Document ID: SEC-2010-1442-0001
Agency: sec
Document Type: Notice
Title: Applications: American Capital, Ltd.
Posted Date: 2010-09-20T04:00Z

[Federal Register: September 20, 2010 (Volume 75, Number 181)]
[Notices]               
[Page 57310-57312]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20se10-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29416; File No. 812-13714]

 
American Capital, Ltd.; Notice of Application

September 14, 2010.
AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of an application for an order under section 61(a)(3)(B) 
of the Investment Company Act of 1940 (the ``Act'').

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SUMMARY: Summary of Application: Applicant, American Capital, Ltd. 
requests an order approving a proposal to grant certain stock options 
to

[[Page 57311]]

directors who are not also employees or officers of the applicant (the 
``Non-employee Directors'') under its 2009 Stock Option Plan (the 
``Plan'').

DATES: Filing Dates: The application was filed on November 5, 2009, and 
amended on January 25, 2010, and September 7, 2010. 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 October 7, 2010, and should be accompanied by proof of 
service on applicant, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Commission, 100 F Street, 
NE., Washington, DC 20549-1090; Applicant, 2 Bethesda Metro Center, 
14th Floor, Bethesda, Maryland 20814.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at 
(202) 551-6876, or Michael W. Mundt, Assistant Director, at (202) 551-
6821 (Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or for an 
applicant using the Company name box, at http://www.sec.gov/search/
search.htm, or by calling (202) 551-8090.

Applicant's Representations

    1. Applicant, a Delaware corporation, is a business development 
company (``BDC'') within the meaning of section 2(a)(48) of the Act.\1\ 
Applicant's primary business objectives are to increase its net 
operating income and net asset value by investing its assets in senior 
debt, subordinated debt, with and without detachable warrants, and 
equity of small to medium sized businesses with attractive current 
yields and potential for equity appreciation. Applicant's investment 
decisions are made either by its board of directors (the ``Board''), 
based on recommendations of the executive officers of applicant, or, 
for investments that meet certain objective criteria established by the 
Board, by the executive officers of applicant, under authority 
delegated by the Board. Applicant does not have an external investment 
adviser within the meaning of section 2(a)(20) of the Act.
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    \1\ Section 2(a)(48) defines a BDC to be any closed-end 
investment company that operates for the purpose of making 
investments in securities described in sections 55(a)(1) through 
55(a)(3) of the Act and makes available significant managerial 
assistance with respect to the issuers of such securities.
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    2. Applicant requests an order under section 61(a)(3)(B) of the Act 
approving its proposal to grant certain stock options under the Plan to 
its Non-employee Directors.\2\ Applicant has a nine member Board with 
one current vacancy. Seven of the eight current members of the Board 
are not ``interested persons'' (as defined in section 2(a)(19) of the 
Act) of the applicant (``Disinterested Directors''). All of the current 
Non-employee Directors are Disinterested Directors. The Board approved 
the Plan at a meeting of the Board held on April 6, 2009 and 
applicant's stockholders approved the Plan at the annual meeting of 
stockholders held on June 11, 2009.\3\
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    \2\ The Non-employee Directors receive a $100,000 per year 
retainer payment and $3,000 for each Board or committee meeting or 
other designated Board-related meeting attended, and reimbursement 
for related expenses. Non-employee Directors who chair a committee 
of the Board receive an additional $10,000 retainer per year. Non-
employee Directors who serve as directors on the boards of portfolio 
companies also receive an annual retainer from applicant set at 
$30,000 per board, in lieu of any payment from the portfolio 
company.
    \3\ At a Board meeting held on January 14, 2010, the Board 
approved an amendment to the Plan. At such meeting, the Board 
determined that the amendment did not require stockholder approval 
under Section 10 of the Plan or applicable law or NASDAQ listing 
requirements. The Company acknowledges that the Commission is not 
taking a position as to whether the Company is required to seek 
stockholder approval for the amendment.
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    3. Applicant's officers, employees, and Non-employee Directors are 
eligible to receive options under the Plan. Under the Plan, a maximum 
of 750,000 shares of applicant's common stock, in the aggregate, may be 
issued to Non-employee Directors and options to purchase 93,750 shares 
of applicant's common stock may be issued to any one Non-employee 
Director. On the date that the Commission issues an order on the 
application (``Order Date''), each of the seven Non-employee Directors 
serving on the Board as of June 11, 2009 will be granted options to 
purchase 93,750 shares of applicant's common stock (the ``Initial 
Grants''), provided that the Non-employee Director is a member of the 
Board on the Order Date. The options issued under the Initial Grants 
will vest in three equal parts on each of the first three anniversaries 
of June 11, 2009. Any person who becomes a Non-employee Director after 
June 11, 2009 will be entitled to receive options to purchase 93,750 
shares of applicant's common stock (the ``Other Grants''), if and to 
the extent that there are options available for grant to Non-employee 
Directors under the Plan. Each Other Grant will be effective on the 
later of the date such person becomes a Non-employee Director and the 
Order Date. The options issued under the Other Grants will vest in 
three equal parts on each of the first three anniversaries of the date 
such person becomes a Non-employee Director.
    4. Under the terms of the Plan, the exercise price of an option 
will not be less than 100% of the current market value, or if no such 
market value exists, the current net asset value (``NAV'') per share of 
applicant's common stock on the date of the issuance of the option 
(``Fair Market Value'').\4\ The Initial Grants will expire on June 11, 
2019, and the Other Grants will expire on the tenth anniversary of the 
date the person becomes a Non-employee Director. Options granted under 
the Plan may not be assigned or transferred other than by will or the 
laws of descent and distribution. In the event of the death or 
disability (as defined in the Plan) of a Non-employee Director during 
such director's service, all such director's unexercised options will 
immediately become exercisable and may be exercised for a period of 
three years following the date of death (by such director's personal 
representative) or one year following the date of disability, but in no 
event after the respective expiration dates of such options. In the 
event of the termination of a Non-employee Director for cause, any 
unexercised options will terminate immediately. If a Non-employee 
Director's service is terminated for any reason other than by death, 
disability, or

[[Page 57312]]

for cause, the options may be exercised within one year immediately 
following the date of termination, but in no event later than the 
expiration date of such options.
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    \4\ Under the Plan, ``Fair Market Value'' is defined as follows: 
(a) if applicant's common stock is listed on any established 
exchange or traded on the NASDAQ Global Select Market, the closing 
sales price of the common stock as quoted on such exchange or market 
(or if the common stock is traded on multiple exchanges or markets, 
the exchange or market with the greatest volume of trading in the 
common stock) on the date on which an option is granted under the 
Plan, as reported in The Wall Street Journal or such other source as 
the Board deems reliable; or (b) in the absence of closing sales 
prices on such exchanges or markets for the common stock, the Fair 
Market Value will be determined in good faith by the Board, but in 
no event shall be less than the current NAV per share of common 
stock.
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    5. Applicant's officers and employees are eligible or have been 
eligible to receive options under stock option plans that exclude Non-
employee Directors as participants (the ``Employee Plans''), 
applicant's 2006 stock option plan (the ``2006 Option Plan''), 
applicant's 2007 stock option plan (the ``2007 Option Plan''), and 
applicant's 2008 stock option plan (the ``2008 Option Plan''). Non-
employee Directors have been eligible to receive options under 
applicant's two Disinterested Director stock option plans (the 
``Disinterested Director Plans''), the 2006 Option Plan, the 2007 
Option Plan and the 2008 Option Plan (collectively, the 2008 Option 
Plan, the 2007 Option Plan, the 2006 Option Plan, the Disinterested 
Director Plans and the Employee Plans are the ``Other Plans''). As of 
August 18, 2010, applicant had 350,309,123 shares of common stock 
outstanding.\5\ The 750,000 shares of applicant's common stock that may 
be issued to Non-employee Directors under the Plan represent 0.2% of 
applicant's outstanding voting securities as of August 18, 2010. As of 
August 18, 2010, the amount of voting securities that would result from 
the exercise of all outstanding options issued to applicant's 
directors, officers, and employees under the Other Plans and the Plan 
would be 33,553,256 shares of applicant's common stock, or 9.5% of 
applicant's outstanding voting securities. As of August 18, 2010, 
applicant had no outstanding warrants, options, or rights to purchase 
its voting securities other than the outstanding options issued to 
applicant's directors, officers, and employees under the Other Plans 
and the Plan.
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    \5\ Applicant's common stock constitutes the only voting 
security of applicant currently outstanding.
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Applicant's Legal Analysis

    1. Section 63(3) of the Act permits a BDC to sell its common stock 
at a price below current NAV upon the exercise of any option issued in 
accordance with section 61(a)(3). Section 61(a)(3)(B) provides, in 
pertinent part, that a BDC may issue to its non-employee directors 
options to purchase its voting securities pursuant to an executive 
compensation plan, provided that: (a) The options expire by their terms 
within ten years; (b) the exercise price of the options is not less 
than the current market value of the underlying voting securities at 
the date of the issuance of the options, or if no market value exists, 
the current NAV of the underlying voting securities; (c) the proposal 
to issue the options is authorized by the BDC's shareholders, and is 
approved by order of the Commission upon application; (d) the options 
are not transferable except for disposition by gift, will or intestacy; 
(e) no investment adviser of the BDC receives any compensation 
described in section 205(a)(1) of the Investment Advisers Act of 1940, 
except to the extent permitted by clause (b)(1) or (b)(2) of that 
section; and (f) the BDC does not have a profit-sharing plan as 
described in section 57(n) of the Act.
    2. In addition, section 61(a)(3) provides that the amount of the 
BDC's voting securities that would result from the exercise of all 
outstanding warrants, options, and rights at the time of issuance may 
not exceed 25% of the BDC's outstanding voting securities, except that 
if the amount of voting securities that would result from the exercise 
of all outstanding warrants, options, and rights issued to the BDC's 
directors, officers, and employees pursuant to any executive 
compensation plan would exceed 15% of the BDC's outstanding voting 
securities, then the total amount of voting securities that would 
result from the exercise of all outstanding warrants, options, and 
rights at the time of issuance will not exceed 20% of the outstanding 
voting securities of the BDC.
    3. Applicant represents that its proposal to grant certain stock 
options to Non-employee Directors under the Plan meets all the 
requirements of section 61(a)(3)(B). Applicant states that the Board is 
actively involved in the oversight of applicant's affairs and that it 
relies extensively on the judgment and experience of its Board. In 
addition to their duties as Board members generally, applicant states 
that the Non-employee Directors provide guidance and advice on 
operational issues, underwriting policies, credit policies, asset 
valuation and strategic direction, as well as serving on committees. 
Applicant believes that the availability of options under the Plan will 
provide significant at-risk incentives to Non-employee Directors to 
remain on the Board and devote their best efforts to ensure applicant's 
success. Applicant states that the options will provide a means for the 
Non-employee Directors to increase their ownership interests in 
applicant, thereby ensuring close identification of their interests 
with those of applicant and its stockholders. Applicant asserts that by 
providing incentives such as options, applicant will be better able to 
maintain continuity in the Board's membership and to attract and retain 
the highly experienced, successful and dedicated business and 
professional people who are critical to applicant's success as a BDC.
    4. As noted above, applicant states that the amount of voting 
securities that would result from the exercise of all outstanding 
options issued to applicant's directors, officers, and employees under 
the Other Plans and the Plan would be 33,553,256 shares of applicant's 
common stock, or 9.5% of applicant's outstanding voting securities, as 
of August 18, 2010. However, applicant represents that the maximum 
number of voting securities that would result from the exercise of all 
outstanding options issued and all options issuable to applicant's 
directors, officers, and employees under the Plan and the Other Plans 
would be 70,981,813 shares of applicant's common stock, or 20.2% of 
applicant's outstanding voting securities, as of August 18, 2010. 
Applicant states that to the extent the number of shares of common 
stock that would be issued upon the exercise of options issued under 
the Other Plans and the Plan exceeds 15% of applicant's outstanding 
voting securities, applicant will comply with the 20% limit in section 
61(a)(3) of the Act.
    5. Applicant asserts that, given the relatively small amount of 
common stock issuable to Non-employee Directors upon their exercise of 
options under the Plan, the exercise of such options would not, absent 
extraordinary circumstances, have a substantial dilutive effect on the 
NAV of applicant's common stock.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-23408 Filed 9-17-10; 8:45 am]
BILLING CODE 8010-01-P