[Federal Register Volume 86, Number 121 (Monday, June 28, 2021)]
[Notices]
[Pages 34066-34069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13664]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 34309; 812-15212]


 Capital Southwest Corporation

June 22, 2021.
AGENCY: Securities and Exchange Commission.

ACTION: Notice.

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    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, an pursuant 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, 
and pursuant section 23(c)(3) of the Act for an exemption from section 
23(c) of the Act.

SUMMARY OF THE APPLICATION: Capital Southwest Corporation (``Company'' 
or ``Applicant''), requests an order (``Order'') to permit it to (i) 
issue restricted shares of its common stock (``Restricted Stock'') 
under the terms of its 2021 Employee Restricted Stock Award Plan (the 
``2021 Plan'') as part of the compensation package for certain of its 
employees in the 2021 Plan, and (ii) withhold shares of the Company's 
common stock or purchase shares of the Company's common stock from the 
participants to satisfy tax withholding obligations relating to the 
vesting of Restricted Stock pursuant to the 2021 Plan.

APPLICANT: Capital Southwest Corporation

FILING DATES: The application was filed on March 29, 2021, and amended 
on May 17, 2021 and on June 14, 2021.

HEARING OR NOTIFICATION OF HEARING: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by emailing the Commission's 
Secretary at Secretarys-Office@sec.gov and serving applicants with a 
copy of the request by email. Hearing requests should be received by 
the Commission by 5:30 p.m. on July 16, 2021, and should be accompanied 
by proof of service on the applicants, in the form of an affidavit, or, 
for lawyers, a certificate of service. Pursuant to rule 0-5 under the 
Act, hearing requests should state the nature of the writer's interest, 
any facts bearing upon the desirability of a hearing on the matter, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification by emailing the 
Commission's Secretary at Secretarys-Office@sec.gov.

ADDRESSES: The Commission: Secretarys-Office@sec.gov. Applicants: 
bdiehl@capitalsouthwest.com; afc2dcceddc1caddefcccedfc6dbcec3dcc0dadbc7d8cadcdb81ccc0c2.

FOR FURTHER INFORMATION CONTACT: Asen Parachkevov, Senior Counsel, at 
(202) 551-6908 or Lisa Reid Ragen, Branch Chief, at (202) 551-6825

[[Page 34067]]

(Division of Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's website 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. The Company, 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\ 
The Company's investment objective is to produce attractive risk-
adjusted returns by generating current income from its debt investments 
and capital appreciation from its equity and equity related 
investments.
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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. Shares of the Company's common stock are traded on the NASDAQ 
Global Select Market under the symbol ``CSWC.'' As of March 31, 2021, 
there were 23,344,836 and 21,005,324 shares of the Company's common 
stock issued and outstanding, respectively. As of March 31, 2021, the 
Company had an aggregate of 21 employees.
    3. The Company currently has a seven-member board of directors (the 
``Board''), of whom one is an ``interested person'' of the Company 
within the meaning of section 2(a)(19) of the Act and six are not 
interested persons (the ``Non-interested Directors''). The Company has 
six directors who are neither officers nor employees of the Company.
    4. The Company 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. The Company believes the highly specialized nature of its 
business, the competitiveness of its market and the small size of its 
employee base relative to its assets and revenue make such retentions 
even more critical for the Company, and that the ability to offer 
equity-based compensation to its professionals is vital to the 
Company's future growth and success.
    5. The Commission previously issued certain exemptive orders (the 
``Prior Orders''), which, among other things, (i) permit the Company to 
issue restricted shares of its common stock under the terms of the 
Company's 2010 Restricted Stock Award Plan (the ``2010 Plan'') as part 
of the compensation packages for certain of its employees and certain 
employees of its wholly-owned subsidiaries, and (ii) allow the Company 
to withhold shares of the Company's common stock or purchase shares of 
the Company's common stock from the Participants (as defined in the 
2010 Plan) to satisfy tax withholding obligations relating to the 
vesting of Restricted Stock (as defined in the 2010 Plan) pursuant to 
the 2010 Plan.\2\
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    \2\ ``Prior Orders'' refers to the exemptive order issued by the 
Commission on October 26, 2010 (see Capital Southwest Corporation, 
Investment Company Act Release Nos. 29450 (notice) (September 29, 
2010) and 29491 (order) (October 26, 2010)) and as amended by the 
exemptive order issued by the Commission on August 22, 2017 (see 
Capital Southwest Corporation, Investment Company Act Release Nos. 
32742 (notice) (July 25, 2017) and 32787 (order) (August 22, 2017)).
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    6. The Company states that the right to grant restricted stock 
awards under the 2010 Plan will terminate on July 18, 2021 and that in 
connection with the termination of the 2010 Plan, the Board approved 
the 2021 Plan as part of the compensation packages for certain of its 
employees, the terms of which are, in all material respects, identical 
to the 2010 Plan. The Company states that the relief that Applicant is 
requesting under the Order would provide the same relief with respect 
to the 2021 Plan as previously provided by the Commission in the Prior 
Orders with respect to the 2010 plan. The Order would supersede the 
Prior Orders, with the result that the Company will no longer rely on 
the Prior Orders if the Order is granted.
    7. The 2021 Plan will authorize the issuance of shares of 
Restricted Stock by the Company to certain of its employees. The 
Company states that the Restricted Stock will be subject to 
restrictions on transferability and other restrictions as required by 
the Compensation Committee of the Board, which will be comprised solely 
of ``non-employee directors'' within the meaning of rule 16b-3 under 
the Securities Exchange Act of 1934 (the ``Exchange Act''), each of 
whom also is not an ``interested person'' of the Company within the 
meaning of section 2(a)(19) of the Act. The Company states that except 
to the extent restricted under the terms of the 2021 Plan, a 
Participant (as defined in the 2021 Plan) who is 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. 
The Company states that during the restriction period (i.e., prior to 
the lapse of the applicable forfeiture restrictions), the Restricted 
Stock generally may not be sold, transferred, pledged, hypothecated, 
margined or otherwise encumbered by the Participant. The Company states 
that 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.
    8. The Company states that the value of Restricted Stock generally 
will be taxable to the recipient as ordinary income in the years in 
which the restrictions on the shares lapse and that such value will be 
the fair market value of the shares on the dates the restrictions 
lapse. The Company states that the 2021 Plan authorizes the Company to 
withhold common stock (in whole or in part) from any award of 
restricted shares granted at the time the Restricted Stock is taxed in 
satisfaction of a Participant's tax obligations.
    9. The Company states that maximum amount of Restricted Stock that 
may be issued and outstanding will not at the time of issuance of any 
Restricted Stock exceed 10% of the Company's outstanding voting 
securities.\3\ In addition, the Company states that no Participant may 
be granted more than 25% of the shares reserved for issuance under the 
2021 Plan.
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    \3\ For purposes of calculating compliance with this limit, 
Capital Southwest counts as Restricted Stock all shares of its 
common stock that are issued pursuant to the 2021 Plan, less any 
shares that are forfeited back to Capital Southwest and cancelled as 
a result of forfeiture restrictions not lapsing.
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    10. The Company states that each issuance of Restricted Stock under 
the 2021 Plan will be approved by the required majority, as defined in 
section 57(o) of the Act,\4\ of the Company's directors on the basis 
that the issuance is in the best interests of the Company and its 
shareholders. The Company states that 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.
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    \4\ Section 57(o) of the Act provides that 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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    11. The Company states that the 2021 Plan was approved by the Board 
as a whole, including the required majority as defined in section 57(o) 
of the Act, on

[[Page 34068]]

March 26, 2021. The Company states that if the Commission issues the 
Order, the 2021 Plan will become effective upon receipt of the approval 
of the Company's shareholders.

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 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 2021 Plan.
    2. Section 23(b) generally prohibits a registered 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 2021 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, in part, 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. The Company 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. The Company 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. The Company states that 
the 2021 Plan does not raise concerns about preferential treatment of 
the Company's insiders because the 2021 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. The Company 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. The Company 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 of the Act. The Company also 
asserts that the 2021 Plan would not become a means for insiders to 
obtain control of the Company because the number of shares of the 
Company issuable under the 2021 Plan would be limited as set forth in 
the application.
    5. The Company further states that the 2021 Plan will not unduly 
complicate the Company's structure because equity-based compensation 
arrangements are widely used among corporations and commonly known to 
investors. The Company notes that the 2021 Plan will be submitted to 
its shareholders for their approval. The Company represents that a 
concise, ``plain English'' description of the 2021 Plan, including its 
potential dilutive effect, will be provided in the proxy materials that 
will be submitted to the Company's shareholders. The Company also 
states that it will comply with the proxy disclosure requirements in 
Item 10 of Schedule 14A under the Exchange Act. The Company further 
notes that the 2021 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, the Company will comply with the 
disclosure requirements for executive compensation plans applicable to 
BDCs.\5\ The Company thus concludes that the 2021 Plan will be 
adequately disclosed to investors and appropriately reflected in the 
market value of the Company's shares.
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    \5\ 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. The Company acknowledges that, while awards granted under the 
2021 Plan would have a dilutive effect on the shareholders' equity in 
the Company, that effect would be outweighed by the anticipated 
benefits of the 2021 Plan to the Company and its shareholders. The 
Company 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, the Company suggests, in turn are 
likely to increase the Company's performance and shareholder value. The 
Company also asserts that equity-based compensation will help align the 
interests of the Company's employees with those of its shareholders. In 
addition, the Company states that its shareholders will be further 
protected by the conditions to the requested order that assure 
continuing oversight of the operation of the 2021 Plan by the Company'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.
    8. The Company requests an order pursuant to sections 57(a)(4) and 
57(i) of the Act and under rule 17d-1 to permit the Company to issue 
Restricted Stock under the 2021 Plan. The Company states that the 2021 
Plan, although benefiting the Participants and The Company in different 
ways, is in the interests of the Company's shareholders because the 
2021 Plan will help align the interests of the Company'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 the Company's shareholders.

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Additionally, section 57(j)(1) of the Act expressly permits any 
director, officer or employee of a BDC to acquire warrants, options and 
rights to purchase voting securities of such BDC, and the securities 
issued upon the exercise or conversion thereof, pursuant to an 
executive compensation plan which meets the requirements of section 
61(a)(3)(B) of the Act. Applicant submits that the issuance of 
Restricted Stock pursuant to the 2021 Plan poses no greater risk to 
stockholders than the issuances permitted by section 57(j)(1) of the 
Act.

Section 23(c)

    9. Section 23(c) of the Act, which is made applicable to BDCs by 
section 63 of the Act, generally prohibits a BDC from purchasing any 
securities of which it is the issuer except in the open market pursuant 
to tenders, or under other circumstances as the Commission may permit 
to ensure that the purchases are made in a manner or on a basis that 
does not unfairly discriminate against any holders of the class or 
classes of securities to be purchased. Applicant states that the 
withholding or purchase of shares of Restricted Stock and common stock 
in payment of applicable withholding tax obligations or of common stock 
in payment for the exercise price of a stock option might be deemed to 
be purchases by the Company of its own securities within the meaning of 
section 23(c) and therefore prohibited by the Act.
    10. Section 23(c)(3) of the Act permits a BDC to purchase 
securities of which it is the issuer in circumstances in which the 
repurchase is made in a manner or on a basis that does not unfairly 
discriminate against any holders of the class or classes of securities 
to be purchased. Applicant believes that the requested relief meets the 
standards of section 23(c)(3).
    11. Applicant submits that these purchases will be made in a manner 
that does not unfairly discriminate against Applicant's stockholders 
because all purchases of Applicant's stock will be at the closing price 
of the common stock on the Nasdaq Global Market (or any primary 
exchange on which its shares of common stock may be traded in the 
future) on the relevant date (i.e., the public market price on the date 
of grant of Restricted Stock). Applicant submits that because all 
transactions with respect to the 2021 Plan will take place at the 
public market price for the Applicant's common stock, these 
transactions will not be significantly different than could be achieved 
by any stockholder selling in a market transaction. Applicant 
represents that no transactions will be conducted pursuant to the 
requested order on days where there are no reported market transactions 
involving Applicant's shares.
    12. Applicant represents that the withholding provisions in the 
2021 Plan do not raise concerns about preferential treatment of 
Applicant's insiders because the 2021 Plan is a bona fide compensation 
plan of the type that is common among corporations generally. 
Furthermore, the vesting schedule is determined at the time of the 
initial grant of the Restricted Stock. Applicant represents that all 
purchases may be made only as permitted by the 2021 Plan, which will be 
approved by the Applicant's stockholders prior to any application of 
the relief. Applicant believes that granting the requested relief would 
be consistent with the policies underlying the provisions of the Act 
permitting the use of equity compensation as well as prior exemptive 
relief granted by the Commission under section 23(c) of the Act.

Applicant's Conditions

    Applicant agrees that the order granting the requested relief will 
be subject to the following conditions:
    1. The 2021 Plan will be authorized by the Company'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 the Company's directors on the basis that such grant is in 
the best interests of the Company and its shareholders.
    3. The amount of voting securities that would result from the 
exercise of all of the Company's outstanding warrants, options, and 
rights, together with any Restricted Stock issued and outstanding 
pursuant to the 2021 Plan and any other compensation plans of the 
Company, at the time of issuance shall not exceed 25% of the 
outstanding voting securities of the Company, except that if the amount 
of voting securities that would result from the exercise of all of the 
Company's outstanding warrants, options, and rights issued to the 
Company's directors, officers, and employees, together with any 
Restricted Stock issued pursuant to the 2021 Plan and any other 
compensation plans of the Company, would exceed 15% of the outstanding 
voting securities of the Company, 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 2021 Plan and any other compensation plans of 
the Company, at the time of issuance shall not exceed 20% of the 
outstanding voting securities of the Company.
    4. The amount of Restricted Stock issued and outstanding will not 
at the time of issuance of any Restricted Stock exceed 10% of the 
Company's outstanding voting securities.
    5. The Board will review the 2021 Plan at least annually. In 
addition, the Board will review periodically the potential impact that 
the issuance of Restricted Stock under the 2021 Plan could have on the 
Company's earnings and NAV per share, such review to take place prior 
to any decisions to grant Restricted Stock under the 2021 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 issuance of Restricted 
Stock under the 2021 Plan will be in the best interests of the 
Company's shareholders. This authority will include the authority to 
prevent or limit the granting of additional Restricted Stock under the 
2021 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.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13664 Filed 6-25-21; 8:45 am]
BILLING CODE 8011-01-P


