Document ID: SEC-2007-1370-0001
Agency: sec
Document Type: Notice
Title: American Capital Strategies, Ltd.; Notice of Application
Posted Date: 2007-10-03T04:00Z

[Federal Register: October 3, 2007 (Volume 72, Number 191)]
[Notices]               
[Page 56393-56395]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03oc07-100]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28001; 812-13398]

 
American Capital Strategies, Ltd.; Notice of Application

September 27, 2007.
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 of Application: Applicant, American Capital Strategies, Ltd., 
requests an order approving a proposal to grant certain stock options 
to directors who are not also employees or officers of the applicant 
(the ``Non-employee Directors'') under its 2007 Stock Option Plan (the 
``Plan'').

Filing Dates: The application was filed on June 15, 2007 and amended on 
September 27, 2007.

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 22, 2007, 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: Laura J. Riegel, Senior Counsel, at 
(202) 551-6873, or Nadya B. Roytblat, 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 is available for a fee at the 
Public Reference Desk, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-0102 (telephone 202-551-5850).

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. 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'').\3\ The Board approved the Plan at a 
meeting held on March 8, 2007. Applicant's stockholders approved the 
Plan at the annual meeting of stockholders held on May 4, 2007.
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    \2\ The Non-employee Directors receive a $75,000 per year 
retainer payment and $2,500 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. Further, under the terms of a disinterested director 
retention plan that applicant established in 2006, Non-employee 
Directors are generally entitled to receive a payment upon 
termination of service as a director equal to a multiple of the 
number of years of service as a Non-employee Director.
    \3\ The Board presently has one vacancy. All of the Non-employee 
Directors are Disinterested Directors.
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    3. Applicant's officers and employees, and Non-employee Directors 
are eligible to receive options under the Plan. Under the Plan, a 
maximum of 400,000 shares of applicant's common stock, in the 
aggregate, may be issued to Non-employee Directors and 50,000 shares of

[[Page 56394]]

applicant's common stock may be issued to any one Non-employee 
Director. Each of the seven Non-employee Directors serving on the Board 
as of May 4, 2007 will be granted options to purchase 50,000 shares of 
applicant's common stock (the ``Initial Grants'') on the date that the 
Commission issues an order on the application (``Order Date''). The 
options issued under the Initial Grants will vest in three equal parts 
on each of the first three anniversaries of May 4, 2007. Any person who 
becomes a Non-employee Director after May 4, 2007 will be entitled to 
receive options to purchase 50,000 shares of applicant's common stock 
(the ``Other Grants'') 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 of, or if no 
such market value exists, the current net asset value per share of, 
applicant's common stock on the date of the issuance of the option.\4\ 
Options granted under the Plan will expire within ten years from the 
date of grant and 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 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 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, ``current market value'' (defined as ``fair 
market value'') is generally the closing sales price of applicant's 
shares as quoted on the Nasdaq Global Select Market, or 
alternatively, on the exchange where applicant's shares are traded, 
on the date the option is granted.
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    5. Applicant's officers and employees are eligible or have been 
eligible to receive options under applicant's six stock option plans 
under which Non-employee Directors are not entitled to participate (the 
``Employee Plans''), applicant's 2006 stock option plan (the ``2006 
Option Plan'') and the Plan. Non-employee Directors are eligible or 
have been eligible to receive options under applicant's two 
Disinterested Director stock option plans (the ``Disinterested Director 
Plans'') and the 2006 Option Plan (collectively, the 2006 Option Plan, 
the Disinterested Director Plans and the Employee Plans are the ``Other 
Plans''). As of August 31, 2007, applicant had 186,436,201 shares of 
common stock outstanding.\5\ The 400,000 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 31, 2007. As of the same date, applicant had no outstanding 
warrants or rights to purchase its voting securities and had no 
outstanding options 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. As of August 31, 2007, 
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 19,173,168 shares 
of applicant's common stock, or approximately 10.3% of applicant's 
outstanding voting securities. As of the same date, 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 Other Plans and the Plan 
would be 25,225,611 shares of applicant's common stock, or 
approximately 13.5% of applicant's outstanding voting securities.
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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 net asset value 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 securities at 
the date of the issuance of the options, or if no market exists, the 
current net asset value of the 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 an 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

[[Page 56395]]

experienced, successful and dedicated business and professional people 
who are critical to applicant's success as a BDC.
    4. 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 19,173,168 shares of applicant's common stock, or 
approximately 10.3% of applicant's outstanding voting securities as of 
August 31, 2007, which is below the percentage limitations in the Act. 
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 
net asset value 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. E7-19539 Filed 10-2-07; 8:45 am]

BILLING CODE 8011-01-P