Document ID: SEC-2010-1527-0001
Agency: sec
Document Type: Notice
Title: Application: Capital Southwest Corp.
Posted Date: 2010-10-06T04:00Z

[Federal Register: October 6, 2010 (Volume 75, Number 193)]
[Notices]               
[Page 61790-61793]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06oc10-146]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29450; 812-13769]

 
Capital Southwest Corporation; Notice of Application

September 29, 2010.
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: Applicant, Capital Southwest Corporation 
(``Capital Southwest''), requests an order to permit it to issue 
restricted shares of its common stock to its officers and employees 
under the terms of its employee compensation plan.

Filing Dates: The application was filed on May 5, 2010, and amended on 
May 17, 2010 and September 24, 2010.

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 25, 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

[[Page 61791]]

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, 12900 Preston Road, 
Suite 700, Dallas, TX 75230.

FOR FURTHER INFORMATION CONTACT: John Yoder, Senior Counsel, at (202) 
551-6878, 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. Capital Southwest, a Texas 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\ Capital Southwest provides debt and equity growth 
capital to privately-held middle-market companies and its investment 
objective is to achieve capital appreciation through long-term 
investments in businesses believed to have favorable growth potential. 
Capital Southwest's investment interests are focused on expansion 
financings, management buyouts, minority recapitalizations, industry 
consolidations and early-stage financings in a broad range of industry 
segments. Shares of Capital Southwest's common stock are traded on the 
NASDAQ Global Select Market under the symbol ``CSWC.'' As of April 13, 
2010, there were 3,741,638 shares of Capital Southwest's common stock 
outstanding. As of that date, Capital Southwest had 514 employees, 
including employees of its wholly-owned subsidiaries.
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    \1\ Capital Southwest was incorporated in Texas in 1961. On 
March 30, 1988 Capital Southwest elected to be regulated as a BDC. 
Section 2(a)(48) of the Act 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. Capital Southwest currently has a five-member board of directors 
(the ``Board'') of whom one is an ``interested person'' of Capital 
Southwest within the meaning of section 2(a)(19) of the Act and four 
are not interested persons (the ``Non-interested Directors''). Capital 
Southwest has four directors who are neither officers nor employees of 
Capital Southwest.
    3. Capital Southwest believes that its successful performance 
depends on its ability to offer fair compensation packages to its 
professionals that are competitive with those offered by other 
investment management businesses. Capital Southwest believes that the 
ability to offer equity-based compensation to its professionals is 
vital to Capital Southwest's future growth and success. Capital 
Southwest wishes to adopt the Capital Southwest Corporation 2010 
Restricted Stock Award Plan (the ``Plan'') 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'') for its employees and officers, 
and employees of its wholly-owned subsidiaries (each a ``Participant,'' 
and collectively, the ``Participants'').
    4. The Plan will authorize the issuance of shares of Restricted 
Stock subject to certain forfeiture restrictions. These restrictions 
may relate to continued employment (lapsing either on an annual or 
other period basis or on a ``cliff'' basis, i.e., at the end of a 
stated period of time), or other restrictions deemed by the 
Compensation Committee (as defined below) to be appropriate.\2\ The 
Restricted Stock will be subject to restrictions on transferability and 
other restrictions as required by the Compensation Committee. Except to 
the extent restricted under the terms of the Plan, 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 during the applicable restriction period, 
Restricted Stock for which forfeiture restrictions have not lapsed at 
the time of such termination shall be forfeited.
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    \2\ The Compensation Committee of the Board (the ``Compensation 
Committee'') is comprised solely of the Non-interested Directors.
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    5. The maximum amount of Restricted Stock that may be issued under 
the Plan will be 10% of the outstanding shares of common stock of 
Capital Southwest on the effective date of the Plan plus 10% of the 
number of shares of Capital Southwest's common stock issued or 
delivered by Capital Southwest (other than pursuant to compensation 
plans) during the term of the Plan.\3\ The Plan limits the total number 
of shares that may be awarded to any single Participant in a single 
year to 6250 shares. In addition, no Restricted Stock Participant may 
be granted more than 25% of the shares reserved for issuance under the 
Plan. The Plan will be administered by the Compensation Committee, 
which, upon approval of the required majority, as defined in section 
57(o) of the Act,\4\ of the Board, 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 Capital Southwest.
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    \3\ For purposes of calculating compliance with this limit, 
Capital Southwest will count as Restricted Stock all shares of its 
common stock that are issued pursuant to the Plan less any shares 
that are forfeited back to Capital Southwest and cancelled as a 
result of forfeiture restrictions not lapsing.
    \4\ 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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    6. Each issuance of Restricted Stock under the Plan will be 
approved by the required majority, as defined in section 57(o) of the 
Act, of Capital Southwest's directors on the basis that the issuance is 
in the best interests of Capital Southwest and its shareholders. The 
date on which the required majority approves an issuance of Restricted 
Stock will be deemed the date on which the subject Restricted Stock is 
granted.
    7. The Plan has been approved by the Compensation Committee, as 
well as the Board, including the required majority as defined in 
section 57(o) of the Act. The Plan will be submitted for approval to 
Capital Southwest's shareholders, and will become effective upon such 
approval, subject to and following receipt of the order.

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

[[Page 61792]]

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 Plan.
    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 Plan 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. Capital Southwest 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.\5\ Capital Southwest states that the 
concerns underlying those sections include: (a) Preferential treatment 
of investment company insiders and the use of options and other rights 
by insiders to obtain control of the investment company; (b) 
complication of the investment company's structure that makes it 
difficult to determine the value of the company's shares; and (c) 
dilution of shareholders' equity in the investment company. Capital 
Southwest states that the Plan does not raise concerns about 
preferential treatment of Capital Southwest's insiders because the Plan 
is a bona fide compensation plan of the type 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. Capital 
Southwest 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. Capital Southwest 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. Capital 
Southwest also asserts that the Plan would not become a means for 
insiders to obtain control of Capital Southwest because the number of 
shares of Capital Southwest issuable under the Plan would be limited as 
set forth in the application. Moreover, no individual Restricted Stock 
Participant could be issued more than 25% of the shares reserved for 
issuance under the Plan.
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    \5\ Capital Southwest asks that the order apply also to any 
future officers and employees of Capital Southwest and future 
employees of Capital Southwest's wholly-owned subsidiaries that are 
eligible to receive Restricted Stock under the Plan. Additionally, 
to the extent that Capital Southwest creates or acquires additional 
wholly-owned subsidiaries, and to the extent that such future 
subsidiaries have employees to whom the relief requested herein 
would otherwise apply, Capital Southwest asks that such relief, if 
granted, be extended to such employees of any future subsidiaries.
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    5. Capital Southwest further states that the Plan will not unduly 
complicate Capital Southwest's structure because equity-based 
compensation arrangements are widely used among corporations and 
commonly known to investors. Capital Southwest notes that the Plan will 
be submitted to its shareholders for their approval. Capital Southwest 
represents that a concise, ``plain English'' description of the Plan, 
including its potential dilutive effect, will be provided in the proxy 
materials that will be submitted to Capital Southwest's shareholders. 
Capital Southwest 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''). Capital Southwest further 
notes that the Plan 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, Capital Southwest will comply with the 
disclosure requirements for executive compensation plans applicable to 
operating companies under the Exchange Act.\6\ Capital Southwest thus 
concludes that the Plan will be adequately disclosed to investors and 
appropriately reflected in the market value of Capital Southwest's 
shares.
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    \6\ Capital Southwest 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, Securities Act 
Release No. 8655 (Jan. 27, 2006) (proposed rule); Executive 
Compensation and Related Party Disclosure, Securities Act Release 
No. 8732A (Aug. 29, 2006) (final rule and proposed rule), as amended 
by Executive Compensation Disclosure, Securities Act Release No. 
8765 (Dec. 22, 2006) (adopted as interim final rules with request 
for comments).
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    6. Capital Southwest acknowledges that, while awards granted under 
the Plan would have a dilutive effect on the shareholders' equity in 
Capital Southwest, that effect would be outweighed by the anticipated 
benefits of the Plan to Capital Southwest and its shareholders. Capital 
Southwest 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, Capital Southwest suggests, in turn 
are likely to increase Capital Southwest's performance and shareholder 
value. Capital Southwest also asserts that equity-based compensation 
would more closely align the interests of Capital Southwest's employees 
with those of its shareholders. In addition, Capital Southwest states 
that its shareholders will be further protected by the conditions to 
the requested order that assure continuing oversight of the operation 
of the Plan by Capital Southwest's Board.

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

    7. 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.

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    8. Capital Southwest requests an order pursuant to section 57(a)(4) 
and rule 17d-1 to permit the Plan. Capital Southwest states that the 
Plan, although benefiting the Participants and Capital Southwest in 
different ways, is in the interests of Capital Southwest's shareholders 
because the Plan will help align the interests of Capital Southwest's 
employees and officers with those of its shareholders, which will 
encourage conduct on the part of those employees and officers designed 
to produce a better return for Capital Southwest's shareholders.

Applicant's Conditions

    Applicant agrees that the order granting the requested relief will 
be subject to the following conditions:
    1. The Plan will be authorized by Capital Southwest's shareholders.
    2. Each issuance of Restricted Stock to officers and employees will 
be approved by the required majority, as defined in section 57(o) of 
the Act, of Capital Southwest's directors on the basis that such 
issuance is in the best interests of Capital Southwest and its 
shareholders.
    3. The amount of voting securities that would result from the 
exercise of all of Capital Southwest's outstanding warrants, options, 
and rights, together with any Restricted Stock issued pursuant to the 
Plan, at the time of issuance shall not exceed 25% of the outstanding 
voting securities of Capital Southwest, except that if the amount of 
voting securities that would result from the exercise of all of Capital 
Southwest's outstanding warrants, options, and rights issued to Capital 
Southwest's directors, officers, and employees, together with any 
Restricted Stock issued pursuant to the Plan, would exceed 15% of the 
outstanding voting securities of Capital Southwest, 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 Plan, at the time of issuance shall not 
exceed 20% of the outstanding voting securities of Capital Southwest.
    4. The maximum amount of shares of Restricted Stock that may be 
issued under the Plan will be 10% of the outstanding shares of common 
stock of Capital Southwest on the effective date of the Plan plus 10% 
of the number of shares of Capital Southwest's common stock issued or 
delivered by Capital Southwest (other than pursuant to compensation 
plans) during the term of the Plan.
    5. The Board will review the Plan at least annually. In addition, 
the Board will review periodically the potential impact that the 
issuance of Restricted Stock under the Plan could have on Capital 
Southwest's earnings and NAV per share, such review to take place prior 
to any decisions to grant Restricted Stock under the Plan, but in no 
event less frequently than annually. Adequate procedures and records 
will be maintained to permit such review. The Board will be authorized 
to take appropriate steps to ensure that the grant of Restricted Stock 
under the Plan would not have an effect contrary to the interests of 
Capital Southwest's shareholders. This authority will include the 
authority to prevent or limit the granting of additional Restricted 
Stock under the Plan. All records maintained pursuant to this condition 
will be subject to examination by the Commission and its staff.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25069 Filed 10-5-10; 8:45 am]
BILLING CODE 8010-01-P