File No.
812-13623
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDED
AND RESTATED APPLICATION FOR AN ORDER PURSUANT TO SECTION 6(c) OF THE INVESTMENT
COMPANY ACT OF 1940 GRANTING AN EXEMPTION FROM SECTIONS 23(a), 23(b) AND 63 OF
THE ACT, AND PURSUANT TO SECTIONS 57(a)(4) AND 57(i) OF THE ACT AND RULE 17d-1
UNDER THE ACT AUTHORIZING CERTAIN JOINT TRANSACTIONS OTHERWISE PROHIBITED BY
SECTION 57(a)(4)
KOHLBERG
CAPITAL CORPORATION
295
Madison Avenue, 6th Floor
New York,
New York 10017
All
Communications, Notices and Orders to:
Dayl W.
Pearson
Chief
Executive Officer
Kohlberg
Capital Corporation
295
Madison Avenue, 6th Floor
New York,
New York 10017
Copy
to:
Michael
G. Doherty, Esq.
Ropes
& Gray LLP
1211
Avenue of the Americas
New York,
NY 10111
July 9,
2009
TABLE
OF CONTENTS
|
Page(s)
|
||||
|
I.
INTRODUCTION
|
1
|
|||
|
II.
KOHLBERG CAPITAL CORPORATION
|
2
|
|||
|
A.
|
Background
|
2
|
||
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B.
|
The
Business of Kohlberg Capital
|
3
|
||
|
III.
MANAGEMENT
|
4
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|||
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A.
|
Kohlberg
Capital’s Board of Directors
|
4
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||
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B.
|
Activities
of the Non-Employee Directors
|
5
|
||
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C.
|
The
Non-Employee Directors
|
6
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||
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D.
|
Compensation
of Directors
|
9
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||
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IV.
KOHLBERG CAPITAL’S CURRENT INCENTIVE COMPENSATION
|
12
|
|||
|
A.
|
Amended
and Restated 2006 Plan
|
13
|
||
|
B.
|
The
2008 Non-Employee Director Plan
|
14
|
||
|
C.
|
Cash
Bonus Program
|
17
|
||
|
D.
|
Restricted
Stock Grants
|
18
|
||
|
V.
REASON FOR REQUEST
|
20
|
|||
|
A.
|
Compensation
Practices in the Asset Management Industry
|
20
|
||
|
B.
|
Use
of Restricted Stock
|
21
|
||
|
1.
|
Developing
Alignment in Business Plan, Shareholder Interests, and Non-Employee
Director Interests
|
23
|
||
|
2.
|
Matching
Return Expectations
|
25
|
||
|
VI.
APPLICABLE LAW AND NEED FOR RELIEF
|
25
|
|||
|
VII.
REQUESTED ORDER
|
28
|
|||
|
VIII.
KOHLBERG CAPITAL’S LEGAL ARGUMENTS
|
28
|
|||
|
A.
|
Similarity
to Issuances Currently Permitted under the 1940 Act for Non-Employee
Directors
|
29
|
||
|
B.
|
Prior
Commission Orders Relating to Non-Employee Director
Compensation
|
30
|
||
|
1.
|
Orders
Relating to Use of Equity-Based Compensation by Business Development
Companies
|
30
|
||
Table of
Contents - i
|
2.
|
Orders
Relating to Use of Equity-Based Compensation by Internally-Managed
Closed-End Investment Companies
|
31
|
||
|
C.
|
Standards
for Exemption Under Section 6(c)
|
32
|
||
|
1.
|
Necessary
or Appropriate in the Public Interest
|
32
|
||
|
2.
|
Consistency
with the Protection of Investors
|
33
|
||
|
3.
|
Consistency
with the Purposes of the 1940 Act
|
36
|
||
|
D.
|
Standards
for an Order Under Rule 17d-1
|
39
|
||
|
1.
|
Consistency
with the 1940 Act’s Policies and Purposes
|
39
|
||
|
2.
|
Differences
in Participation
|
40
|
||
|
IX.
KOHLBERG CAPITAL’S CONDITIONS
|
40
|
|||
|
X.
PROCEDURAL MATTERS
|
42
|
|||
|
A.
|
Communications
|
42
|
||
|
B.
|
Authorization
|
42
|
||
|
XI.
EXHIBITS
|
43
|
|||
Exhibits:
|
EXHIBIT
A
|
AMENDED
AND RESTATED NON-EMPLOYEE DIRECTOR
PLAN
|
|
EXHIBIT
B
|
RESOLUTION
OF THE BOARD OF DIRECTORS OF KOHLBERG CAPITAL CORPORATION AUTHORIZING THE
FILING OF THIS APPLICATION
|
|
|
RESOLUTION
OF THE BOARD OF DIRECTORS OF KOHLBERG CAPITAL CORPORATION AUTHORIZING THE
AMENDMENT AND RESTATEMENT OF THE NON-EMPLOYEE DIRECTOR
PLAN
|
Table of
Contents - ii
UNITED
STATES OF AMERICA
Before
the
SECURITIES
AND EXCHANGE COMMISSION
|
In
the Matter of
KOHLBERG
CAPITAL CORPORATION
295
Madison Avenue, 6th Floor
New
York, New York 10017
File
No. 812-13623
Investment
Company Act of 1940, as amended
|
AMENDED
AND RESTATED APPLICATION FOR AN ORDER PURSUANT TO SECTION 6(c) OF THE
INVESTMENT COMPANY ACT OF 1940 GRANTING AN EXEMPTION FROM SECTIONS 23(a),
23(b) AND 63 OF THE 1940 ACT, AND PURSUANT TO SECTIONS 57(a)(4) AND 57(i)
OF THE 1940 ACT AND RULE 17d-1 UNDER THE 1940 ACT AUTHORIZING CERTAIN
JOINT TRANSACTIONS OTHERWISE PROHIBITED BY SECTION
57(a)(4)
|
I. INTRODUCTION
Kohlberg
Capital Corporation (“Kohlberg Capital”),
an internally managed, non-diversified, closed-end investment company that has
elected to be regulated as a business development company (“BDC”)1 within
the meaning of Section 54(a) of the Investment Company Act of 1940, as amended
(the “1940 Act”), hereby applies for an order of the U.S. Securities and
Exchange Commission (the “Commission”) pursuant
to Section 6(c) of the 1940 Act2 granting
an exemption from Sections 23(a), 23(b) and 63 of the 1940 Act, and pursuant to
Sections 57(a)(4) and 57(i) of the 1940 Act and Rule 17d-1 under the 1940
Act3
authorizing certain joint transactions otherwise prohibited by Section 57(a)(4)
(the “Order”). The
Order would permit Kohlberg Capital to issue shares of its restricted common
stock as part of the compensation packages for the directors of Kohlberg Capital
who are not officers or employees of Kohlberg Capital (the “Non-Employee
Directors”) and future Non-Employee Directors.
1 Section
2(a)(48) generally 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 1940 Act and makes available
significant managerial assistance with respect to the issuers of such
securities.
2 Unless
otherwise indicated, all section references herein are to the 1940
Act.
3 Unless
otherwise indicated, all rule references herein are to rules under the 1940
Act.
II. KOHLBERG
CAPITAL CORPORATION
A. Background
Kohlberg
Capital was organized under the laws of the State of Delaware on August 8, 2006
and commenced investment operations in December 2006. Kohlberg
Capital is organized as a Delaware corporation and has its principal place of
business in New York, New York. Kohlberg Capital was originally
organized as a Delaware limited liability company (Kohlberg Capital, LLC) and
converted to a Delaware corporation pursuant to 8 Del. C. § 1-265 on December
11, 2006. Kohlberg Capital elected to be regulated as a BDC pursuant
to Section 54(a) of the 1940 Act on December 5, 2006.
On December 4, 2006, Kohlberg Capital
filed with the Commission its registration statement on Form N-2 under the
Securities Act of 1933, as amended (the “1933
Act”), in connection with
its initial public offering of Common Stock (the “IPO”). On December 12, 2006,
the common stock of Kohlberg Capital (the “Common
Stock”) began trading on
the NASDAQ Global Select Market under the symbol “KCAP.” Kohlberg
Capital completed its IPO on December 15, 2006. In connection with
the IPO, Kohlberg Capital issued 13,500,000 shares of Common Stock at a price to
the public of $15.00 per share, generating net proceeds to Kohlberg Capital of
approximately $202,500,000.4 In addition, Kohlberg
Capital has filed a shelf registration statement covering 87,555 shares of
Common Stock outstanding prior to the IPO. Of these shares, 60,000 were sold in
June 2007 and, accordingly, 27,555 shares remain registered for resale
thereunder. As of June 1, 2009, there were 21,743,470 shares of
Kohlberg Capital’s Common Stock outstanding.5
4 Kohlberg
Capital also issued 962,000 shares of Common Stock pursuant to the exercise by
underwriters of their overallotment option for the IPO.
5 The
Common Stock constitutes the only type of Kohlberg Capital voting security
currently outstanding.
2
Kohlberg
Capital currently has a seven member board of directors (the “Board”) of whom three
are considered to be “interested persons” of Kohlberg Capital within the meaning
of Section 2(a)(19) of the 1940 Act and four are not interested persons (the
“Disinterested
Directors”). Kohlberg Capital has four Non-Employee
Directors. Currently Kohlberg Capital’s Non-Employee Directors are
all Disinterested Directors, but it is possible that Kohlberg Capital may have
Non-Employee Directors in the future who are interested persons of Kohlberg
Capital. As of June 1, 2009, Kohlberg Capital had twenty-six (26)
employees.
B. The
Business of Kohlberg Capital
Kohlberg
Capital is an internally managed, non-diversified closed-end management
investment company that has elected to be treated as a BDC under the 1940
Act. Kohlberg Capital elected to be treated as a regulated investment
company, or RIC, as defined in Subtitle A, Chapter 1, under Subchapter
M of the Internal Revenue Code of 1986, as amended (the “Code”), with the
filing of its federal corporate income tax return for the year ended December
31, 2006.
3
Kohlberg
Capital provides debt and equity growth capital to privately-held middle-market
companies. Kohlberg Capital’s investment objective is to generate
current income and capital appreciation from the investments made by its middle
market business in senior secured term loans, mezzanine debt and selected equity
investments in privately-held middle market companies. Kohlberg
Capital originates its investments through its principal office located in New
York. While Kohlberg Capital’s primary investment focus will be on
making loans to, and selected equity investments in, privately-held middle
market companies, Kohlberg Capital may also invest capital in other investments
such as loans to larger, publicly-traded companies, high-yield bonds, distressed
debt securities and debt and equity securities issued by collateralized debt
obligation funds managed by Katonah Debt Advisors L.L.C. (“Katonah Debt
Advisors”), Kohlberg Capital’s wholly-owned portfolio company, or by
other asset managers. Kohlberg Capital also expects to receive
distributions of recurring fee income and to generate capital appreciation from
its investment in the asset management business of Katonah Debt
Advisors.
III. MANAGEMENT
A. Kohlberg
Capital’s Board of Directors
The business and affairs of Kohlberg
Capital are managed under the direction of the Board. To carry out
this purpose, the Board is responsible for, among other things, overseeing the
process by which investments are selected and managed, approving senior
executives of Kohlberg Capital, the administration of management and the
allocation of Kohlberg Capital’s resources. The Board, including each
Non-Employee Director, is also responsible for overseeing the management of
Kohlberg Capital’s investment portfolio on an ongoing basis. Each of
the directors has experience in business and/or finance, which allows them to
contribute guidance and analyses to management regarding Kohlberg Capital’s
investments.
4
Regular meetings of the Board are held
quarterly, and are generally expected to be lengthy and
comprehensive. Special meetings may be held from time to time when
needed and vary in length depending on the circumstances.
B. Activities
of the Non-Employee Directors
In addition to their duties as
directors generally, Kohlberg Capital and its management look to the
Non-Employee Directors for advice on specific matters including, among other
things, credit and underwriting policies, asset valuation and strategic
direction. The professional experiences and expertise of the
Non-Employee Directors make them valuable resources for Kohlberg Capital’s
management, which communicates regularly with the Non-Employee Directors on an
individual basis. The Non-Employee Directors regularly assist
management with the hiring of and maintaining relationships with investment
banking institutions. Management also solicits their ideas and advice
with respect to operational matters as well as potential investments and
transactions.
In addition to their regular and
special Board meetings, each of the Non-Employee Directors serves on at least
one of the committees of the Board. Messrs. Pastino, Jacobi and
Cademartori serve on the audit committee. Mr. Stevens serves on the
valuation committee. Messrs. Cademartori and Stevens serve on the
compensation committee. The audit committee is responsible for
approving Kohlberg Capital’s independent accountants, reviewing with such
independent accountants the plans and results of the audit engagement, approving
professional services provided by the independent accountants, reviewing the
independence of the independent accountants and reviewing the adequacy of
Kohlberg Capital’s internal accounting controls. The valuation
committee is responsible for reviewing and recommending to the full Board the
fair value of debt and equity securities that are not traded
publicly. The valuation committee may utilize the services of an
independent valuation firm in arriving at the fair value of these
securities. The compensation committee determines compensation for
Kohlberg Capital’s executive officers.
5
C. The
Non-Employee Directors
The following persons are the current
Non-Employee Directors of Kohlberg Capital:
1. Turney Stevens,
Jr.
Mr. Stevens retired is the retired
Chairman and Chief Executive Officer of Harpeth Companies, LLC, a diversified
financial services company that is the parent company of Harpeth Capital, LLC
and Harpeth Consulting, LLC. Prior to founding Harpeth in 1999, Mr.
Stevens was a founder and Chairman of Printing Arts America,
Inc. From 1986 to 1994, Mr. Stevens served in various capacities at
Rodgers Capital Corporation, a middle market investment banking firm focused on
mergers and acquisitions and private institutional equity transactions,
including as President. In 1973, Mr. Stevens founded PlusMedia, Inc.,
a magazine publishing company that he later sold to a public company in
1982. Mr. Stevens began his career at Tennessee Securities, a
Nashville investment banking firm, which was one of the region’s leaders in
helping to capitalize early-stage and growth-stage companies. Mr.
Stevens graduated from David Lipscomb University in 1972 and received an
Executive M.B.A. degree from the Owen Graduate School of Management at
Vanderbilt University in 1981. He currently serves as the Dean of the
College of Business and Professor of Management at Lipscomb University. He is a
2007 graduate of the Directors’ College at the Anderson School of Management at
UCLA and is certified as a public company director by Institutional Shareholder
Services.
6
2. Albert G.
Pastino
Mr. Pastino is the Senior Managing
Director at Amper Investment Banking (“AIB”), a NASD member investment bank
focusing on private transactions for middle market companies. He
founded AIB in 2004. AIB focuses on capital formation, mergers and acquisitions
and strategic advisory assignments. After leaving an affiliate of
Kohlberg & Co. in June 1997, Mr. Pastino worked as an investor, Chief
Financial Officer and Chief Operating Officer at a variety of companies and was
involved in all aspects of financial and general management, reporting and
fundraising for a variety of companies, including Aptegrity, Inc., Bolt, Inc.,
AmTec, Inc. and Square Earth, Inc. From 1976 to 1986, he was a
partner at Deloitte & Touche LLP and was in charge of its Emerging Business
Practice. Mr. Pastino is a member of the Board of Directors of
Critical Homecare Solutions Holdings, Inc. and a member of the Board of
Directors and Finance Committee of New Eyes for the Needy, a not-for-profit
organization headquartered in New Jersey. Mr. Pastino is a graduate
of Saint Joseph’s University and received an Executive M.B.A. degree from
Fairleigh Dickinson University. He also attended the Harvard Business
School Executive Management Program for Small Business and is a certified public
accountant.
7
3. Michael Jacobi
Mr. Jacobi is the owner and President
of Stable House, LLC, a company that is engaged in real estate
development. From 2001 to 2004, Mr. Jacobi served as the President,
Chief Executive Officer and member of the board of directors of Katy Industries,
Inc., a portfolio company of investment funds affiliated with Kohlberg &
Co., which is involved in the manufacture and distribution of maintenance
products. Mr. Jacobi was the President and Chief Executive Officer of
Timex Corporation from 1993 to 1999, and he was a member of the board of
directors of Timex Corporation from 1992 to 2000. Prior to 1993, he
served Timex Corporation in senior positions in marketing, sales, finance and
manufacturing. Mr. Jacobi received a B.S. from the University of Connecticut and
he is a Certified Public Accountant. Mr. Jacobi is currently a member
of the board of directors of Webster Financial Corporation, Corrections
Corporation of America and Sturm Ruger & Co. He serves as the
audit committee chairman of the board of directors of Webster Financial
Corporation, Corrections Corporation of America and Sturm, Ruger & Co.,
Inc.
4. Gary Cademartori
Mr. Cademartori is a partner in Wall
Street Technology Group, LLC, a company engaged in financial and technology
consulting and executive mentoring to create more value for companies involved
in business change. Previously, Mr. Cademartori was a financial
consultant for less than one year and, from 1999 to 2005, a partner in Tatum CFO
Partners, LLP, serving as the interim Chief Financial Officer and rendering
financial consulting services for mid-market SEC reporting and privately-held
companies. From 1995 to 1998, Mr. Cademartori served in the capacity
of Chief Financial Officer for Schrader-Bridgeport International,
Inc. Between 1981 and 1995, Mr. Cademartori served as the Chief
Financial Officer of Charter Power Systems, Inc., Athlone Industries, Inc.,
Formica Corporation, and Butler International, Inc., all of which were mid-sized
companies listed on the New York Stock Exchange. Prior to 1981, Mr.
Cademartori was an audit partner in Touche Ross & Co., an international
accounting firm. Mr. Cademartori received his M.B.A. degree in
Finance and International Business from Seton Hall University and he is a
certified public accountant. He serves on the Small Business Advisory
Committee of the Financial Accounting Standards Board, and on the board of
directors of Marotta Controls, Inc.
Kohlberg
Capital may add additional Non-Employee Directors from time to
time.
8
D. Compensation
of Directors
As compensation for serving on the
Board, each of Kohlberg Capital’s Non-Employee Directors receives an annual fee
of $25,000, and the Board may make additional changes to their compensation from
time to time. Non-Employee Directors who serve on Board committees
receive cash compensation in addition to the compensation they receive for
service on the Board. The chairperson of the audit committee receives
an additional $10,000 per year and the chairperson of each other committee of
the Board receives an additional $5,000 per year. All committee
members receive an additional $500 for each committee meeting they attend.
Kohlberg Capital reimburses its directors for their reasonable out-of-pocket
expenses incurred in attending Board meetings. Kohlberg Capital did
not grant cash compensation to Non-Employee Directors for the year ending
December 31, 2008. In addition, in lieu of cash compensation,
Kohlberg Capital may make a quarterly direct stock grant to its Non-Employee
Directors as contemplated by Commission Release No. IC-24083, Interpretive
Matters Concerning Independent Directors of Investment Companies, October 14,
1999. Pursuant to the 2008 Non-Employee Director Plan, Non-Employee
Directors are not entitled to receive any severance or other type of payment
upon termination of service as a director. However, certain options
issued under the 2008 Non-Employee Director Plan may remain outstanding for a
specified period after the termination of Board service, unless the Non-Employee
Director’s service was terminated for certain specified causes.
9
Pursuant
to exemptive relief granted in 2008,6
Non-Employee Directors currently automatically receive stock options to purchase
5,000 shares of Common Stock each year on the date of the annual meeting of
shareholders. Subject to the issuance of the Order and approval by
shareholders, Kohlberg Capital proposes to discontinue the issuance of stock
options to Non-Employee Directors. In place of such grants, Kohlberg
Capital proposes to grant 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”),
to Non-Employee Directors, as discussed in more detail below.
Kohlberg Capital has concluded that it
must provide the Non-Employee Directors with additional incentives in order to
attract and retain highly qualified and motivated individuals to assist in its
development. Kohlberg Capital believes that it is competing for
qualified and motivated director candidates against non-BDC public companies
which are permitted to offer equity compensation such as options and Restricted
Stock. Specifically, upon receipt of the Order and approval by
shareholders, Kohlberg Capital proposes to issue Restricted Stock to
Non-Employee Directors, thereby discontinuing the periodic issuance of stock
options to Non-Employee Directors (as permitted pursuant to the Kohlberg Options
Order).
6 Kohlberg Capital received an exemptive order in April 2008 (the “Kohlberg Options Order”) permitting it to grant stock options to directors of Kohlberg Capital who are not officers or employees of Kohlberg Capital pursuant to the 2008 Non-Employee Director Plan (as defined below). See Kohlberg Capital Corporation, Investment Company Act Releases Nos. 28228 (March 28, 2008) (notice) and 28239 (April 23, 2008) (order).
10
Subject to the issuance of the Order
and approval of the 2010 Amended and Restated Non-Employee Director Plan
(defined below) by shareholders, Non-Employee Directors automatically would be
granted 1,000 shares of Restricted Stock each year on the date of the annual
meeting of shareholders (or meeting in lieu of the annual meeting of
shareholders). The shares shall immediately vest as to one-half of
the Restricted Stock grant and as to the remaining one-half of the Restricted
Stock grant on the earlier of (i) the first anniversary of such grant, or (ii)
the date immediately preceding the next annual meeting of shareholders (or
meeting in lieu of the annual meeting of shareholders), so that vesting for one
hundred percent (100%) of the Restricted Stock grant shall occur one year after
the date of grant; provided that the participant is then and since the date of
grant has continuously been a Non-Employee Director (subject to Section 7 of the
2010 Amended and Restated Non-Employee Director Plan). If the 2010
Amended and Restated Non-Employee Director Plan is approved by shareholders at a
meeting other than an annual meeting of shareholders, the Non-Employee Directors
shall automatically be granted a pro rata portion of the Restricted Stock grant
on the date of such approval (i.e., each Non-Employee
Director will receive a grant of Restricted Stock equal to the product of (x)
the number of full months remaining until the next annual meeting of
shareholders (or meeting in lieu of the annual meeting of
shareholders) divided by twelve and (y) 1,000). One-half of such
pro rata grant will vest immediately and the remaining one-half of such pro rata
grant will vest on the earlier of (i) the first anniversary of the preceding
annual meeting of shareholders (or the preceding meeting in lieu of the annual
meeting of shareholders), or (ii) the date immediately preceding the next annual
meeting of shareholders (or the next meeting in lieu of the annual meeting of
shareholders); provided that the participant is then and since the date of grant
has continuously been a Non-Employee Director (subject to Section 7 of the 2010
Amended and Restated Non-Employee Director Plan). In addition, a
Non-Employee Director who is appointed to serve on the Board outside of the
annual election cycle shall automatically be granted a pro rata portion of the
Restricted Stock grant on the date of such appointment to the Board (i.e., such Non-Employee
Director will receive a grant of Restricted Stock equal to the product of (x)
the number of full months remaining until the next annual meeting of
shareholders (or the next meeting in lieu of the annual meeting of shareholders)
divided by twelve and (y) 1,000). One-half of such pro rata grant
will vest immediately and the remaining one-half of such pro rata grant will
vest on the earlier of (i) the first anniversary of the preceding annual meeting
of shareholders (or the
preceding meeting in lieu of the annual meeting of shareholders), or (ii)
the date immediately preceding the next annual meeting of shareholders (or
meeting in lieu of the annual meeting of shareholders); provided that the
participant is then and since the date of grant has continuously been a
Non-Employee Director (subject to Section 7 of the 2010 Amended and Restated
Non-Employee Director Plan). The grants of Restricted Stock to
Non-Employee Directors under the 2010 Amended and Restated Non-Employee Director
Plan will be automatic (subject to the authority of the Board set forth in
Section 9(b) of the 2010 Amended and Restated Non-Employee Director Plan to
prevent or limit the granting of Restricted Stock) and will not be changed
without Commission approval.
11
IV. KOHLBERG
CAPITAL’S CURRENT INCENTIVE COMPENSATION
Kohlberg
Capital currently has two equity-based compensation plans, the Amended and
Restated 2006 Equity Incentive Plan (the “Amended and Restated 2006
Plan”)7 and the
2008 Non-Employee Director Plan8, and a
discretionary bonus program for Employees. Kohlberg Capital does not have a
profit-sharing plan within the meaning of Section 57(n).9
7 Kohlberg Capital received an exemptive order in March 2008 (the “Kohlberg Restricted Stock Order”) permitting it to issue shares of its restricted common stock as part of the compensation for certain of its officers and employees and any future employees of Kohlberg Capital and future employees of its wholly owned consolidated subsidiaries pursuant to the Amended and Restated 2006 Plan. See Kohlberg Capital Corporation, Investment Company Act Releases Nos. 28168 (February 25, 2008) (notice) and 28199 (March 24, 2008) (order).
8 See supra note
6.
9 No
shares of Restricted Stock were or will be issued to Non-Employee Directors
under the 2008 Non-Employee Director Plan. Upon shareholder approval
and the issuance of any Order, the 2010 Amended and Restated Non-Employee
Director Plan will supersede the 2008 Non-Employee Director Plan and no further
awards will be made pursuant to the 2008 Non-Employee Director
Plan.
12
Kohlberg
Capital proposes to amend and restate the 2008 Non-Employee Director Plan (as
amended and restated, the “2010 Amended and Restated
Non-Employee Director Plan” and, together with any Kohlberg Capital
executive compensation plan that did, does or may in the future exist, the
“Plans”) in the
form set forth in Exhibit A hereto. Upon receipt of the Order and
approval of the 2010 Amended and Restated Non-Employee Director Plan by
shareholders, Kohlberg Capital would discontinue the periodic issuance of stock
options to Non-Employee Directors (as permitted pursuant to the Kohlberg Options
Order), providing instead for the issuance of Restricted Stock to Non-Employee
Directors. Options issued prior to the effective date of the 2010
Amended and Restated Non-Employee Director Plan will remain outstanding in
accordance with the terms of the 2008 Non-Employee Director
Plan. Kohlberg Capital currently intends to submit the 2010 Amended
and Restated Non-Employee Director Plan to a vote of its shareholders at its
next meeting of shareholders following the issuance of any Order.
A. Amended
and Restated 2006 Plan
Kohlberg
Capital’s Board approved the Amended and Restated 2006 Plan for the purpose of
attracting and retaining the services of officers, employees and employees of
Kohlberg Capital’s wholly owned consolidated subsidiaries.10 Non-Employee
Directors are not eligible to participate in the Amended and Restated 2006
Plan. The Amended and Restated 2006 Plan was approved by the Board as
a whole, including a majority of the Non-Employee Directors and the required
majority as defined in Section 57(o) of the 1940 Act, by written consent on
February 5, 2008. There are 2,000,000 shares of Common Stock
authorized for issuance under the Amended and Restated 2006
Plan. Following Kohlberg Capital’s receipt of the Kohlberg Restricted
Stock Order from the Commission, the Amended and Restated 2006 Plan was
submitted for approval by Kohlberg Capital’s shareholders and was approved at
the 2008 annual meeting of shareholders. As of June 1, 2009, there
were 334,250 shares of Restricted Stock outstanding to employees and officers of
Kohlberg Capital.
10
Kohlberg Capital does not currently have any wholly owned consolidated
subsidiaries. Kohlberg Capital does not have any current plans to
establish or acquire any wholly owned consolidated
subsidiaries. Kohlberg Capital’s wholly-owned portfolio company
Katonah Debt Advisors is not consolidated with Kohlberg Capital for financial
reporting purposes.
13
Under the
Amended and Restated 2006 Plan, the Board may award incentive stock options
within the meaning of Section 422 of the Code, or ISOs, and non-statutory
options, or NSOs, to its employees. As of June 1, 2009, there were no
options outstanding to officers and employees pursuant to the Amended and
Restated 2006 Plan. Kohlberg Capital has not issued any warrants or
rights to its Common Stock under the Amended and Restated 2006
Plan.
B. The
2008 Non-Employee Director Plan
The Board
approved the 2008 Non-Employee Director Plan by unanimous written consent on
February 5, 2008 for the purpose of advancing the interests of Kohlberg Capital
by providing for the grant of awards to eligible directors of Kohlberg Capital
who are Non-Employee Directors. As noted above in footnote 6 and the
accompanying text, the Commission granted Kohlberg Capital exemptive relief in
April 2008 permitting it to grant stock options to Non-Employee Directors under
the 2008 Non-Employee Director Plan. Shareholders subsequently
approved the 2008 Non-Employee Director Plan at the 2008 annual meeting of
shareholders. There are 75,000 shares of Common Stock authorized for
issuance under the 2008 Non-Employee Director Plan.11 As of June 1, 2009,
there were options outstanding for 20,000 shares of Common Stock that had been
issued to Non-Employee Directors.
11 The 75,000 shares of Common Stock authorized for issuance under the 2008 Non-Employee Director Plan represent 0.34% shares of Common Stock outstanding as of June 1, 2009.
14
Kohlberg
Capital proposes to amend and restate the 2008 Non-Employee Director Plan to
permit the issuance of shares of Restricted Stock to its Non-Employee Directors
and to discontinue the issuance of options to its Non-Employee
Directors. There are 100,000 shares of Common Stock authorized for
issuance under the 2010 Amended and Restated Non-Employee Director Plan, which
would represent 0.46% shares of Common Stock outstanding as of June 1,
2009. If the Commission issues the Order, and if shareholders approve
the 2010 Amended and Restated Non-Employee Director Plan, Kohlberg Capital
intends to award Restricted Stock to its Non-Employee Directors under the 2010
Amended and Restated Non-Employee Director Plan. The 2010 Amended and
Restated Non-Employee Director Plan would supersede the 2008 Non-Employee
Director Plan and no additional options would be issued to Non-Employee
Directors under the 2010 Amended and Restated Non-Employee Director
Plan. Options granted to Non-Employee Directors prior to the
effectiveness of the 2010 Amended and Restated Non-Employee Director Plan would
remain outstanding in accordance with the terms of the 2008 Non-Employee
Director Plan. The 2010 Amended and Restated Non-Employee Director
Plan is attached to this application as part of Exhibit A.
15
Subject
to the issuance of the Order and approval of the 2010 Amended and Restated
Non-Employee Director Plan by shareholders, Non-Employee Directors automatically
would be granted 1,000 shares of Restricted Stock each year on the date of the
annual meeting of shareholders (or meeting in lieu of the annual meeting of
shareholders). The shares shall immediately vest as to one-half of
the Restricted Stock grant and as to the remaining one-half of the Restricted
Stock grant on the earlier of (i) the first anniversary of such grant, or (ii)
the date immediately preceding the next annual meeting of shareholders (or
meeting in lieu of the annual meeting of shareholders), so that vesting for one
hundred percent (100%) of the Restricted Stock grant shall occur one year after
the date of grant; provided that the participant is then and since the date of
grant has continuously been a Non-Employee Director (subject to Section 7 of the
2010 Amended and Restated Non-Employee Director Plan). If the 2010
Amended and Restated Non-Employee Director Plan is approved by shareholders at a
meeting other than an annual meeting of shareholders, the Non-Employee Directors
shall automatically be granted a pro rata portion of the Restricted Stock grant
on the date of such approval (i.e., the Non-Employee
Directors will receive a grant of Restricted Stock equal to the product of (x)
the number of full months remaining until the next annual meeting of
shareholders (or
meeting in lieu of the annual meeting of shareholders) divided by
twelve and (y) 1,000). One-half of such pro rata grant will vest
immediately and the remaining one-half of such pro rata grant will vest on the
earlier of (i) the first anniversary of the preceding annual meeting of
shareholders (or the
preceding meeting in lieu of the annual meeting of shareholders), or (ii)
the date immediately preceding the next annual meeting of shareholders (or the
next meeting in lieu of the annual meeting of shareholders); provided
that the participant is then and since the date of grant has continuously been a
Non-Employee Director (subject to Section 7 of the 2010 Amended and Restated
Non-Employee Director Plan). In addition, a Non-Employee Director who
is appointed to serve on the Board outside of the annual election cycle shall
automatically be granted a pro rata portion of the Restricted Stock grant on the
date of such appointment to the Board (i.e., such Non-Employee
Director will receive a grant of Restricted Stock equal to the product of (x)
the number of full months remaining until the next annual meeting of
shareholders (or the
next meeting in lieu of the annual meeting of shareholders) divided by
twelve and (y) 1,000). One-half of such pro rata grant will vest
immediately and the remaining one-half of such pro rata grant will vest on the
earlier of (i) the first anniversary of the preceding annual meeting of
shareholders (or the
preceding meeting in lieu of the annual meeting of
shareholders), or (ii) the date immediately preceding the next
annual meeting of shareholders (or
meeting in lieu of the annual meeting of shareholders); provided that the
participant is then and since the date of grant has continuously been a
Non-Employee Director (subject to Section 7 of the 2010 Amended and Restated
Non-Employee Director Plan). The grants of Restricted Stock to
Non-Employee Directors under the 2010 Amended and Restated Non-Employee Director
Plan will be automatic (subject to the authority of the Board set forth in
Section 9(b) of the 2010 Amended and Restated Non-Employee Director Plan to
prevent or limit the granting of Restricted Stock) and will not be changed
without Commission approval.
16
If the
relief requested herein is granted and shareholders approve the 2010 Amended and
Restated Non-Employee Director Plan, the four current Non-Employee Directors
would become eligible to participate in the 2010 Amended and Restated
Non-Employee Director Plan. Additional Non-Employee Directors would
become eligible to participate upon their election or appointment to the
Board. The 2010 Amended and Restated Non-Employee Director Plan will
not be modified materially from the description in this Application without
obtaining an order of the Commission or approval of the Commission
staff.
C. Cash
Bonus Program
Kohlberg
Capital pays discretionary cash bonus awards to its employees
annually. Kohlberg Capital’s bonus program (the “Program”) is not a
profit sharing plan as described in Section 57(n) of the Act because the
compensation paid to participating employees under it is not based on Kohlberg
Capital’s profitability. Thus, the amount a participant will receive
each year under the Program will not be tied to Kohlberg Capital’s gross or net
income, or any other indicia of Kohlberg Capital’s overall financial
performance. Rather, awards under the Program are discretionary cash
bonus awards based on the individual performance of the
recipient. The total amount of awards made annually varies at the
discretion of the Board’s compensation committee (the “Committee”) depending on
Kohlberg Capital’s performance and other factors that the Committee deems
appropriate. The Committee approves the total amount of the annual
award and the specific bonus amounts to be paid to all senior executive
officers.
17
D. Restricted
Stock Grants
Kohlberg
Capital currently intends that, if the requested relief is granted and
shareholders approve the 2010 Amended and Restated Non-Employee Director Plan,
Kohlberg Capital will grant shares of Restricted Stock to Non-Employee
Directors. As noted above, pursuant to the 2010 Amended and Restated
Non-Employee Director Plan, the Board would award 1,000 shares of Restricted
Stock to Non-Employee Directors on the date of each annual meeting of
shareholders during the term of the plan. If the 2010 Amended and
Restated Non-Employee Director Plan is approved by shareholders at a meeting
other than an annual meeting of shareholders, the Non-Employee Directors
automatically would be granted a pro rata portion of the Restricted Stock grant
on the date of such approval. The Board would have the responsibility
to ensure that the 2010 Amended and Restated Non-Employee Director Plan is
operated in a manner that best serves the interest of Kohlberg Capital and its
shareholders.
Vested
Restricted Stock may be sold, assigned, pledged, hypothecated, encumbered, or
transferred or disposed of in any other manner, in whole or in part, only in
compliance with the terms, conditions and restrictions as set forth in the
governing instruments of Kohlberg Capital, applicable federal and state
securities laws or any other applicable laws or regulations and the terms and
conditions hereof. Except to the extent restricted under the terms of
the 2010 Amended and Restated Non-Employee Director Plan, a Non-Employee
Director 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 (i.e., prior to the lapse of
applicable forfeiture restrictions), the Restricted Stock generally may not be
sold, transferred, pledged, hypothecated, margined, or otherwise encumbered by
Non-Employee Directors pursuant to the 2010 Amended and Restated Non-Employee
Director Plan. Except as the Board otherwise determines, upon
termination of a Non-Employee Director’s service on the Board, Restricted Stock
for which forfeiture restrictions have not lapsed at the time of such
termination shall be forfeited (unless upon such termination or within 90
days thereafter the participant becomes an officer or employee of
Kohlberg Capital or rejoins the Board as a Non-Employee Director).
18
The
maximum amount of shares of Restricted Stock that may be issued under the Plans
will be 10% of the outstanding shares of common stock of Kohlberg Capital on the
effective date of the 2010 Amended and Restated Non-Employee Director Plan plus
10% of the number of shares of Kohlberg Capital’s common stock issued or
delivered by Kohlberg Capital (other than pursuant to compensation plans) during
the term of the 2010 Amended and Restated Non-Employee Director
Plan. For purposes of calculating compliance with this limit,
Kohlberg Capital will count as Restricted Stock all shares of Kohlberg Capital’s
common stock that are issued pursuant to the 2010 Amended and Restated
Non-Employee Director Plan less any shares that are forfeited back to Kohlberg
Capital and cancelled as a result of forfeiture restrictions not
lapsing. The amount of voting securities that would result from the
exercise of all of Kohlberg Capital’s outstanding warrants, options and rights,
together with any Restricted Stock issued pursuant to the Plans, at the time of
issuance shall not exceed 25% of the outstanding voting securities of Kohlberg
Capital (excluding Restricted Stock), except that if the amount of voting
securities that would result from the exercise of all of Kohlberg Capital’s
outstanding warrants, options and rights issued to Kohlberg Capital’s directors,
officers and employees, together with any Restricted Stock issued pursuant to
the Plans, would exceed 15% of the outstanding voting securities of Kohlberg
Capital (excluding Restricted Stock), 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 Plans, at the
time of issuance shall not exceed 20% of the outstanding voting securities of
Kohlberg Capital (excluding Restricted Stock). No Non-Employee
Director may be granted more than 25% of the shares of Kohlberg Capital’s common
stock reserved for issuance under the 2010 Amended and Restated Non-Employee
Director Plan. The 2010 Amended and Restated Non-Employee Director
Plan will be submitted for approval to Kohlberg Capital’s shareholders after the
issuance of any Order.
19
V. REASON
FOR REQUEST
A. Compensation
Practices in the Asset Management Industry
Kohlberg
Capital believes that, because the market for qualified director candidates is
highly competitive, Kohlberg Capital’s successful performance depends on its
ability to offer fair compensation packages to its directors that are
competitive with those offered by other investment management
businesses. In that regard, the ability to offer equity-based
compensation to its Non-Employee Directors which both aligns the behavior of
Non-Employee Directors with shareholder interests and provides a retention tool,
is vital to Kohlberg Capital’s future growth and success.
20
The 2010
Amended and Restated Non-Employee Director Plan would enable Kohlberg Capital to
offer Non-Employee Directors compensation packages that are competitive with
those offered by its competitors and other investment management businesses.
Kohlberg Capital believes that granting Non-Employee Directors Restricted Stock
under the 2010 Amended and Restated Non-Employee Director Plan is fair and
reasonable. Non-Employee Directors provide Kohlberg Capital with the
skills and experience necessary for management and oversight of Kohlberg
Capital’s investments and operations, and are likely to have specific experience
with respect to industries in which Kohlberg Capital invests. The
Restricted Stock to be granted to Non-Employee Directors is a necessary adjunct
to the Non-Employee Directors’ fees and provide fair and reasonable compensation
for the services and attention they devote to Kohlberg
Capital. Kohlberg Capital’s Non-Employee Directors make a significant
contribution to the management of Kohlberg Capital’s business and to the
analysis and supervision of its portfolio investments. The
Non-Employee Directors serve as valuable resources, whom Kohlberg Capital’s
management consults for guidance regarding, among other things, operational
matters, asset valuation and strategic direction. The Non-Employee
Directors also serve on the Board’s three committees. Kohlberg
Capital believes that these commitments of time and attention by its
Non-Employee Directors are consistent with those described in prior applications
for which the Commission has issued exemptive orders for the issuance of
Restricted Stock.12
B. Use
of Restricted Stock
Retention
and recruitment of the best people is vital to the future success and growth of
Kohlberg Capital’s business and is in the best interests of Kohlberg Capital’s
shareholders. Appropriate compensation plans that support the
company’s objectives and align the interests of shareholders and Non-Employee
Directors are essential to long term success in the investment business in
general and critical to Kohlberg Capital’s business in
particular. Most of the leading asset management, private equity and
commercial finance firms in the United States provide equity-based compensation
in one form or another.
12 See, e.g., MCG Capital
Corporation, Investment Company Act Release Nos. 27258 (March 8, 2006)
(notice) and 27280 (April 4, 2006) (order) (the “MCG Order”); Hercules Technology Growth Capital,
Inc., Investment Company Act Release Nos. 27815 (May 2, 2007) (notice)
and 27838 (May 23, 2007) (order) (the “Hercules Order”); and
Adams Express Company, et.
al., Investment Company Act Release Nos. 26759 (Feb. 10, 2005) (notice)
and 26780 (March 8, 2005) (order) (the “Adams Express
Order”).
21
Kohlberg
Capital believes that its ability to make Restricted Stock grants under the 2010
Amended and Restated Non-Employee Director Plan to Non-Employee Directors
provides a means of retaining the services of current Non-Employee Directors and
of attracting qualified persons to serve as Non-Employee Directors in the
future. The Restricted Stock to be granted to Non-Employee Directors
will provide significant incentives to the Non-Employee Directors to remain on
the Board and to devote their best efforts to the success of Kohlberg Capital’s
business and the enhancement of stockholder value in the future. The
Restricted Stock will provide a means for the Non-Employee Directors to increase
their ownership interests in Kohlberg Capital, thereby ensuring close
identification of their interests with those of Kohlberg Capital and its
shareholders.
22
|
1.
|
Developing
Alignment in Business Plan, Shareholder Interests, and Non-Employee
Director Interests
|
Alignment
of a company’s business plans, its shareholders’ expectations and its
Non-Employee Director compensation is an essential component of long term
business success. Long term business success is in the interest of
Kohlberg Capital’s shareholders, employees and directors. Kohlberg
Capital typically makes investments in debt securities with a 3 to 7 year
duration in privately held businesses. Its business plan involves
taking on investment risk over an extended period of time and a premium is
placed on its ability to maintain stability of net asset values and continuity
of earnings to pass through to shareholders in the form of a recurring
dividend. Kohlberg Capital’s strategy is to generate income from its
portfolio of investments in the debt and equity securities of its
customers. This income is intended to support the payment of a
quarterly dividend to Kohlberg Capital’s shareholders equal to or greater than
98% of Kohlberg Capital’s taxable income. As a taxpayer that has
elected to be regulated as a RIC under Subchapter M of the Code, Kohlberg
Capital will be required to pay out 90% of its annual taxable income to maintain
its tax advantaged status and 98% of its annual taxable income to avoid
non-deductible excise taxes. This “pass through” configuration means
that, assuming the company performs successfully, under normal market conditions
the price of Kohlberg Capital’s common stock will appreciate modestly, if
at all, as a result of this income since earnings are distributed currently and
not accumulated. Rather, the primary return for Kohlberg Capital’s
shareholders is in the form of current income through the payment of dividends
(which may consist of income, realized gains and returns of capital) rather than
capital appreciation through a rising stock price. This recurring
payout requires a methodical asset acquisition approach and active monitoring
and management of the investment portfolio over time. A meaningful
part of Kohlberg Capital’s employee base is dedicated to the maintenance of
asset values and expansion of this recurring revenue to support and grow
dividends.
On June
13, 2008 Kohlberg Capital declared a dividend in the amount of $0.41 per share,
on September 19, 2008 Kohlberg Capital declared a dividend in the amount of
$0.35 per share, on December 19, 2008 Kohlberg Capital declared a dividend in
the amount of $0.27 per share, and on March 23, 2009 Kohlberg Capital declared a
dividend in the amount of $0.24 per share. These dividends represented Kohlberg
Capital’s estimated distributable income for the quarters ended June 30, 2008,
September 30, 2008, December 31, 2008 and March 31, 2009, plus a portion of
Kohlberg Capital’s undistributed 2008 distributable income.
23
The
implications of Kohlberg Capital’s business model, as described above, for the
analysis of using Restricted Stock versus using other forms of equity-based
compensation, such as stock options, are relatively clear. Kohlberg
Capital believes that grants of options under the Original Plan were helpful in
attracting and retaining qualified Non-Employee
Directors. Kohlberg Capital has continued to analyze possible
equity compensation alternatives for its Non-Employee Directors and believes
that granting Restricted Stock in lieu of options will better align the
interests of Non-Employee Directors, employees and
shareholders. Restricted Stock has intrinsic value while stock
options represent an arbitrage on the strike price of the option against the
future value of the stock. Holders of Restricted Stock, over time,
become owners of the stock with a vested interest in value maintenance and,
importantly in Kohlberg Capital’s case, the income stream and stock
appreciation. These interests are completely aligned with those of
Kohlberg Capital’s shareholders. Stock option holders only earn
compensation if the stock price increases and do not benefit from dividends or
valuation protection, two concepts that have high priority for Kohlberg
Capital’s shareholders. Stock options are less effective for Kohlberg
Capital in terms of motivating behaviors consistent with the business objectives
of moderate appreciation and stable and growing dividends, in part because the
1940 Act does not provide a mechanism for BDCs to adjust the exercise price of a
stock option when a dividend is issued or to issue dividend equivalent rights in
order to align the interests of an option holder with those of a
stockholder.
24
2.
Matching
Return Expectations
As
discussed above, Restricted Stock motivates behavior that is more consistent
with the type of return expectations that Kohlberg Capital has established for
its shareholders. Kohlberg Capital’s strategy is to originate high
quality, medium-term assets and to support the risk management activities of its
portfolio companies over a period of time. Further, Kohlberg
Capital’s business plan is to execute a methodical and conservative accumulation
of assets that have a risk-based pricing premium relative to similar
securities. To this end, Restricted Stock places more value on the
quality of originated assets over the quantity of originated assets, and thus,
Restricted Stock is a better compensation tool for Kohlberg Capital to align
Non-Employee Directors with stockholder interests.
Kohlberg
Capital’s management and the Board have considered each of the factors discussed
above and believe that the issuance of Restricted Stock as a form of
equity-based compensation is in the best interest of Kohlberg Capital’s
shareholders, Non-Employee Directors and business.
VI. APPLICABLE
LAW AND NEED FOR RELIEF
Under
Section 63, the provisions of Section 23(a), which generally prohibit 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.
25
Section
23(b) prohibits a registered closed-end investment company from selling any
common stock of which it is the issuer at a price below the stock’s current net
asset value, except with the consent of a majority of the company’s common
shareholders at the time of issuance or under certain other enumerated
circumstances not applicable to the subject of this Application. Section 63(2)
provides that, notwithstanding Section 23(b), a BDC may sell any common stock of
which it is the issuer at a price below the current net asset value of such
stock and may sell warrants, options, or rights to acquire any such common stock
at a price below the current net asset value of such stock if, generally (1)
holders of a majority of the BDC’s outstanding voting securities, and the
holders of a majority of the BDC’s voting securities who are not interested
persons of the BDC, approved the BDC’s policy and practice of making such sales
of securities at the last annual meeting of shareholders within one year
immediately prior to any such sale; (2) a required majority of the BDC’s
directors (i.e., a
majority of directors who have no financial interest in the transaction, plan or
arrangement and who are not interested persons of the BDC) have determined that
such sale would be in the best interests of the BDC and its shareholders; and
(3) a required majority of the BDC’s directors have determined immediately prior
to the issuance of such securities that the price at which such securities are
to be sold is not less than a price which closely approximates the market value
of those securities.
Because
Restricted Stock that would be granted under the 2010 Amended and Restated
Non-Employee Director Plan would not meet the terms of Section 63(2), in the
absence of the requested Order, Sections 23(b) and 63 would prevent the issuance
of the Restricted Stock.
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. Non-employee directors of a BDC are 57(b)
persons. Section 57(a)(4) generally prohibits a 57(b) person from
effecting a transaction in which the BDC is a joint participant absent such
order. Rule 17d-1 is made applicable to BDCs by Section 57(i). Rule
17d-1 proscribes participation in a “joint enterprise or other joint arrangement
or profit-sharing plan,” which includes, pursuant to paragraph 17d-l(c), a stock
option or purchase plan. Thus, although a compensation plan involving grants of
restricted stock is not specifically covered by Section 57(a)(4) or Rule 17d-l,
the issuance of shares of the 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).
26
Pursuant
to Section 57 of the 1940 Act, an internally managed BDC may provide
compensation to its officers, directors and employees in a number of
ways. Pursuant to Section 57(j) an internally managed BDC may issue
options to its officers, directors and employees. As discussed
above, Kohlberg Capital issues options pursuant to an executive compensation
plan to provide additional incentive compensation to its officers, directors and
employees. Pursuant to Section 57(n) an internally managed BDC may adopt a
profit sharing plan. Kohlberg Capital has not adopted a
profit-sharing plan and, in fact, Sections 57(n)(2) and 61(a)(3)(B)(iv) of the
1940 Act provide that an internally managed BDC may not adopt both an executive
compensation plan pursuant to which it has outstanding options and a profit
sharing plan.
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 thereof, from any provision of the 1940 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 1940 Act.
Section
57(a)(4) and Rule 17d-1 provide that the Commission may, by order upon
application, grant relief under Section 57(a)(4) and Rule 17d-1 permitting
certain joint enterprises or arrangements and profit-sharing
plans. Rule 17d-1(b) further provides that in passing upon such
an application, the Commission will consider (i) whether the participation of
the BDC in such enterprise, arrangement, or plan is consistent with the policies
and purposes of the 1940 Act and (ii) the extent to which such participation is
on a basis different from or less advantageous than that of other
participants.
27
VII. REQUESTED
ORDER
Kohlberg
Capital requests an Order of the Commission pursuant to Section 6(c) of the 1940
Act granting an exemption from Sections 23(a), 23(b) and 63 of the 1940 Act and
pursuant to Sections 57(a)(4) and 57(i) of the 1940 Act and Rule 17d-1 under the
1940 Act authorizing certain joint transactions otherwise prohibited by Section
57(a)(4) to permit Kohlberg Capital to issue Restricted Stock to Non-Employee
Directors pursuant to the 2010 Amended and Restated Non-Employee Director
Plan. Kohlberg Capital also asks that the Order apply to any future
Non-Employee Directors.
VIII. KOHLBERG
CAPITAL’S LEGAL ARGUMENTS
The
Commission and Congress have recognized the need for certain types of investment
companies, including closed-end investment companies, small business investment
companies (“SBICs”), and BDCs, to offer Non-Employee Directors equity-based
compensation. Kohlberg Capital believes that its ability to offer
equity-based compensation in the form of Restricted Stock is necessary for
Kohlberg Capital to attract and retain director talent and align that talent
with shareholders’ interests. Thus, Kohlberg Capital believes that
its request for an order is consistent with the policies underlying the
provisions of the 1940 Act permitting the use of equity compensation by BDCs as
well as prior exemptive relief granted by the Commission.
28
A. Similarity
to Issuances Currently Permitted under the 1940 Act for Non-Employee
Directors
Congress
recognized the importance of equity-based compensation as a means of attracting
and retaining qualified directors in the Small Business Investment Incentive Act
of 1980 (the “1980 Amendments”). The 1980 Amendments permit BDCs to
issue to their directors warrants, options, and rights to purchase voting
securities of such companies pursuant to executive compensation plans as long as
such companies complied with certain conditions.
13 Kohlberg Capital believes that the issuance of Restricted
Stock to Non-Employee Directors of Kohlberg Capital, for purposes of investor
protection under the 1940 Act, is substantially similar to what is currently
permitted under Section 61.
Kohlberg
Capital is not aware of any specific discussion in the legislative history of
the 1980 Amendments regarding the use of direct grants of stock as incentive
compensation; however, the legislative history recognizes the crucial role that
equity-based compensation plays in the operation of a private equity fund and
its ability to attract and retain Non-Employee Directors. Congress
endowed BDCs with the ability to issue derivative securities in order to ensure
that BDCs would be able to compete for skilled personnel in light of
compensation practices as they existed in 1980. In the late 1970s
direct grants of stock were not a widely used form of
compensation. In fact, publications in the late 1970s indicate that
it was stock options – which the 1980 Amendments made permissible for use by
BDCs – that were the most widely used types of incentive compensation.
14
13 See Section 61(a)(3) of the
1940 Act.
14 See James F. Carey, Successors to the Qualified Stock
Option, Harv. Bus. Rev., Jan./Feb. 1978, at 140 (“Stock options
predominate among the long-term incentives for executives” and “Restricted
stock, once widely used in executive compensation, declined in popularity after
1969 tax law changes and is now a rarity.”). See also Annual Survey of Executive
Compensation, Bus. Wk., May 14, 1979, at 79 (“Most companies still use
stock option grants and appreciation rights as their predominant incentives . .
.. .”).
29
B. Prior
Commission Orders Relating to Non-Employee Director
Compensation
|
|
1.
|
Orders
Relating to Use of Equity-Based Compensation by Business Development
Companies
|
MCG Capital Corporation. MCG
Capital Corporation (“MCG”) filed an
application on September 2, 2005, and an amendment to the application on January
31, 2006, requesting an order under Section 6(c) of the 1940 Act granting an
exemption from Sections 23(a), 23(b) and 63 of the 1940 Act; and under Sections
57(a)(4) and 57(i) of the 1940 Act and Rule 17d-1 under the 1940 Act. The order
granted on April 4, 2006 permits MCG to issue restricted stock to MCG’s
non-employee directors, employees and employees of MCG’s wholly owned
consolidated subsidiaries.
15
Hercules Technology Growth Capital,
Inc. Hercules Technology Growth Capital, Inc. (“Hercules”) filed a
similar application on July 7, 2006, and subsequent amendments to the
application on March 26, 2007 and May 1, 2007, requesting an order under Section
6(c) of the Act granting 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. The order granted on May 23, 2007 permits Hercules to issue
restricted stock to Hercules’ non-employee directors and employees and employees
of Hercules’ wholly owned consolidated subsidiaries.
16
15 See MCG Order, supra note 12.
16 See Hercules Order, supra note
12.
30
Kohlberg Capital
Corporation. Kohlberg Capital filed a similar application on
February 27, 2007, and subsequent amendments to the application on February 22,
2008 and March 10, 2008, requesting an order
under Section 6(c) of the Act granting 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. The order granted on March 24, 2008 permits
Kohlberg Capital to issue Restricted Stock to Kohlberg Capital’s officers and
employees and employees of Kohlberg Capital’s wholly owned subsidiaries.
17
|
|
2.
|
Orders
Relating to Use of Equity-Based Compensation by Internally-Managed
Closed-End Investment Companies
|
The
important role that equity compensation can play in attracting and retaining
qualified personnel has been expressly recognized by the Commission with respect
to internally-managed closed-end investment companies.
Baker, Fentress & Company
and Adams Express
Company, et. al. In 1998, the Commission issued an order
granting Baker, Fentress & Company (“Baker Fentress”) exemptive relief from
Sections 17(a) and (d), 18(d), and 23(a), (b), and (c) and Rule
17d-1. More recently, in 2005, the Commission issued a similar order
granting Adams Express Company and Petroleum and Resources Corporation (“Adams
Express”) exemptive relief from Sections 17(d), 18(d), and 23(a), (b), and (c)
and Rule 17d-1. These orders permitted the companies to implement
broad equity-based compensation plans that included the issuance of restricted
stock to their employees.
18
17 See supra note
6.
18
See Baker, Fentress &
Company, Investment Company Act Release Nos. 23571 (Nov. 24, 1998)
(notice) and 23619 (Dec. 22, 1998) (order) and Adams Express Order, supra note
12. Kohlberg Capital notes that, in each of their respective
applications, Adams Express and Baker Fentress cited the legislative history of
the 1980 Amendments as standing for the idea that Congress had recognized the
importance of equity-based compensation as a means of attracting and retaining
qualified personnel. Both Adams Express and Baker Fentress received orders from
the Commission permitting the issuance of equity-based compensation, including
direct grants of stock.
31
|
|
C. Standards
for Exemption Under Section 6(c)
|
Section
6(c), which governs Kohlberg Capital’s request for exemptive relief from Section
23 and 63 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 thereof, from any provisions of the 1940 Act, if and to the
extent that such exemption is necessary or appropriate in the public interest
and consistent with the protection of investors and the purposes fairly intended
by the 1940 Act’s policy and provisions.
|
|
1.
|
Necessary
or Appropriate in the Public
Interest
|
As
indicated above, both the Commission and Congress have long recognized the
importance of equity-based compensation in attracting and retaining qualified
personnel, including directors. Kohlberg Capital submits that
maintaining the ability of a BDC that provides debt and equity growth capital to
privately-held middle market companies to attract and retain highly qualified
directors is in the public interest, including the interests of Kohlberg
Capital’s shareholders. Kohlberg Capital competes for talented
directors primarily with banks, private equity funds, and other financial
services companies that are not investment companies registered under the 1940
Act. These organizations are able to offer all types of equity-based
compensation to their directors, including restricted stock, and, therefore,
have an advantage over Kohlberg Capital in attracting and retaining highly
qualified directors. Non-Employee Directors provide Kohlberg Capital
with the skills and experience necessary for management and oversight of
Kohlberg Capital’s investments and operations, and may have specific experience
with respect to industries in which Kohlberg Capital invests. For
Kohlberg Capital to compete on a more equal basis with such organizations, it
must be able to attract and retain talented directors and offer them comparable
compensation packages.
32
|
|
2.
|
Consistency
with the Protection of Investors
|
Investors
will be protected to at least the same extent that they are currently protected
under Section 61(a)(3). The 2010 Amended and Restated Non-Employee
Director Plan was approved by the Board in accordance with Section
61(a)(3)(A)(iv) on December 19, 2008. The 2010 Amended and Restated
Non-Employee Director Plan will be submitted to Kohlberg Capital’s shareholders
for their approval or disapproval after the issuance of any Order. A
proxy statement submitted to Kohlberg Capital’s shareholders will contain a
concise “Plain English” description of the 2010 Amended and Restated
Non-Employee Director Plan and its potential dilutive effect. If the
2010 Amended and Restated Non-Employee Director Plan is not approved by
shareholders it will not be implemented. Thus, Kohlberg Capital’s
shareholders will have the opportunity to decide for themselves whether the
prospective benefits offered by the 2010 Amended and Restated Non-Employee
Director Plan are worth the dilution that will result from its
operation. Kohlberg Capital is subject to the standards and
guidelines adopted by the Financial Accounting Standards Board for operating
companies relating to the accounting for and disclosure of Restricted Stock, and
the requirements under the Securities and Exchange Act of 1934, as amended (the
“1934 Act”),
relating to executive compensation disclosure for operating companies. 19
19 In
addition, Kohlberg Capital will comply with the amendments to the disclosure
requirements for executive and director compensation, related party
transactions, director independence and other corporate 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).
33
Based on
the manner in which the 2010 Amended and Restated Non-Employee Director Plan
will be administered, the 2010 Amended and Restated Non-Employee Director Plan
will be no more dilutive than if Kohlberg Capital were to issue stock options,
as is permitted by Section 61(a)(3) and the Kohlberg Options
Order. If the Order is granted and shareholders approve the 2010
Amended and Restated Non-Employee Director Plan, Non-Employee Directors
automatically will be granted 1,000 shares of Restricted Stock each year on the
date of the annual meeting of shareholders. If the 2010 Amended
and Restated Non-Employee Director Plan is approved by shareholders at a meeting
other than an annual meeting of shareholders, the Non-Employee Directors
automatically would be granted a pro rata portion of the Restricted Stock grant
on the date of such approval. Kohlberg Capital has agreed that the
maximum amount of shares of Restricted Stock that may be issued under the Plans
will be 10% of the outstanding shares of common stock of Kohlberg Capital on the
effective date of the 2010 Amended and Restated Non-Employee Director Plan plus
10% of the number of shares of Kohlberg Capital’s common stock issued or
delivered by Kohlberg Capital (other than pursuant to compensation plans) during
the term of the 2010 Amended and Restated Non-Employee Director
Plan. The amount of voting securities that would result from the
exercise of all of Kohlberg Capital’s outstanding warrants, options and rights,
together with any Restricted Stock issued pursuant to the Plans, at the time of
issuance shall not exceed 25% of the outstanding voting securities of Kohlberg
Capital (excluding Restricted Stock), except that if the amount of voting
securities that would result from the exercise of all of Kohlberg Capital’s
outstanding warrants, options and rights issued to Kohlberg Capital’s directors,
officers and employees, together with any Restricted Stock issued pursuant to
the Plans, would exceed 15% of the outstanding voting securities of Kohlberg
Capital (excluding Restricted Stock), 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 Plans, at the
time of issuance shall not exceed 20% of the outstanding voting securities of
Kohlberg Capital (excluding Restricted Stock). Kohlberg Capital
acknowledges that while awards granted under the 2010 Amended and Restated
Non-Employee Director Plan would have a dilutive effect on the shareholders’
equity in Kohlberg Capital, that effect would be outweighed by the anticipated
benefits of the 2010 Amended and Restated Non-Employee Director Plan to Kohlberg
Capital and its shareholders. In addition, Kohlberg Capital notes
that it currently has the ability to issue Restricted Stock to its employees and
officers pursuant to the Kohlberg Restricted Stock Order, and therefore
investors will be aware of the anticipated benefits and potential dilutive
effects of the 2010 Amended and Restated Non-Employee Director
Plan.
34
Section
61(a)(3) provides that the amount of voting securities that would result from
the exercise of all of a BDC’s outstanding warrants, options, or rights, at the
time of issuance, may not exceed 25% of the outstanding voting securities of
such BDC, except that if the amount of voting securities that would result from
the exercise of all outstanding warrants, options, and rights issued to such
BDC’s directors, officers, and employees, would exceed 15% of the outstanding
voting securities of such BDC, 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 shall not exceed 20% of the outstanding voting
securities of such BDC. The maximum amount of shares of Restricted
Stock that may be issued under the Plans will be 10% of the outstanding shares
of common stock of Kohlberg Capital on the effective date of the 2010 Amended
and Restated Non-Employee Director Plan, plus 10% of the number of shares of
Kohlberg Capital’s common stock issued or delivered by Kohlberg Capital (other
than pursuant to compensation plans) during the term of the 2010 Amended and
Restated Non-Employee Director Plan. As of June 1, 2009, there were
no options outstanding to officers and employees pursuant to the Amended and
Restated 2006 Plan. As of June 1, 2009, there are 334,250 shares of
Restricted Stock outstanding held by officers and employees. Kohlberg
Capital has not issued any warrants or rights to its Common Stock under the
Amended and Restated 2006 Plan.
35
|
|
3.
|
Consistency
with the Purposes of the 1940 Act
|
As
indicated earlier, Kohlberg Capital is at a disadvantage in competing with other
financial services companies in attracting and retaining management directors
because they cannot offer shares of the company in the form of Restricted Stock
as part of a compensation plan. The Commission previously recognized
the problem of restricting equity compensation in the context of SBICs in 1971
and granted a limited exemption from the 1940 Act’s provisions to permit SBICs
to issue qualified stock options. Congress amended the 1940 Act in
1980 to permit BDCs also to issue warrants, options, and rights subject to
certain conditions and limitations. The Commission again recognized
these problems in the context of closed-end investment companies in 1985 and
granted a limited exemption from the 1940 Act’s provisions to permit certain
internally managed closed-end investment companies to issue incentive stock
options. In 1998, the Commission issued the Baker Fentress Order and
in 2005, the Commission issued the Adams Express Order, both permitting numerous
types of equity compensation, including the issuance of restricted stock by a
registered closed-end investment company. In 2006, 2007 and 2008, the
Commission issued the MCG Order, the Hercules Order and the Kohlberg Restricted
Stock Order, respectively, permitting equity compensation, including the
issuance of restricted stock by a BDC. In each of these instances, it
was found that equity compensation would not offend the 1940 Act’s policies and
purposes.
36
In the
present case, Kohlberg Capital is merely requesting that it be allowed to issue
Restricted Stock to its Non-Employee Directors in substantially the same manner
and subject to substantially similar restrictions under which it is currently
permitted to issue warrants, options, and rights to purchase under
Section 61(a)(3). In terms of the issuance of shares of
Restricted Stock to Non-Employee Directors, Kohlberg Capital is merely
requesting that it be allowed to issue such awards in a substantially similar
manner and subject to substantially similar restrictions as the Commission has,
by way of an order, permitted BDCs and closed-end funds to issue warrants,
options and restricted stock. Kohlberg Capital further submits that
the 2010 Amended and Restated Non-Employee Director Plan would not violate the
purposes behind Sections 23(a) and (b). The concerns underlying
the enactment of those provisions included (i) preferential treatment of
investment company insiders and the use of options and other rights by insiders
to obtain control of the investment company; (ii) complication of the investment
company’s structure that made it difficult to determine the value of the
company’s shares; and (iii) dilution of shareholders’ equity in the investment
company.
37
The 2010
Amended and Restated Non-Employee Director Plan does not raise concerns about
preferential treatment of Kohlberg Capital’s insiders because the 2010 Amended
and Restated Non-Employee Director Plan is a bona fide compensation plan of the
type that is common among corporations generally, and that is contemplated by
Section 61 of the 1940 Act and approved by the Commission in orders given to
MCG, Hercules, Kohlberg Capital, Baker Fentress and Adams
Express. Kohlberg Capital also asserts that the 2010 Amended and
Restated Non-Employee Director Plan would not become a means for insiders to
obtain control of Kohlberg Capital because the maximum amount of Restricted
Stock that may be issued under the 2010 Amended and Restated Non-Employee
Director Plan and that may be issued to an individual Non-Employee Director will
be limited as set forth in the conditions to the Order.
Kohlberg
Capital further states that the 2010 Amended and Restated Non-Employee Director
Plan will not unduly complicate Kohlberg Capital’s structure because
equity-based incentive compensation arrangements are widely used among
corporations and commonly known to investors. Kohlberg Capital notes
that the 2010 Amended and Restated Non-Employee Director Plan will be submitted
to shareholders for their approval. Kohlberg Capital represents that
a concise, “plain English” description of the 2010 Amended and Restated
Non-Employee Director Plan, including its potential dilutive effect, will be
provided in the proxy materials that will be submitted to
shareholders. Kohlberg Capital also states that it will comply with
the proxy disclosure requirements in Item 10 of Schedule 14A under the 1934
Act. Kohlberg Capital further notes that the 2010 Amended and
Restated Non-Employee Director Plan will be disclosed to investors in accordance
with the requirements of Form N-2 for registration statements, and pursuant to
the standards and guidelines adopted by the Financial Accounting Standards Board
for operating companies. Kohlberg Capital thus concludes that the
2010 Amended and Restated Non-Employee Director Plan will be adequately
disclosed to investors and appropriately reflected in the market value of
Kohlberg Capital’s shares of Common Stock. In addition, Kohlberg
Capital states that its shareholders will be further protected by the conditions
to the requested order that assure continuing oversight of the operation of the
2010 Amended and Restated Non-Employee Director Plan by Kohlberg Capital’s
Board.
38
|
|
D. Standards
for an Order Under Rule 17d-1
|
Rule
17d-1 provides that the Commission may, by order upon application, grant relief
permitting certain joint enterprises or arrangements and profit-sharing
plans. Rule 17d-1(b) further provides that in passing upon such
an application, the Commission will consider (i) whether the participation of
the BDC in such enterprise, arrangement, or plan is consistent with the policies
and purposes of the 1940 Act and (ii) the extent to which such participation is
on a basis different from or less advantageous than that of other
participants.
|
|
1.
|
Consistency
with the 1940 Act’s Policies and
Purposes
|
The
arguments as to why the 2010 Amended and Restated Non-Employee Director Plan is
consistent with the 1940 Act are almost identical to the standards for
exemptions under Section 6(c) and have been set forth
above. Additionally, Section 57(j)(1) 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). Kohlberg Capital
submits that the issuance of Restricted Stock pursuant to the 2010 Amended and
Restated Non-Employee Director Plan poses no greater risk to shareholders than
the issuances currently permitted by Section 57(j)(1) and by the Kohlberg
Options Order.
39
|
|
2.
|
Differences
in Participation
|
Kohlberg
Capital’s role is necessarily different from that of other participants in the
arrangement at issue since the other participants in the 2010 Amended and
Restated Non-Employee Director Plan are its Non-Employee Directors. Kohlberg
Capital’s participation with respect to the 2010 Amended and Restated
Non-Employee Director Plan will not be “less advantageous” than that of the
Non-Employee Directors. Kohlberg Capital, either directly or indirectly, is
responsible for the compensation of the Non-Employee Directors; the 2010 Amended
and Restated Non-Employee Director Plan is simply Kohlberg Capital’s chosen
method of providing such compensation. Moreover, the 2010 Amended and Restated
Non-Employee Director Plan provides the added benefit to Kohlberg Capital of
enhancing its ability to attract and retain highly qualified directors. The 2010
Amended and Restated Non-Employee Director Plan will help align the interests of
Kohlberg Capital’s Non-Employee Directors with those of its shareholders, which
will encourage conduct on the part of those Non-Employee Directors designed to
produce a better return for Kohlberg Capital’s shareholders.
IX.
KOHLBERG CAPITAL’S CONDITIONS
Kohlberg
Capital agrees that the order granting the requested relief will be subject to
the following conditions:
1.
The 2010 Amended and Restated
Non-Employee Director Plan will be authorized by Kohlberg Capital’s
stockholders.
40
2. The
amount of voting securities that would result from the exercise of all of
Kohlberg Capital’s outstanding warrants, options, and rights, together with any
Restricted Stock issued pursuant to the Plans, at the time of issuance shall not
exceed 25% of the outstanding voting securities of Kohlberg Capital (excluding
Restricted Stock), except that if the amount of voting securities that would
result from the exercise of all of Kohlberg Capital’s outstanding warrants,
options, and rights issued to Kohlberg Capital’s directors, officers, and
employees, together with any Restricted Stock issued pursuant to the Plans,
would exceed 15% of the outstanding voting securities of Kohlberg Capital
(excluding Restricted Stock), 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 Plans, at the time of
issuance shall not exceed 20% of the outstanding voting securities of Kohlberg
Capital (excluding Restricted Stock).
3. The
maximum amount of Restricted Stock that may be issued under the Plans will be
10% of the outstanding shares of common stock of Kohlberg Capital on the
effective date of the 2010 Amended and Restated Non-Employee Director Plan plus
10% of the number of shares of Kohlberg Capital’s common stock issued or
delivered by Kohlberg Capital (other than pursuant to compensation plans),
during the term of the 2010 Amended and Restated Non-Employee Director
Plan.
4. The
Board will review 2010 Amended and Restated Non-Employee Director Plan at least
annually. In addition, the Board will review periodically the
potential impact that the issuance of Restricted Stock under the 2010 Amended
and Restated Non-Employee Director Plan could have on Kohlberg Capital’s
earnings and NAV per share, such review to take place prior to any decisions to
grant Restricted Stock under the 2010 Amended and Restated Non-Employee Director
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 2010 Amended and Restated Non-Employee Director Plan
would not have an effect contrary to the interests of Kohlberg Capital’s
shareholders. This authority will include the authority to prevent or
limit the granting of additional Restricted Stock under the 2010 Amended and
Restated Non-Employee Director Plan. All records maintained pursuant
to this condition will be subject to examination by the Commission and its
staff.
41
X. PROCEDURAL
MATTERS
|
|
A.
|
Communications
|
Please
address all communications concerning this Application and the Notice and Order
to:
Dayl W.
Pearson
Chief
Executive Officer
Kohlberg
Capital Corporation
295
Madison Avenue, 6th Floor
New York,
New York 10017
Please
address any questions concerning this Application and a copy of any
communications, notice, or order to:
Michael
G. Doherty, Esq.
Ropes
& Gray LLP
1211
Avenue of the Americas
New York,
NY 10111
|
B.
|
Authorization
|
The
filing of Kohlberg Capital’s Application for the order sought hereby and the
taking of all acts reasonably necessary to obtain the relief requested herein
was authorized by the Board at its meeting held on December 19,
2008. A copy of the resolution then adopted by the Board is attached
as Exhibit B. Such authorization still remains in full force and
effect.
42
XI. EXHIBITS
|
Exhibit
A
|
Amended
and Restated Non-Employee Director
Plan
|
|
Exhibit
B
|
Resolution
of the Board of Directors of Kohlberg Capital Corporation Authorizing the
Filing of this Application
|
Resolution
of the Board of Directors of Kohlberg Capital Corporation Approving the Amended
and Restated Non-Employee Director Plan
43
Kohlberg
Capital has caused this Application to be duly signed on its behalf, in the
County of New York, State of New York, on the 9th day of July,
2009.
|
KOHLBERG
CAPITAL CORPORATION
|
|||
|
By:
|
/s/ MICHAEL I. WIRTH |
|
|
|
Name:
Michael I. Wirth
|
|||
|
Title: Chief
Financial Officer
|
|||
EXHIBIT
A
KOHLBERG
CAPITAL
AMENDED
AND RESTATED NON-EMPLOYEE DIRECTOR PLAN
1. Purpose
and Certain Defined Terms
The
purpose of this Amended and Restated Non-Employee Director Plan (the “Plan”) is to advance
the interests of the Company (as defined below) by providing for the grant to
Non-Employee Directors (as defined below) of Restricted Shares (as defined
below) (the “Awards”) to the
extent permitted by exemptive or other relief that may be granted by the
Securities and Exchange Commission (the “Commission”). The
Plan is an amendment and restatement of the 2008 Non-Employee Director Plan (the
“Prior Plan”)
as adopted on February 5, 2008, and is effective as described in Section 3
below. At all times during such periods as the Company qualifies or
intends to qualify as a “business development company” under the Investment
Company Act of 1940, as amended (the “1940 Act”), the terms
of the Plan shall be construed so as to conform to the share-based compensation
requirements applicable to “business development companies” under the 1940
Act. Any Non-Employee Director selected to receive an Award under the
Plan is referred to as a “participant.”
The following terms, when used in the
Plan, will have the meanings and be subject to the provisions set forth
below:
“Board” means the
board of directors of the Corporation.
“Company” means the
Corporation.
“Continuous Service”
means a participant’s uninterrupted service with the Company as a Non-Employee
Director.
“Corporation” means
Kohlberg Capital Corporation, a Delaware corporation.
“Employee Plan” means
the Company’s 2006 Equity Incentive Plan, as amended from time to
time.
“Executive Compensation
Plans” means the Plan, together with any Company executive compensation
plan that did, does, or may in the future, exist.
“Non-Employee
Director” means any director of the Company who is not an employee or
officer of the Company.
Exhibit A
- - 1
“Restricted Shares”
means an award of Shares for so long as the Shares remain subject to
restrictions requiring that they be forfeited to the Corporation if specified
conditions are not satisfied.
“Shares” means the
common stock, $.01 par value per share, of the Corporation.
“Shareholders” means
the shareholders of the Corporation.
2. Administration
The Plan
shall be administered by the Board unless and until it delegates administration
to a committee as provided herein. The Board shall have discretionary authority,
subject to the express provisions of the Plan, (a) subject to Section 9(b), to
grant Awards to such Eligible Persons (defined below in Section 5 hereof) as the
Board may select; (b) to prescribe the form or forms of any instruments
evidencing Awards and any other instruments required under the Plan and to
change such forms from time to time; (c) to adopt, amend, and rescind rules
and regulations for the administration of the Plan; and (d) to interpret the
Plan and to decide any questions and settle all controversies and disputes that
may arise in connection with the Plan. Such determinations of the
Board shall be conclusive and shall bind all parties. Subject to
Section 9(a) hereof, the Board shall also have the authority, both generally and
in particular instances, to waive compliance by a participant with any
obligation to be performed by him or her under an Award, to waive any condition
or provision of an Award, and to amend or cancel any Award (and if an Award is
canceled, to grant a new Award on such terms as the Board shall specify),
provided that the Board may not take any action with respect to an outstanding
Award that would adversely affect the rights of the participant under such Award
without such participant’s consent. Nothing in the preceding sentence
shall be construed as limiting the power of the Board to make adjustments
required by Sections 4(d) and 6(e) hereof or by applicable law.
The Board
may, in its discretion, delegate some or all of its powers with respect to the
Plan to a committee (the “Committee”), in which
event all references (as appropriate) to the Board hereunder shall be deemed to
refer to the Committee.
Determinations,
interpretations and constructions made by the Board in good faith shall not be
subject to review by any person and shall be final, binding and conclusive on
all persons.
3. Effective
Date and Term of Plan
The Board
adopted the Prior Plan on February 5, 2008 and amended and restated the Prior
Plan on December 19, 2008. The Plan shall become effective on the
date (the “Effective
Date”) on which it is approved by the Shareholders of the Company subject
to the Company previously having received an order of the Commission that
permits such Award or grants. For the avoidance of doubt, all option
Awards made under the Prior Plan as in force prior to the Effective Date are
governed in all respects by the terms of the Prior Plan and shall be construed
accordingly.
Exhibit A
- - 2
No Awards
shall be granted under the Plan after the fifth anniversary of the Effective
Date, but Awards granted prior to the Effective Date may extend beyond
that date.
4. Shares
Subject to the Plan
(a) Number
of Shares. Subject to adjustment as provided in Section 4(d),
the aggregate number of Shares that may be the subject of Awards granted under
the Plan shall be 100,000. If any Restricted Share Award granted
under the Plan is forfeited, the number of Shares as to which such Restricted
Share Award was granted shall be available for future grants.
(b) Shares
to be Delivered. Shares delivered
under the Plan shall be authorized but unissued Shares, or if the Board so
decides in its sole discretion, previously issued Shares acquired by the Company
and held in its treasury. Any Shares acquired by the Company will be
acquired in accordance with the 1940 Act, including Section 23 of the 1940 Act.
No fractional Shares shall be delivered under the Plan.
(c) Limits
on Number of Awards.
The maximum amount of Restricted Shares that may be issued
under the Executive Compensation Plans will be 10% of the outstanding Shares on
the Effective Date, plus 10% of the number of Shares issued or delivered by the
Company (other than pursuant to the Executive Compensation Plans) during the
term of the Plan. No one person shall be granted more than 25% of the
Restricted Shares reserved for issuance under this Plan. 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 Shares
issued pursuant to the Executive Compensation Plans, at the time of issuance
shall not exceed 25% of the outstanding voting securities of the Company
(excluding the Restricted Shares), except that if the amount of voting
securities that would result from the exercise of all the Company’s outstanding
warrants, options and rights issued to the Company’s directors, officers and
employees (not including any warrants, options or rights issued to Shareholders
of the Company generally), together with any Restricted Shares issued pursuant
to the Executive Compensation Plans, would exceed 15% of the outstanding voting
securities of the Company (excluding the Restricted Shares), then the total
amount of voting securities that would result from the exercise of all
outstanding warrants, options and rights, together with any Restricted Shares
issued pursuant to the Executive Compensation Plans, at the time of issuance
shall not exceed 20% of the outstanding voting securities of the Company
(excluding the Restricted Shares).
(d) Changes
in Shares. In the event of a Share dividend, Share split or
combination of Shares, recapitalization, or other change in the Shares, the
number and kind of Shares or securities of the Company subject to Awards then
outstanding or subsequently granted under the Plan, the maximum number of Shares
that may be delivered under the Plan, and other relevant provisions shall be
appropriately adjusted by the Board, whose determination shall be binding on all
persons.
Exhibit A
- - 3
The Board
may also adjust the number of Shares subject to outstanding Awards and the terms
of outstanding Awards, to take into consideration material changes in accounting
practices or principles, extraordinary dividends, consolidations or mergers
(except those described in Section 6(e)), acquisitions or dispositions of
securities or property, or any other event if it is determined by the Board that
such adjustment is appropriate to avoid distortion in the operation of the
Plan. References in the Plan to Shares will be construed to include
any units, any stock or any other securities resulting from an adjustment
pursuant to this Section 4(d).
5. Eligibility
for Awards
Persons
eligible to receive Awards under the Plan (“Eligible Persons”)
shall be Non-Employee Directors.
6. Terms
and Conditions of Awards
(a) Awards. Each Award shall
contain such terms and conditions as the Board shall deem
appropriate. No Awards of Restricted Shares shall be granted prior to
the Effective Date.
(b) Amounts;
Vesting of Awards. Subject to
Section 9(b), on and after the Effective Date, each Non-Employee Director who is
a director of the Company on the date of each annual meeting of Shareholders or
meeting in lieu of the annual meeting of Shareholders (including any annual
meeting or meeting in lieu of the annual meeting occurring on the Effective
Date), shall automatically be granted 1,000 Restricted Shares on the date of
each such annual meeting of Shareholders during the term of the
Plan. Such Awards shall immediately vest as to one-half of the
Restricted Share grant and as to the remaining one-half of the Restricted Share
grant on the earlier of (i) the first anniversary of such grant, or (ii) the
date immediately preceding the next annual meeting of Shareholders (or meeting
in lieu of the annual meeting of Shareholders), so that vesting for one hundred
percent (100%) of the Restricted Share grant shall occur one year after the date
of grant, provided that the participant is then and since the date of grant has
continuously been a Non-Employee Director (subject to Section 7
hereof). Subject to Section 9(b), if the Effective Date is a date
other than the date of an annual meeting of Shareholders or meeting in lieu of
the annual meeting of Shareholders, each Non-Employee Director who is a director
of the Company on the Effective Date shall automatically be granted on the
Effective Date a pro rata portion of the Restricted Shares Award (i.e., each Non-Employee
Director will receive a grant of Restricted Shares equal to the product of (x)
the number of full months remaining until the next annual meeting of
Shareholders (or
meeting in lieu of the annual meeting of Shareholders) divided by twelve
and (y) 1,000). One-half of such pro rata grant will vest immediately
and the remaining one-half of such pro rata grant will vest on the earlier of
(i) the first anniversary of the preceding annual meeting of Shareholders (or the
preceding meeting in lieu of the annual meeting of Shareholders), or (ii)
the date immediately preceding the next annual meeting of Shareholders (or the
next meeting in lieu of the annual meeting of Shareholders); provided
that the participant is then and since the date of such pro-rata grant has
continuously been a Non-Employee Director (subject to Section 7
hereof). In addition, subject to Section 9(b), a Non-Employee
Director who is appointed to serve on the Board outside of the annual election
cycle shall automatically be granted a pro rata portion of the Restricted Share
Award (if the date of such appointment is on or after the Effective Date) on the
date of such appointment to the Board (i.e., such Non-Employee
Director will receive a grant of Restricted Shares equal to the product of (x)
the number of full months, if any, remaining until the next annual meeting of
Shareholders (or the
next annual meeting in lieu of the annual meeting of Shareholders)
divided by twelve and (y) 1,000). One-half of such pro rata
grant will vest immediately and the remaining one-half of such pro rata grant
will vest on the earlier of (i) the first anniversary of the preceding annual
meeting of Shareholders (or the
preceding meeting in lieu of the annual meeting of Shareholders), or
(ii) the date immediately preceding the next annual meeting of
Shareholders (or
meeting in lieu of the annual meeting of Shareholders), provided that the
participant is then and since the date of such pro-rata grant has continuously
been a Non-Employee Director (subject to Section 7 hereof).
Exhibit A
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(c) Rights
as Shareholder. A participant
shall not have the rights of a Shareholder with regard to Awards under the Plan
except as to Shares actually received by him or her under the Plan.
(d) Nontransferability
of Awards. No unvested
Restricted Shares may be transferred. Vested Restricted Shares may be
sold, assigned, pledged, hypothecated, encumbered, or transferred or disposed of
in any other manner, in whole or in part, only in compliance with the terms,
conditions and restrictions as set forth in the governing instruments of the
Company, applicable federal and state securities laws or any other applicable
laws or regulations and the terms and conditions hereof.
(e) Mergers,
etc. To the extent
permitted under the 1940 Act, the following provisions shall apply in the event
of a Covered Transaction (as defined below).
(1) Subject
to subparagraph (2) below, all outstanding Awards to the extent not fully vested
(including Awards subject to conditions not yet satisfied or determined) will be
forfeited, as of the effective time of the Covered Transaction (as defined in
subparagraph (3) herein), provided that the Board may
in its sole discretion on or prior to the effective date of the Covered
Transaction remove any conditions or restrictions on any Award; or
(2) With
respect to an outstanding Award held by a participant who, following the Covered
Transaction, will be employed by or otherwise providing services to an entity
which is a surviving or acquiring entity in the covered transaction or any
affiliate of such an entity, the Board may at or prior to the effective time of
the Covered Transaction, in its sole discretion and in lieu of the action
described in subparagraph (1) above, arrange to have such surviving or acquiring
entity or affiliate assume any Award held by such participant outstanding
hereunder or grant a replacement Award which, in the judgment of the Board is
substantially equivalent to any Award being replaced.
(3) For
purposes of this Section 6(e), a “Covered Transaction”
is a (i) Share sale, consolidation, merger, or similar transaction or series of
related transactions in which the Company is not the surviving corporation or
which results in the acquisition of all or substantially all of the Company’s
then outstanding Shares by a single person or entity or by a group of persons
and/or entities acting in concert; (ii) a sale or transfer of all or
substantially all the Company’s assets, or (iii) a dissolution or liquidation of
the Company. Where a Covered Transaction involves a tender offer that
is reasonably expected to be followed by a merger described in clause (i) (as
determined by the Board), the Covered Transaction shall be deemed to have
occurred upon consummation of the tender offer.
Exhibit A
- - 5
(f) Compliance
with Law; Commission Approval. At all times
during such periods as the Company qualifies or intends to qualify as a
“business development company,” no Award may be granted under the Plan if the
grant or terms of such Award would cause the Company to violate any provision of
the 1940 Act applicable to “business development companies,” and, if approved
for grant, such an Award will be void and of no effect. Subject to
Section 9(b), the grants of Awards under the Plan will be automatic and will not
be changed without shareholder approval.
7. Termination
of Continuous Service
Unless
the Board expressly provides otherwise, immediately upon the cessation of the
participant’s service as a Non-Employee Director (unless upon such termination
or within 90 days thereafter the participant becomes an officer or employee of
the Company or rejoins the Board as a Non-Employee Director) all Awards, to the
extent not already vested, will be forfeited. If a participant ceases
providing services as a Non-Employee Director but within 90 days of such
cessation becomes an officer or employee of the Company or rejoins the Board as
a Non-Employee Director, such participant shall vest in any unvested Restricted
Shares on the later of (i) the next annual shareholders meeting (in accordance
with Section 6(b) hereof) or (ii) the date on which such participant becomes an
officer or employee of th Company or rejoins the Board as a Non-Employee
Director.
8. Rights
Neither the adoption of the Plan nor
the grant of Awards shall confer upon any participant any right to continue as a
Non-Employee Director (or in any other capacity) of the Company, its parent, or
any subsidiary or affect in any way the right of the Company, its parent, or a
subsidiary to terminate the participant’s relationship at any
time. Except as specifically provided by the Board in any particular
case, the loss of existing or potential profit in Awards granted under this Plan
shall not constitute an element of damages in the event of termination of the
relationship of a participant even if the termination is in violation of an
obligation of the Company to the participant by contract or
otherwise.
Exhibit A
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9. Discontinuance,
Cancellation, Amendment, and Termination; Board Review
(a) The
Board may at any time or times amend the Plan or any outstanding Award for any
purpose which may at the time be permitted by law, and may at any time terminate
the Plan as to any future grants of Awards; provided that, except as
otherwise expressly provided in the Plan the Board may not, without the
participant’s consent, alter the terms of an Award so as to affect adversely the
participant’s rights under the Award, unless the Board expressly reserved the
right to do so at the time of the Award. Any amendments to the Plan
shall be conditioned upon approval of Shareholders and the Commission only to
the extent, if any, such approval is required by law (including the Code), as
determined by the Board.
(b) The Board
shall review the Plan from time to time and at least annually, its reviews to
include an assessment of the potential impact that Awards made or scheduled to
be made under the Plan may have on the Company’s earnings and net-asset value
per Share. The Board is authorized to take appropriate steps to ensure
that the granting of Awards would not have an effect contrary to the interests
of Shareholders, including the authority to limit or eliminate the
automatic granting of additional Awards pursuant
to Section 6(b). The Board shall maintain adequate records of any reviews
conducted pursuant to this Section 9(b). For the avoidance of doubt, any action
by the Board pursuant to this Section 9(b) that would affect an already
outstanding Award shall, to that extent, be subject to the limitations of
Section 9(a).
10. Waiver
of Jury Trial
By
accepting an Award under the Plan, each participant waives any right to a trial
by jury in any action, proceeding or counterclaim concerning any rights under
the Plan and any Award, or under any amendment, waiver, consent, instrument,
document or other agreement delivered or which in the future may be delivered in
connection therewith, and agrees that any such action, proceedings or
counterclaim shall be tried before a court and not before a jury. By
accepting an Award under the Plan, each participant certifies that no officer,
representative, or attorney of the Company has represented, expressly or
otherwise, that the Company would not, in the event of any action, proceeding or
counterclaim, seek to enforce the foregoing waivers.
11. Legal
Conditions on Delivery of Shares
The
Company will not be obligated to deliver any Shares pursuant to the Plan or to
remove any restriction from Shares previously delivered under the Plan until:
(i) the Company is satisfied that all legal matters in connection with the
issuance and delivery of such Shares have been addressed and resolved; (ii) if
the outstanding Shares are at the time of delivery listed on any stock exchange
or national market system, the Shares to be delivered have been listed or
authorized to be listed on such exchange or system upon official notice of
issuance; and (iii) all conditions of the Award have been satisfied or waived.
If the sale of
Shares has not been registered under the Securities Act of 1933, as amended (the
“Securities
Act”), the Company may require, as a condition to exercise of the Award,
such representations or agreements as counsel for the Company may consider
appropriate to avoid violation of the Securities Act. The Company may
require that certificates evidencing Shares issued under the Plan bear an
appropriate legend reflecting any restriction on transfer applicable to such
Shares, and the Company may hold the certificates pending lapse of the
applicable restrictions.
Exhibit A
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KOHLBERG
CAPITAL
EXHIBIT
B
Resolution
of the Board of Directors of Kohlberg Capital Corporation Authorizing the Filing
of this Application
RESOLVED: That
the Authorized Officers be, and each of them acting singly hereby is, authorized
and directed, by and on behalf of the Corporation, and in its name, to execute
and cause to be filed with the SEC any applications for exemptive relief,
including without limitation relief permitting the issuance of equity
compensation to non-employee directors of the Corporation, and any amendments
deemed necessary or appropriate thereto, and any related documents including but
not limited to requests for no-action relief or interpretative positions under
the Securities Act, the Exchange Act, the Investment Company Act of 1940 (the
“1940 Act”) or
any other applicable federal or state securities law, as such Authorized
Officer, in his or her sole discretion, deems necessary or appropriate to effect
such actions or pursue such activities or transactions of the Corporation as are
duly authorized.
Resolution
of the Board of Directors of Kohlberg Capital Corporation Approving the Amended
and Restated Non-Employee Director Plan
RESOLVED:
That the form, terms and provisions of, and the transactions contemplated by the
Amended and Restated Non-Employee Director Plan (the “Amended and Restated
Plan”) attached hereto as Exhibit B with such
changes therein and modifications as requested by the Securities and Exchange
Commission or approved by the officers of the Corporation, and all actions taken
or caused to be taken, by any officer on behalf of the Corporation with respect
to the Amended and Restated Plan, are hereby ratified, approved and confirmed in
all respects; and the officers be, and each hereby is, authorized to take any
and all actions deemed necessary to implement the Amended and Restated
Plan.
Exhibit C
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