[Federal Register Volume 75, Number 152 (Monday, August 9, 2010)]
[Notices]
[Pages 47860-47863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-19527]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29376; File No. 812-13623]
Kohlberg Capital Corporation; Notice of Application
August 3, 2010.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (``Act'') for an exemption from sections
23(a), 23(b) and 63 of the Act, and under sections 57(a)(4) and 57(i)
of the Act and rule 17d-1 under the Act permitting certain joint
transactions otherwise prohibited by section 57(a)(4) of the Act.
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SUMMARY: Summary of the Application: Kohlberg Capital Corporation
(``Kohlberg Capital'') requests an order to permit it to issue
restricted shares of its common 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) (``Restricted Stock'') to its directors who are not also
employees or officers of Kohlberg Capital (``Non-Employee Directors'')
under the terms of its 2010 Amended and Restated Non-Employee Director
Plan (together with any Kohlberg Capital executive compensation plan
that did, does, or may in the future, exist, ``Plans'').
DATES: Filing Dates: The application was filed on January 20, 2009, and
amended on July 9, 2009, and on July 29, 2010.
Hearing or Notification of Hearing: An order granting the
application will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicant with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on August 30, 2010, and should be accompanied by proof of
service on applicant, in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-1090. Kohlberg Capital Corporation,
295 Madison Avenue, 6th Floor, New York, NY 10017.
FOR FURTHER INFORMATION CONTACT: Steven I. Amchan, Senior Counsel, at
(202) 551-6826, or Jennifer L. Sawin, Branch Chief, at (202) 551-6821
(Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at http://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicant's Representations
1. Kohlberg Capital, a Delaware corporation, is an internally
managed, non-diversified, closed-end investment company that has
elected to be regulated as a business development company (``BDC'')
under the Act.\1\ Kohlberg Capital provides debt and equity growth
capital to privately-held middle market companies and its investment
objective is to generate current income and capital appreciation from
investments in senior secured term loans, mezzanine debt and selected
equity investments in such companies. Kohlberg Capital may also invest
in loans to larger, publicly traded companies, high-yield bonds,
distressed debt securities and debt and equity securities issued by
collateralized debt obligation funds. As of June 30, 2010, there were
22,549,235 shares of Kohlberg Capital's common stock outstanding.
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\1\ Section 2(a)(48) defines a BDC to be any closed-end
investment company that operates for the purpose of making
investments in securities described in sections 55(a)(1) through
55(a)(3) of the Act and makes available significant managerial
assistance with respect to the issuers of such securities.
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2. Kohlberg Capital currently has seven directors serving on its
board of directors (``Board'') of whom four are Non-Employee Directors.
Currently, none of Kohlberg Capital's Non-Employee Directors is an
``interested person'' of Kohlberg Capital within the meaning of section
2(a)(19) of the Act, but it is possible that Kohlberg Capital may have
Non-Employee Directors in the future who are interested persons of
Kohlberg Capital.
3. Kohlberg Capital believes that, because the market for qualified
director candidates is highly competitive, its successful performance
depends on its ability to offer compensation packages to its directors
that are competitive with those offered by other investment management
businesses. Kohlberg Capital states that granting Restricted Stock to
Non-Employee Directors under the 2010 Amended and Restated Non-Employee
Director Plan is fair and reasonable and would be competitive with
compensation packages offered by other investment management
businesses.
4. 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
[[Page 47861]]
right to vote the Restricted Stock and the right to receive dividends.
During the restriction period, the Restricted Stock generally may not
be sold, transferred, pledged, hypothecated, margined, or otherwise
encumbered by the Non-Employee Director. 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 generally be forfeited.
5. The maximum amount of Restricted Stock that may be issued under
the Plans will be 10% of the outstanding shares of Kohlberg Capital's
common stock 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.\2\ No Non-Employee
Director may be granted more than 25% of the shares reserved for
issuance under the 2010 Amended and Restated Non-Employee Director
Plan.
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\2\ For purposes of calculating compliance with this limit,
Kohlberg Capital will count as Restricted Stock all shares of its
common stock that are issued pursuant to the Plan less any shares
that are forfeited back to Kohlberg Capital and cancelled as a
result of forfeiture restrictions not lapsing.
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6. Under the 2010 Amended and Restated Non-Employee Director Plan,
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). Half of the Restricted Stock grant would vest
immediately, and the remaining half would vest 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). Pro rata grants of Restricted
Stock would be made to Non-Employee Directors appointed outside the
annual election cycle. 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.
7. The 2010 Amended and Restated Non-Employee Director Plan will be
submitted to Kohlberg Capital's shareholders for their approval
following the issuance of the order and will not become effective
unless and until shareholders approve it.
Applicant's Legal Analysis
Sections 23(a) and (b), Section 63
1. Under section 63 of the Act, the provisions of section 23(a) of
the Act generally prohibiting a registered closed-end investment
company from issuing securities for services or for property other than
cash or securities are made applicable to BDCs. This provision would
prohibit the issuance of Restricted Stock as a part of the 2010 Amended
and Restated Non-Employee Director Plan.
2. Section 23(b) generally prohibits a closed-end management
investment company from selling its common stock at a price below its
current net asset value (``NAV''). Section 63(2) makes section 23(b)
applicable to BDCs unless certain conditions are met. Because
Restricted Stock that would be granted under the 2010 Amended and
Restated Non-Employee Director Plan would not meet the terms of section
63(2), sections 23(b) and 63 prohibit the issuance of the Restricted
Stock.
3. Section 6(c) provides that the Commission may, by order upon
application, conditionally or unconditionally exempt any person,
security, or transaction, or any class or classes of persons,
securities or transactions, from any provision of the Act, if and to
the extent that the exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act.
4. Kohlberg Capital requests an order pursuant to section 6(c) of
the Act granting an exemption from the provisions of sections 23(a) and
(b) and section 63 of the Act. Kohlberg Capital states that the
concerns underlying those sections include: (a) preferential treatment
of investment company insiders and the use of options and other rights
by insiders to obtain control of the investment company; (b)
complication of the investment company's structure that makes it
difficult to determine the value of the company's shares; and (c)
dilution of shareholders' equity in the investment company. Kohlberg
Capital states that the 2010 Amended and Restated Non-Employee Director
Plan does not raise the concern about preferential treatment of
Kohlberg Capital's insiders because the 2010 Amended and Restated Non-
Employee Director Plan is bona fide compensation plan of the type that
is common among corporations generally. In addition, section
61(a)(3)(B) of the Act permits a BDC to issue to its officers,
directors and employees, pursuant to an executive compensation plan,
warrants, options and rights to purchase the BDC's voting securities,
subject to certain requirements. Kohlberg Capital states that it is not
aware of any specific discussion in Section 61 and its legislative
history regarding the use of direct grants of stock as incentive
compensation. Kohlberg Capital states, however, that the issuance of
Restricted Stock is substantially similar, for purposes of investor
protection under the Act, to the issuance of warrants, options, and
rights as contemplated by section 61. 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 number of shares of Kohlberg Capital issuable under the
2010 Amended and Restated Non-Employee Director Plan, and the number of
shares issuable to an individual Non-Employee Director, would be
limited as set forth in the conditions.
5. Kohlberg Capital further states that the 2010 Amended and
Restated Non-Employee Director Plan will not unduly complicate Kohlberg
Capital's capital structure because equity-based 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 its shareholders for
their approval or disapproval after the issuance of any order. 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 Kohlberg Capital's shareholders. Kohlberg Capital
also states that it will comply with the proxy disclosure requirements
in Item 10 of Schedule 14A under the Securities Exchange Act of 1934
(``Exchange 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 the Form N-2
registration statement for closed-end investment companies, and
pursuant to the standards and guidelines adopted by the Financial
Accounting Standards Board for operating companies. In addition,
Kohlberg Capital will comply with the disclosure requirements for
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executive compensation plans applicable to operating companies under
the Exchange Act.\3\ 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 common stock.
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\3\ Kohlberg Capital will comply with the amendments to the
disclosure requirements for executive and director compensation,
related party transactions, director independence and other
corporate governance matters, and security ownership of officers and
directors to the extent adopted and applicable to BDCs. See
Executive Compensation and Related Party Disclosure, Securities Act
Release No. 8655 (Jan. 27, 2006) (proposed rule); Executive
Compensation and Related Party Disclosure, Securities Act Release
No. 8732A (Aug. 29, 2006) (final rule and proposed rule), as amended
by Executive Compensation Disclosure, Securities Act Release No.
8765 (Dec. 22, 2006) (adopted as interim final rules with request
for comments).
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6. 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. Kohlberg Capital asserts that it needs the
flexibility to provide the requested equity-based compensation in order
to be able to compete effectively with other financial services firms
for talented directors. Kohlberg Capital states that its Non-Employee
Directors make a significant contribution to the management of its
business and to the analysis and supervision of its portfolio
investments, by providing guidance regarding, among other things,
operational matters and strategic direction, as well as by serving on
the Board's three committees. 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. Kohlberg Capital believes that the Restricted Stock grants
will provide significant incentives to the Non-Employee Directors to
devote their best efforts to the success of Kohlberg Capital's business
and the enhancement of shareholder value in the future. Kohlberg
Capital also states that 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.
Section 57(a)(4), Rule 17d-1
7. Section 57(a) proscribes certain transactions between a BDC and
persons related to the BDC in the manner described in section 57(b)
(``57(b) persons''), absent a Commission order. Section 57(a)(4)
generally prohibits a 57(b) person from effecting a transaction in
which the BDC is a joint participant absent such an order. Rule 17d-1,
made applicable to BDCs by section 57(i), proscribes participation in a
``joint enterprise or other joint arrangement or profit-sharing plan,''
which includes a stock option or purchase plan. Non-employee directors
of a BDC are 57(b) persons. Thus, the issuance of shares of Restricted
Stock could be deemed to involve a joint transaction involving a BDC
and a 57(b) person in contravention of section 57(a)(4). Rule 17d-1(b)
provides that, in considering relief pursuant to the rule, the
Commission will consider (i) whether the participation of the company
in a joint enterprise is consistent with the Act's policies and
purposes and (ii) the extent to which that participation is on a basis
different from or less advantageous than that of other participants.
8. Kohlberg Capital requests an order pursuant to section 57(a)(4)
and rule 17d-1 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 states that the 2010 Amended
and Restated Non-Employee Director Plan is in the interests of Kohlberg
Capital's shareholders because the 2010 Amended and Restated Non-
Employee Director Plan will help Kohlberg Capital attract and retain
highly qualified directors, help align the interests of Kohlberg
Capital's Non-Employee Directors with those of its shareholders, and is
designed to produce a better return for Kohlberg Capital's
shareholders.
Applicant's Conditions
Applicant 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 shareholders.
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 the 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.
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For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-19527 Filed 8-6-10; 8:45 am]
BILLING CODE 8010-01-P