mr06-119]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27258; 812-13233]

 
MCG Capital Corporation; Notice of Application

March 8, 2006.
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: MCG Capital Corporation (``Applicant'') 
requests an order to permit Applicant to issue restricted shares of its 
common stock under the terms of its employee and director compensation 
plans.
    Filing Dates: The application was filed on September 2, 2005, and 
amended on January 31, 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 April 3, 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 Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090. Applicant, c/o Bryan J. 
Mitchell, Chief Executive Officer, MCG Capital Corporation, 1100 Wilson 
Blvd., Suite 3000, Arlington, VA 22209.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior Counsel, at (202) 
551-6813, or Mary Kay Frech, Branch Chief, 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 may be obtained for a fee at the 
Commission's Public Reference Desk, 100 F Street, NE., Washington, DC 
20549-0102 (tel. 202-551-5850).

Applicant's Representations

    1. Applicant, 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\ 
Applicant provides financing and advisory services to a variety of 
small- and medium-sized companies throughout the United States with a 
focus on growth-oriented companies. Applicant's investments are 
primarily senior secured commercial loans, subordinated debt and 
equity-based investments. Shares of Applicant's common stock are traded 
on The NASDAQ Stock Market, Inc. National Market under the symbol 
``MCGC.'' As of December 31, 2005, there were 53,371,893 shares of 
Applicant's common stock outstanding. As of that date, Applicant had 
128 employees, including the employees of its wholly-owned consolidated 
subsidiaries.
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    \1\ Applicant was organized on March 18, 1998. On December 4, 
2001, Applicant completed its initial public offering (``IPO'') and 
immediately thereafter 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.
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    2. Applicant currently has an eight-member board of directors (the 
``Board'') of whom three are ``interested persons'' of Applicant within 
the meaning of section 2(a)(19) of the Act and five are not interested 
persons (the ``non-interested directors''). The five non-interested 
directors are neither employees nor officers of Applicant (the ``non-
employee directors''). Applicant states that its non-employee directors 
actively participate in service on committees of the Board and other 
aspects of corporate governance, as well as make a significant 
contribution to Applicant's business.
    3. On November 28, 2001, prior to Applicant's election to be 
regulated as a BDC, Applicant terminated its stock option plan, and in 
exchange therefore issued to its employees and directors, in the 
aggregate, 1,539,851 shares of its common stock. These shares are 
subject to forfeiture restrictions but otherwise carry the rights of 
common stock, including the right to vote and the right to receive 
dividends. These shares represented 10.8% of Applicant's outstanding 
shares prior to its IPO, and 5.4% of Applicant's outstanding shares 
immediately following the IPO.
    4. Applicant 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. Applicant believes 
its ability to adopt compensation plans 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. Applicant wishes to adopt equity-based compensation plans 
for its non-employee directors (the ``Director Plan'') and employees 
(the ``Employee Plan'', and together the ``Plans''), as well as 
employees of its wholly owned consolidated subsidiaries (the 
``Participants'').

[[Page 13191]]

    5. The Plans will authorize the issuance of shares of Restricted 
Stock subject to certain forfeiture restrictions. These restrictions 
may relate to continued employment or service on the Applicant's Board, 
as the case may be (lapsing either on an annual or other periodic basis 
or on a ``cliff'' basis, i.e., at the end of a stated period of time), 
the performance of the company, or other restrictions deemed by the 
compensation committee of the Board (the ``Committee'') to be 
appropriate. The Restricted Stock will be subject to restrictions on 
transferability and other restrictions as required by the Committee. 
Except to the extent restricted under the terms of the Plans, 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 or service on the Board during the applicable 
restriction period, Restricted Stock for which forfeiture restrictions 
have not lapsed at the time of such termination shall be forfeited.
    6. The maximum number of shares that are represented by shares of 
Restricted Stock will be 10% of the outstanding shares of Applicant's 
common stock on the effective date of the Plans plus 10% of the 
outstanding shares of Applicant's common stock issued or delivered by 
Applicant (other than pursuant to compensation plans) during the term 
of the Plans.\2\ The Employee 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 Participant may be granted more than 
25% of the shares reserved for issuance under the Plans. The Employee 
Plan will be administered by the Committee, 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 the Applicant.
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    \2\ For purposes of calculating compliance with this limit, 
Applicant will count as Restricted Stock all shares of Applicant's 
common stock that are issued pursuant to the Plans less any shares 
that are forfeited back to Applicant and cancelled as a result of 
forfeiture restrictions not lapsing. Applicant will also count as 
Restricted Stock the shares of Applicant's common stock that were 
issued in November 2001 in connection with the termination of 
Applicant's stock option plan, pursuant to the same calculation 
formula.
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    7. Under the Director Plan, Applicant's non-employee directors will 
each receive a grant of 7,500 shares of Restricted Stock at the 
beginning of each three-year term of service on the Board, for which 
forfeiture restrictions will lapse as to one-third of such shares each 
year. The Director Plan will be administered by the Committee, and the 
grants of Restricted Stock under the Director Plan will be automatic 
and will not be changed without Commission approval.
    8. The Employee Plan has been approved by the Committee, which is 
composed entirely of non-interested directors, as well as the Board, 
including a majority of the non-interested directors and the required 
majority, as defined in section 57(o) of the Act (``required 
majority'').\3\ The Plans will be submitted for approval to Applicant's 
shareholders, and will become effective upon such approval, subject to 
and following receipt of the order.
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    \3\ 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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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 Plans.
    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 Plans 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 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. Applicant 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. Applicant states that the concerns underlying 
those sections include: (i) Preferential treatment of investment 
company insiders and the use of options and other rights by insiders to 
obtain control of the investment company; (ii) complication of the 
investment company's structure that makes it difficult to determine the 
value of the company's shares; and (iii) dilution of shareholders' 
equity in the investment company. Applicant states that the Plans do 
not raise the concern about preferential treatment of Applicant's 
insiders because the Plans are bona fide employee compensation plans 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. Applicant 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. 
Applicant 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. Applicant also asserts that the Plans would not become a 
means for insiders to obtain control of Applicant because the number of 
shares of Applicant issuable under the Plans would be limited as set 
forth in the application. Applicant's current intention is to issue 
only shares of Restricted Stock as incentive compensation; however, if 
Applicant issues stock options in the future, it will do so pursuant to 
section 61 and in compliance with the terms and conditions of the 
application. Moreover, no individual Participant could be issued more 
than 25% of the shares reserved for issuance under the Plans.
    5. Applicant further states that the Plans will not unduly 
complicate Applicant's structure because equity-based employee 
compensation arrangements are widely used among corporations and 
commonly known to investors. Applicant notes that the Plans will be 
submitted to Applicant's shareholders for their approval. Applicant 
represents that a concise, ``plain English'' description of the Plans,

[[Page 13192]]

including their potential dilutive effect, will be provided in the 
proxy materials that will be submitted to Applicant's shareholders. 
Applicant 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''). Applicant further notes that the 
Plans 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, Applicant will comply with the disclosure 
requirements for executive compensation plans applicable to operating 
companies under the Exchange Act.\4\ Applicant thus concludes that the 
Plans will be adequately disclosed to investors and appropriately 
reflected in the market value of Applicant's shares.
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    \4\ In addition, Applicant 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, Release No. 34-
53185 (Jan. 27, 2006).
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    6. Applicant acknowledges that, while awards granted under the 
Plans would have a dilutive effect on the shareholders' equity in 
Applicant, that effect would be outweighed by the anticipated benefits 
of the Plans to Applicant and its shareholders. Applicant 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, Applicant suggests, in turn are likely to increase 
Applicant's performance and shareholder value. Applicant also asserts 
that equity-based compensation would more closely align the interests 
of Applicant's employees with those of Applicant's shareholders. 
Applicant believes that the granting of shares of Restricted Stock to 
non-employee directors under the Director Plan is fair and reasonable 
because of the skills and experience that such directors provide to 
Applicant. Such skills and experience are necessary for the management 
and oversight of Applicant's investments and operations. Applicant 
believes that granting the shares of Restricted Stock will provide 
significant incentives for non-employee directors to remain on the 
Board and to devote their best efforts to the success of Applicant's 
business in the future, as they have done in the past. The issuance of 
shares of Restricted Stock will also provide a means for Applicant's 
non-employee directors to increase their ownership interest in 
Applicant, thereby helping to ensure a close identification of their 
interests with those of Applicant and its shareholders.
    7. In addition, Applicant states that Applicant's shareholders will 
be further protected by the conditions to the requested order that 
assure continuing oversight of the operation of the Plans by 
Applicant's Board. Under these conditions, the Board will review the 
Plans at least annually. In addition, the Committee periodically will 
review the potential impact that the issuance of Restricted Stock could 
have on Applicant's earnings and NAV per share, such review to take 
place prior to any decisions to issue Restricted Stock, but in no event 
less frequently than annually. Adequate procedures and records will be 
maintained to permit such review. The Committee will be authorized to 
take appropriate steps to ensure that the grant of Restricted Stock 
under the Plans would not have an effect contrary to the interests of 
Applicant's shareholders. This authority will include the authority to 
prevent or limit the grant of additional Restricted Stock under the 
Plans.

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

    8. 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.
    9. Applicant requests an order pursuant to section 57(a)(4) and 
rule 17d-1 to permit the Plans. Applicant states that the Plans, 
although benefiting the Participants and Applicant in different ways, 
are in the interests of Applicant's shareholders because the Plans will 
help Applicant attract and retain talented professionals, help align 
the interests of Applicant's employees with those of its shareholders, 
and in turn help produce a better return to Applicant's shareholders. 
Thus, Applicant asserts that the Plans are consistent with the policies 
and purposes of the Act and that Applicant's participation in the Plans 
will be on a basis no less advantageous than that of other 
participants.

Applicant's Conditions

    Applicant agrees that the order granting the requested relief will 
be subject to the following conditions:
    1. The Employee Plan will be authorized in accordance with section 
61(a)(3)(A)(iv) of the Act, and each Plan will be approved by the 
Applicant's shareholders.
    2. The Applicant will comply with sections 61(a)(3)(B)(iii) and 
(iv) of the Act.
    3. The amount of voting securities that would result from the 
exercise of all of the Applicant's outstanding warrants, options, and 
rights, together with any Restricted Stock issued pursuant to the 
Plans, at the time of issuance shall not exceed 25% of the outstanding 
voting securities of the Applicant, except that if the amount of voting 
securities that would result from the exercise of all of the 
Applicant's outstanding warrants, options, and rights issued to the 
Applicant's directors, officers, and employees, together with any 
Restricted Stock issued pursuant to the Plans, would exceed 15% of the 
outstanding voting securities of the Applicant, 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 Plans, at the time of issuance shall not 
exceed 20% of the outstanding voting securities of the Applicant.
    4. The maximum amount of Restricted Stock that may be issued under 
the Plans will be 10% of the outstanding shares of common stock of 
Applicant on the effective date of the Plans plus 10% of the number of 
shares of Applicant's common stock issued or delivered by Applicant 
(other than pursuant to compensation plans) during the term of the 
Plans.
    5. The Committee will administer the Plans.
    6. The Board will review the Plans at least annually. In addition, 
the Committee will review periodically the

[[Page 13193]]

potential impact that the issuance of Restricted Stock under the Plans 
could have on Applicant's earnings and NAV per share, such review to 
take place prior to any decisions to grant Restricted Stock under the 
Plans, but in no event less frequently than annually. Adequate 
procedures and records will be maintained to permit such review. The 
Committee will be authorized to take appropriate steps to ensure that 
the grant of Restricted Stock under the Plans would not have an effect 
contrary to the interests of Applicant's shareholders. This authority 
will include the authority to prevent or limit the granting of 
additional Restricted Stock under the Plans. All records maintained 
pursuant to this condition will be subject to examination by the 
Commission and its staff.

    By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. E6-3544 Filed 3-13-06; 8:45 am]

BILLING CODE 8010-01-P