

[Federal Register: January 26, 2007 (Volume 72, Number 17)]
[Notices]               
[Page 3880-3882]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ja07-150]                         

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27669; 812-13308]

 
American Capital Strategies, Ltd.; Notice of Application

January 19, 2007.
AGENCY: Securities and Exchange Commission (the ``Commission'').

[[Page 3881]]


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

-----------------------------------------------------------------------

    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 2006 Stock Option 
Plan (the ``Plan'').
    Filing Dates: The application was filed on June 2, 2006 and amended 
on January 19, 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 February 15, 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 either made by its board of directors (the ``Board''), 
based on recommendations of an investment committee comprised of senior 
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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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. Six 
of the seven 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 23, 2006 and amended the Plan at meetings held on 
April 6, 2006 and December 7, 2006. Applicant's stockholders approved 
the Plan at the annual meeting of stockholders held on May 11, 2006.
---------------------------------------------------------------------------

    \2\ The Non-employee Directors receive a $75,000 per year 
retainer payment and $2,500 for each Board or committee meeting 
attended, and reimbursement for related expenses. Additionally, 
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 and the retainer payment then in effect.
    \3\ The Board presently has two vacancies. All of the Non-
employee Director are Disinterested Directors.
---------------------------------------------------------------------------

    3. Applicant's officers and employees, and Non-employee Directors 
are eligible to receive options under the Plan. Under the Plan, a 
maximum of 320,000 shares of applicant's common stock, in the 
aggregate, may be issued to Non-employee Directors and 40,000 shares of 
applicant's common stock may be issued to any one Non-employee 
Director. Each of the six Non-employee Directors serving on the Board 
as of May 11, 2006 will be granted options to purchase 40,000 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 11, 2006. Any person 
who becomes a Non-employee Director after May 11, 2006 will be entitled 
to receive options to purchase 40,000 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 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.
---------------------------------------------------------------------------

    \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 Stock Market, or alternatively, on 
the exchange where applicant's shares are traded, on the day the 
option is granted.
---------------------------------------------------------------------------

    5. Applicant's officers and employees are eligible or have been 
eligible to receive options under applicant's six other stock option 
plans under which Non-employee Directors are not entitled to 
participate (the ``Employee Plans''). The remaining 16,990,212 shares 
of applicant's common stock subject to issuance to officers and 
employees under the Employee Plans and the Plan represent 11.5% of the 
147,613,188 shares of applicant's common stock outstanding as of 
December 31, 2006. Non-employee Directors are eligible or have been 
eligible to participate in applicant's Disinterested Director stock 
option plans (together with the Employee Plans, the ``Other Plans'')

[[Page 3882]]

under which 225,000 shares of applicant's common stock remain for 
issuance, representing 0.2% of shares of applicant's common stock 
outstanding as of December 31, 2006. The 320,000 shares of applicant's 
common stock that may be issued to Non-employee Directors under the 
Plan represent 0.2% of shares of applicant's common stock outstanding 
as of December 31, 2006. Therefore, the maximum number of applicant's 
voting securities that would result from the exercise of all 
outstanding options issued and all options issuable to directors, 
officers, and employees under the Other Plans and the Plan would be 
17,535, 212 shares of applicant's common stock, or approximately 11.9% 
of shares of applicant's common stock outstanding as of December 31, 
2006. Applicant has no outstanding warrants, options, or rights to 
purchase its voting securities, other than the options granted or to be 
granted to its directors, officers, and employees under the Other Plans 
and the Plan.

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 experienced, successful and dedicated business and 
professional people who are critical to applicant's success as a BDC.
    4. Applicant states that the maximum amount of voting securities 
that would result from the exercise of all outstanding options issued 
to the directors, officers, and employees under the Other Plans and the 
Plan would be 14,258,728 shares of applicant's common stock, or 
approximately 9.7% of applicant's shares of common stock outstanding as 
of December 31, 2006, 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. E7-1228 Filed 1-25-07; 8:45 am]

BILLING CODE 8011-01-P
