Document:

Exhibit 10.4

CAPITAL SOUTHWEST CORPORATION

Form of Non-Qualified Stock Option Agreement

	
Date of Grant:

		
	 		 
	
Name of Optionee:

		 
	 		 
	
Number of Shares:

	
_____ Shares of Common Stock (the “Shares”)

	 		 
	
Exercise Price Per Share:

	
$______per Share, which exceeds the Fair Market Value of the Shares as of the Date of Grant as determined in accordance with the Capital Southwest Corporation 2009 Stock Incentive Plan, as amended (the “Plan”)

	 		 
	
Expiration Date:

		
 

	 		 
	
Vesting Schedule:

	
1/3 exercisable beginning on the Trigger Event  Date; an additional 1/3 exercisable beginning on the first anniversary of the Trigger Event Date; and the final 1/3 exercisable beginning on the second anniversary of the Trigger Event Date

Capital Southwest Corporation (the “Company”) hereby awards to the Optionee (the “Optionee”) an option (the “Option”) to purchase from the Company, for the exercise price per share set forth above (the “Exercise Price”), the number of shares of Common Stock of the Company set forth above pursuant to the Plan.  The Option is not intended by the parties hereto to be, and shall not be treated as, an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).  The Option is not intended to be a Qualified Performance-Based Award under the Plan.

To the extent not controlled by the terms and conditions contained in the Plan, the terms and conditions of the Option granted hereby shall be governed by this Non-Qualified Stock Option Agreement (the “Agreement”) as follows:

 

	1.	No Right to Continued Employee Status

Nothing contained in this Agreement shall confer upon Optionee the right to the continuation of his or her Employee status, or to interfere with the right of the Company or other member of the Company Group, as applicable, to terminate such relationship.

	2.	Vesting of Option

The Option shall vest in accordance with the Vesting Schedule set forth above.

For purposes hereof, “Trigger Event” means a transformative transaction intended to increase the market value of the Company equity for the benefit of its shareholders, which may involve, for example, a spinoff of one or more wholly-owned subsidiaries of the Company (collectively, “Spinco”), a going private transaction, a leveraged recapitalization, or termination of the Company’s regulated investment company status and (b) “Trigger Event Date” means the 90th day following the consummation of the Trigger Event, unless the Trigger Event is a going private transaction, in which case the Trigger Event Date shall be the closing date of such transaction.

Notwithstanding the foregoing, in the event of a Change of Control that occurs on or following the consummation of a Trigger Event, all unvested Options shall immediately vest in full.  Further, if the Trigger Event is effected through a spinoff transaction in connection with which the Optonee’s employment is transferred to Spinco, in the event a Change of Control of Spinco (substituting Spinco for the Company in such definition) occurs following the consummation of the Trigger Event, all unvested Options shall immediately vest in full.

	3.	Exercise; Transferability

		(a)	Exercise Method.  The Option shall be exercised by delivery to the Company of (i) written notice of exercise stating the number of Shares being purchased (in whole shares only) and such other information set forth on the form of Notice of Exercise attached to this Agreement as Exhibit A and (ii) a check or cash in the amount of the Exercise Price of the Shares covered by the notice (or such other consideration as has been approved by the Board of Directors consistent with the Plan).  Optionee may also exercise the Option through a cashless exercise in accordance with the Plan and the Company’s rules and procedures governing cashless exercises.  Any cashless exercise permitted hereunder will be subject to any applicable limitations or restrictions imposed under the Sarbanes-Oxley Act of 2002.

		(b)	Transferability.  Unless otherwise required by law, the Option shall not be assignable or transferable other than by will, by the laws of descent and distribution, or by a qualified domestic relations order, and may be exercised during the lifetime of the Optionee only by the Optionee (or the Optionee’s guardian or legal representative) or an alternate payee under a qualified domestic relations order.

 

	4.	Certain Adjustments

Adjustments to the Option shall be effected in accordance with Section 16(a) of the Plan.  For the avoidance of doubt, in the event of any distribution of shares of a Company subsidiary to Company shareholders in connection with a spinoff transaction, the Company will retain the number of shares of such entity that the Optionee would have received if the Optionee had exercised the Option immediately prior to such distribution and the Optionee will additionally be conveyed such shares and any dividends or other distributions received in respect thereof upon the exercise of the Option.

	5.	Termination of Service

The transfer of Optionee’s employment to Spinco will not constitute a Termination of Service under this Agreement and the Optionee will be considered, for purposes of this Agreement, to be an Employee of the Company Group for so long as Optionee’s employment with Spinco continues, notwithstanding that Spinco ceases to be a subsidiary of the Company.

	6.	Notices

Any notice required to be given pursuant to this Agreement or the Plan shall be in writing and shall be deemed to be delivered upon receipt or, in the case of notices by the Company, five (5) days after deposit in the U.S. mail, postage prepaid, addressed to Optionee at the address last provided by Optionee for his or her employee records.

	7.	Modification, Extension and Renewal of Options

The Board or Committee, as described in the Plan, may modify, extend or renew the Option or accept its surrender (to the extent not yet exercised) and authorize the granting of a new option in substitution for it (to the extent not yet exercised), subject at all times to the Plan, the Code, and the applicable laws of the State of Texas.  Notwithstanding the foregoing provisions of this Section 7, no modification shall, without the consent of the Optionee, alter to the Optionee’s detriment or impair any rights of the Optionee under this Agreement except to the extent permitted under the Plan.

	8.	Agreement Subject to Plan; Applicable Law

This Agreement is made pursuant to the Plan and shall be interpreted to comply therewith.  A copy of the Plan is attached hereto.  Any provision of this Agreement inconsistent with the Plan shall be considered void and replaced with the applicable provision of the Plan.  This Agreement shall be governed by the laws of the State of Texas and subject to the exclusive jurisdiction of the courts therein.  Unless otherwise provided herein, capitalized terms used herein that are defined in the Plan and not defined herein shall have the meanings set forth in the Plan.

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on as of the date first above written.

	
COMPANY:

	
		 	
	
CAPITAL SOUTHWEST CORPORATION

	
		 	
	
By:

		
	
Name:

	
	
Title:

	
		 	
	
OPTIONEE:

	
		 	
	 	
	
Name:

	
		 	
	
Address:

	

 

EXHIBIT A

Capital Southwest Corporation

NON-QUALIFIED STOCK OPTION EXERCISE FORM

	
Date:

		 
	 		 
	
Attention:

		 

The undersigned hereby elects to exercise all or a portion of the Options issued to him/her by Capital Southwest Corporation (the “Company”) and dated _______ (the “Options”) and to purchase ____________ shares of common stock of the Company (the “Shares”) at an exercise price of _______ Dollars ($___) per share or an aggregate purchase price of ________________________ Dollars ($_______) (the “Exercise Price”).  Pursuant to the terms of the Option Agreement the undersigned has delivered the Exercise Price herewith in full in cash or ______________.

Please issue a certificate or certificates representing said shares of common stock in the name of the undersigned.

	
By:

		 
	 		 
	
Typed Name:

		 
	 		 
	
Address:

		 

 

EXHIBIT B

Capital Southwest Corporation

INVESTMENT REPRESENTATION LETTER

	
Date:

		 
	 		 
	
Attention:

		 

I am acquiring the Shares for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act or state securities laws.  I have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of my investment in the Shares; and, I and any account for which I am acting each are able to bear the economic risks of my or its investment.

	
By:

		 
	 		 
	
Typed Name:

		 
	 		 
	
Address:Exhibit 10.5

CAPITAL SOUTHWEST CORPORATION

Form of Cash Incentive Award Agreement

This Cash Incentive Award Agreement (the “Agreement”) is entered into effective as of __________, 2014 (the “Grant Date”) between Capital Southwest Corporation (the “Company”) and __________________ (the “Executive”).

1.              Grant of Cash Incentive Award.  Subject to the terms of this Agreement, effective as of the Grant Date, the Executive  is hereby granted a cash incentive award (the “Cash Incentive Award”) in an amount equal to the Excess Award Value.  The Cash Incentive Award shall become earned and vested as described in Section 3 and the Earned Cash Incentive Award (as defined in Section 3) shall be paid in accordance with Section 4.  The purpose of the Cash Incentive Award is to align the compensation of the Executive with the Company’s key strategic objective of increasing the market value of the Company’s shares through a transformative transaction for the benefit of the Company’s shareholders.

2.              Defined Terms.  For purposes of this Agreement,

(a)            “Aggregate Base Value” means the product of (i) $_____ and (ii) the Fully Diluted Shares of the Company outstanding as of the Grant Date, i.e., $_____.

(b)            “Aggregate Trigger Event Value” means the sum of (i) the product of (A) the VWAP of one share of Common Stock of the Company over the 20 consecutive trading days immediately preceding the Trigger Event Date and (B) the Fully Diluted Shares of the Company outstanding as of the Trigger Event Date, plus, except as specified in clause (ii), the aggregate value of all dividends and distributions paid on Common Stock of the Company from the Grant Date through the Trigger Event Date and (ii) if the Trigger Event results in a distribution of shares of a newly formed  entity to the Company stockholders (“Spinco”), the product of (A) the VWAP of one share of Spinco common stock over the 20 consecutive trading days immediately preceding the Trigger Event Date and (B) the Fully Diluted Shares of Spinco outstanding as of the Trigger Event Date, provided that if the Trigger Event is a going private transaction, the Aggregate Trigger Event Value shall be the Sale Consideration Value.

(c)            “Common Stock” meant the common stock, par value $.25 per share, of the Company.

(d)            “Equity Award Value” means the sum of (i) the Restricted Stock Value and (ii) the Option Award Value.

 

(e)            “Excess Award Value” means the positive difference, if any, between (i) the Total Payout Amount minus (ii) the Equity Award Value.

(f)            “Fully Diluted Shares” means, at any time of determination, the number of shares of common stock of the applicable entity outstanding at such time, plus the number of shares of  common stock of such entity issuable upon exercise or conversion or otherwise pursuant to any in-the-money common stock equivalents of such entity outstanding at such time.

(g)            “Option Award Value” means the positive difference, if any, between (i) the sum of (A) the product of (I) the number of shares of Common Stock of the Company underlying the options awarded to the Executive under the nonqualified option grant of even date herewith and (II) the VWAP of one share of Common Stock of the Company over the 20 consecutive trading days immediately preceding the Trigger Event Date and (B) if the Trigger Event results in a distribution of shares of Spinco to the Company shareholders, the product of (I) the number of shares of Spinco common stock that would be distributed upon exercise of such nonqualified option grant and (II) the VWAP of one share of Spinco common stock over the 20 consecutive trading days immediately preceding the Trigger Event Date minus (ii) the aggregate exercise price payable under such nonqualified option grant, provided that if the Trigger Event is a going private transaction, the Option Award Value shall be the Sale Consideration Value payable in respect of the options awarded to the Executive under the nonqualified option grant of even date herewith.

(h)            “Restricted Stock Value” means (i) the product of (A) the aggregate number of shares of restricted Common Stock of the Company granted to the Executive under the restricted stock award agreement of even date herewith and (B) the VWAP of one share of Common Stock of the Company over the 20 consecutive trading days immediately preceding the Trigger Event Date, plus, except as specified in clause (ii), the aggregate value of all dividends and distributions, if any, paid on the restricted Common Stock of the Company granted to the Executive under the restricted stock award agreement of even date herewith from the Grant Date through the Trigger Event Date and (ii) if the Trigger Event results in a distribution of shares of Spinco to the Company shareholders, the product of (A) the number of shares of Spinco common stock distributed in respect of the restricted Common Stock awarded under the restricted stock award agreement of even date herewith and (B) the VWAP of one share of Spinco common stock over the 20 consecutive trading days immediately preceding the Trigger Event Date, provided that if the Trigger Event is a going private transaction, the Restricted Stock Value shall be the Sale Consideration Value payable in respect of the restricted Common Stock awarded under the Executive’s restricted stock award agreement of even date therewith.

(i)            “Sale Consideration Value” means, in the event the Trigger Event is a going private transaction, the fair market value as of the Trigger Event Date of the aggregate consideration received by the holders of Common Stock and common stock equivalents of the Company in such transaction, as determined in good faith by the board of directors of the Company.

 

(j)            “Total Payout Amount” means (i) two percent (2%) of the positive difference, if any, of (A) the Aggregate Trigger Event Value less (B) the Aggregate Base Value (such difference, the “Equity Value Accretion”), up to $7.5 million, plus (ii) _____ percent (_____%) for any excess Equity Value Accretion over $7.5 million.

(k)            “Trigger Event Date” means the 90th day following the consummation of the Trigger Event, unless the Trigger Event is a going private transaction, in which case the Trigger Event Date shall be the closing date of such transaction.

(l)            “Trigger Event” means a transformative transaction intended to increase the market value of the Company equity for the benefit of its shareholders, which may involve, for example, a spinoff of one or more wholly-owned subsidiaries of the Company (collectively, “Spinco”), a going private transaction, a leveraged recapitalization, or termination of the Company’s regulated investment company status.

(m)          “VWAP” means, for the relevant security, the per share volume-weighted average price as displayed under the heading “Bloomberg VWAP” on the Bloomberg AQR page for the relevant security (or its equivalent successor if such page is not available) in respect of the period from the scheduled open of trading until the scheduled close of trading of the primary trading session over the relevant determination period (or if such volume-weighted average price is unavailable, the market value of one share on each trading day during the relevant determination period, determined, using a volume-weighted average method, by a nationally recognized independent investment banking firm retained for this purpose by the Company).  The VWAP will be determined without regard to after hours trading or any other trading outside of the regular trading session trading hours.

3.              Award Vesting.

(a)            The Cash Incentive Award shall be unearned and unvested unless and until it becomes earned and vested and nonforfeitable in accordance with this Section 3.  The Cash Incentive Award shall vest and be earned and payable as follows:  (i) 1/3 on the Trigger Event Date; (ii) an additional 1/3 on the first anniversary of the Trigger Event Date; and (iii) the final 1/3 on the second anniversary of the Trigger Event Date.  Any portion of the Cash Incentive Award granted pursuant to this Agreement that becomes earned in accordance with this Agreement shall be referred to herein as “Earned Cash Incentive Award.”

(b)           Any portion of the Cash Incentive Award that remains unvested and unearned as of the Termination of Service of the Executive shall expire and be forfeited immediately and the Executive shall have no further rights with respect to any remaining portion of the Cash Incentive Award.  For purposes hereof, “Termination of Service” means the termination of employment of the Executive by the Company and all subsidiaries of the Company, including Spinco (the “Company Group”).  For purposes of this Agreement, the transfer of the Executive’s employment to Spinco will not constitute a Termination of Service and the Executive will be considered, for purposes of this Agreement, to be a continuing employee of the Company for so long as the Executive’s employment with Spinco continues, notwithstanding that Spinco ceases to be a subsidiary of the Company.  The Executive’s service shall not be deemed to have terminated because of a change in the entity for which the Executive renders such service, provided that there is no material interruption or termination of the Executive’s service.  Furthermore, the Executive ’s service with the Company Group shall not be deemed to have terminated if the Executive takes any military leave, sick leave, or other bona fide leave of absence approved by the Company or Spinco, as applicable.

 

(c)            Notwithstanding the foregoing, the Cash Incentive Award shall automatically vest and be earned and payable upon a termination of the Executive’s employment with the Company Group member employing the Executive either by such Executive for Good Reason or by such Company Group member without Cause at or following a Change of Control of such employer, provided that a Trigger Event shall have occurred on or prior to such termination date.  For purposes hereof,

(i)            "Cause" means, with respect to the Executive, (A) commission of any act or acts of personal dishonesty intended to result in substantial personal enrichment to the Executive to the detriment of the applicable Company Group member, (B) conviction of, or entering into a plea of nolo contendere to, a felony, (C) the Executive’s repeated failure to perform his or her responsibilities that are demonstrably willful and deliberate, provided that such failures have continued for more than 30 days following written notice from the employer of its intent to terminate his employment based on such failures, (D) intentional, repeated or continuing violation of any of the applicable Company Group member’s policies or procedures that occurs or continues after notice to the Executive that he or she has violated such policy or procedure; or (E) any material breach of a written covenant or agreement with the applicable Company Group member or material breach of  fiduciary duty to the applicable Company Group member, provided that such breach is not corrected, to the extent correctible, within 30 days following written notice from the employer of its intent to terminate his employment based on such breach;

(ii)            “Change of Control” means (A) the date any one person, or more than one "person" acting as a group, acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person(s)), directly or indirectly, ownership of the voting equity possessing 51% or more of the total voting power of the relevant entity; (B) individuals who at any time during the term of this Agreement constitute the board of directors of the relevant entity (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election or nomination for election was approved by a vote of at least 75% of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the relevant entity in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (B) considered as though such person were a member of the Incumbent Board; (C) any consolidation or merger to which the relevant entity is a party, if following such consolidation or merger, shareholders of such entity immediately prior to such consolidation or merger shall not beneficially own securities representing at least 51% of the combined voting power of the outstanding voting securities of the surviving or continuing corporation; or (D) any sale, lease, exchange or other transfer (in one transaction or in a series of related transactions) of all, or substantially all, of the assets of such entity, other than to an entity (or entities) of which the relevant entity or the shareholders of such entity immediately prior to such transaction beneficially own securities representing at least 51% of the combined voting power of the outstanding voting securities; and

 

(iii)            “Good Reason” means the occurrence of any of the following:  (A) a material breach of the Executive’s employment agreement by the employer which is not cured by the employer within thirty (30) days following the employer’s receipt of written notice from the Executive describing such alleged breach; (B) a reduction in Executive’s title or a material reduction in Executive’s duties, authorities, and/or responsibilities; (C) a material reduction in the Executive’s compensation or benefits; or (D) a requirement by the employer, without Executive’s consent, that Executive relocate to a location greater than thirty‐five (35) miles from Executive’s place of residence.

4.              Settlement and Payment. The Earned Cash Incentive Award shall be paid as promptly as practicable following the date such amount becomes vested and earned, and in any event not later than 60 days following such date.

5.              Withholding.  All payments under this Agreement are subject to withholding of all applicable taxes.

6.              Transferability. The Cash Incentive Award is not transferable except as designated by the Executive by will or by the laws of descent and distribution.

7.              Heirs and Successors. If any benefits deliverable to the Executive under this Agreement have not been delivered at the time of the Executive’s death, such rights shall be delivered to the Executive’s estate.

8.              Administration.  The authority to administer and interpret this Agreement shall be vested in the compensation committee of the board of directors of the Company.  Any interpretation of the Agreement by the committee and any decision made by it with respect to the Agreement is final and binding on all persons.  Notwithstanding anything herein to the contrary, the Company reserves the right, in its sole discretion, to terminate the Cash Incentive Award or to reduce the Total Payout Amount at any time prior to the Trigger Event Date.

9.           Notices.  Any notice required or permitted under this Agreement shall be deemed given when delivered personally, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to Company at its principal offices, to the Executive at the Executive’s address set forth below or, in either case, such other address as one party may designate in writing to the other.

10.           Governing Law.  The validity, construction and effect of this Agreement shall be determined in accordance with the laws of the State of Texas and applicable federal law.

11.           Amendments.  This Agreement may not be amended or modified other than by a writing executed by both parties.

 

12.            Award Not Contract of Employment.  The award granted hereunder does not constitute a contract of employment or continued service, and the grant of the award will not give the Executive the right to be retained in the employ or service of the Company or other member of the Company Group, unless such right or claim has specifically accrued under the terms of this Agreement.

13.            Severability.  If a provision of this Agreement is held invalid by a court of competent jurisdiction, the remaining provisions will nonetheless be enforceable according to their terms.  Further, if any provision is held to be overbroad as written, that provision shall be amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and enforced as amended.

14.            Section 409A Rules.  To the fullest extent possible, amounts and other benefits payable under this Agreement are intended to comply with or be exempt from the provisions of section 409A of the Internal Revenue Code of 1986, as amended.  This Agreement will be interpreted and administered to the extent possible in a manner consistent with the foregoing statement of intent; provided, however, that the Company does not guarantee the tax treatment of the award granted hereunder.

 

IN WITNESS WHEREOF, the parties hereto have executed this Cash Incentive Award Agreement as of the date first above written.

	
COMPANY:

	 
		 	 
	
CAPITAL SOUTHWEST CORPORATION

	 
		 	 
	
By:

		 
	
Name:

	 
	
Title:

	 
		 	 
	
EXECUTIVE:

	 
		 	 
	
By:

		 
	
Name:

		 
		 	 
	
Address:

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