Notice2021-13664
Capital Southwest Corporation
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 28, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 121 (Monday, June 28, 2021)</title>
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[Federal Register Volume 86, Number 121 (Monday, June 28, 2021)]
[Notices]
[Pages 34066-34069]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-13664]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 34309; 812-15212]
Capital Southwest Corporation
June 22, 2021.
AGENCY: Securities and Exchange Commission.
ACTION: Notice.
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Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (the ``Act'') for an exemption from
sections 23(a), 23(b) and 63 of the Act, an pursuant sections 57(a)(4)
and 57(i) of the Act and rule 17d-1 under the Act permitting certain
joint transactions otherwise prohibited by section 57(a)(4) of the Act,
and pursuant section 23(c)(3) of the Act for an exemption from section
23(c) of the Act.
SUMMARY OF THE APPLICATION: Capital Southwest Corporation (``Company''
or ``Applicant''), requests an order (``Order'') to permit it to (i)
issue restricted shares of its common stock (``Restricted Stock'')
under the terms of its 2021 Employee Restricted Stock Award Plan (the
``2021 Plan'') as part of the compensation package for certain of its
employees in the 2021 Plan, and (ii) withhold shares of the Company's
common stock or purchase shares of the Company's common stock from the
participants to satisfy tax withholding obligations relating to the
vesting of Restricted Stock pursuant to the 2021 Plan.
APPLICANT: Capital Southwest Corporation
FILING DATES: The application was filed on March 29, 2021, and amended
on May 17, 2021 and on June 14, 2021.
HEARING OR NOTIFICATION OF HEARING: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by emailing the Commission's
Secretary at <a href="/cdn-cgi/l/email-protection#83d0e6e0f1e6f7e2f1faf0aecce5e5eae0e6c3f0e6e0ade4ecf5"><span class="__cf_email__" data-cfemail="bdeed8decfd8c9dccfc4ce90f2dbdbd4ded8fdced8de93dad2cb">[email protected]</span></a> and serving applicants with a
copy of the request by email. Hearing requests should be received by
the Commission by 5:30 p.m. on July 16, 2021, and should be accompanied
by proof of service on the applicants, in the form of an affidavit, or,
for lawyers, a certificate of service. Pursuant to rule 0-5 under the
Act, hearing requests should state the nature of the writer's interest,
any facts bearing upon the desirability of a hearing on the matter, the
reason for the request, and the issues contested. Persons who wish to
be notified of a hearing may request notification by emailing the
Commission's Secretary at <a href="/cdn-cgi/l/email-protection#97c4f2f4e5f2e3f6e5eee4bad8f1f1fef4f2d7e4f2f4b9f0f8e1"><span class="__cf_email__" data-cfemail="e8bb8d8b9a8d9c899a919bc5a78e8e818b8da89b8d8bc68f879e">[email protected]</span></a>.
ADDRESSES: The Commission: <a href="/cdn-cgi/l/email-protection#386b5d5b4a5d4c594a414b15775e5e515b5d784b5d5b165f574e"><span class="__cf_email__" data-cfemail="095a6c6a7b6c7d687b707a24466f6f606a6c497a6c6a276e667f">[email protected]</span></a>. Applicants:
<a href="/cdn-cgi/l/email-protection#b1d3d5d8d4d9ddf1d2d0c1d8c5d0ddc2dec4c5d9c6d4c2c59fd2dedc"><span class="__cf_email__" data-cfemail="7b191f121e13173b181a0b120f1a1708140e0f130c1e080f55181416">[email protected]</span></a>; <a href="/cdn-cgi/l/email-protection#cca1bfadbea2a9be8cafadbca5b8ada0bfa3b9b8a4bba9bfb8e2afa3a1"><span class="__cf_email__" data-cfemail="274a544655494255674446574e53464b544852534f504254530944484a">[email protected]</span></a>.
FOR FURTHER INFORMATION CONTACT: Asen Parachkevov, Senior Counsel, at
(202) 551-6908 or Lisa Reid Ragen, Branch Chief, at (202) 551-6825
[[Page 34067]]
(Division of Investment Management, Chief Counsel's Office).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's website by searching for the file number, or for an
applicant using the Company name box, at <a href="http://www.sec.gov/search/search.htm">http://www.sec.gov/search/search.htm</a> or by calling (202) 551-8090.
Applicant's Representations
1. The Company, a Texas corporation, is an internally managed, non-
diversified, closed-end investment company that has elected to be
regulated as a business development company (``BDC'') under the Act.\1\
The Company's investment objective is to produce attractive risk-
adjusted returns by generating current income from its debt investments
and capital appreciation from its equity and equity related
investments.
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\1\ Capital Southwest was incorporated in Texas in 1961. On
March 30, 1988 Capital Southwest elected to be regulated as a BDC.
Section 2(a)(48) of the Act defines a BDC to be any closed-end
investment company that operates for the purpose of making
investments in securities described in sections 55(a)(1) through
55(a)(3) of the Act and makes available significant managerial
assistance with respect to the issuers of such securities.
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2. Shares of the Company's common stock are traded on the NASDAQ
Global Select Market under the symbol ``CSWC.'' As of March 31, 2021,
there were 23,344,836 and 21,005,324 shares of the Company's common
stock issued and outstanding, respectively. As of March 31, 2021, the
Company had an aggregate of 21 employees.
3. The Company currently has a seven-member board of directors (the
``Board''), of whom one is an ``interested person'' of the Company
within the meaning of section 2(a)(19) of the Act and six are not
interested persons (the ``Non-interested Directors''). The Company has
six directors who are neither officers nor employees of the Company.
4. The Company believes that its successful performance depends on
its ability to offer fair compensation packages to its professionals
that are competitive with those offered by other investment management
businesses. The Company believes the highly specialized nature of its
business, the competitiveness of its market and the small size of its
employee base relative to its assets and revenue make such retentions
even more critical for the Company, and that the ability to offer
equity-based compensation to its professionals is vital to the
Company's future growth and success.
5. The Commission previously issued certain exemptive orders (the
``Prior Orders''), which, among other things, (i) permit the Company to
issue restricted shares of its common stock under the terms of the
Company's 2010 Restricted Stock Award Plan (the ``2010 Plan'') as part
of the compensation packages for certain of its employees and certain
employees of its wholly-owned subsidiaries, and (ii) allow the Company
to withhold shares of the Company's common stock or purchase shares of
the Company's common stock from the Participants (as defined in the
2010 Plan) to satisfy tax withholding obligations relating to the
vesting of Restricted Stock (as defined in the 2010 Plan) pursuant to
the 2010 Plan.\2\
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\2\ ``Prior Orders'' refers to the exemptive order issued by the
Commission on October 26, 2010 (see Capital Southwest Corporation,
Investment Company Act Release Nos. 29450 (notice) (September 29,
2010) and 29491 (order) (October 26, 2010)) and as amended by the
exemptive order issued by the Commission on August 22, 2017 (see
Capital Southwest Corporation, Investment Company Act Release Nos.
32742 (notice) (July 25, 2017) and 32787 (order) (August 22, 2017)).
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6. The Company states that the right to grant restricted stock
awards under the 2010 Plan will terminate on July 18, 2021 and that in
connection with the termination of the 2010 Plan, the Board approved
the 2021 Plan as part of the compensation packages for certain of its
employees, the terms of which are, in all material respects, identical
to the 2010 Plan. The Company states that the relief that Applicant is
requesting under the Order would provide the same relief with respect
to the 2021 Plan as previously provided by the Commission in the Prior
Orders with respect to the 2010 plan. The Order would supersede the
Prior Orders, with the result that the Company will no longer rely on
the Prior Orders if the Order is granted.
7. The 2021 Plan will authorize the issuance of shares of
Restricted Stock by the Company to certain of its employees. The
Company states that the Restricted Stock will be subject to
restrictions on transferability and other restrictions as required by
the Compensation Committee of the Board, which will be comprised solely
of ``non-employee directors'' within the meaning of rule 16b-3 under
the Securities Exchange Act of 1934 (the ``Exchange Act''), each of
whom also is not an ``interested person'' of the Company within the
meaning of section 2(a)(19) of the Act. The Company states that except
to the extent restricted under the terms of the 2021 Plan, a
Participant (as defined in the 2021 Plan) who is granted Restricted
Stock will have all the rights of any other shareholder, including the
right to vote the Restricted Stock and the right to receive dividends.
The Company states that during the restriction period (i.e., prior to
the lapse of the applicable forfeiture restrictions), the Restricted
Stock generally may not be sold, transferred, pledged, hypothecated,
margined or otherwise encumbered by the Participant. The Company states
that except as the Board otherwise determines, upon termination of a
Participant's employment during the applicable restriction period,
Restricted Stock for which forfeiture restrictions have not lapsed at
the time of such termination shall be forfeited.
8. The Company states that the value of Restricted Stock generally
will be taxable to the recipient as ordinary income in the years in
which the restrictions on the shares lapse and that such value will be
the fair market value of the shares on the dates the restrictions
lapse. The Company states that the 2021 Plan authorizes the Company to
withhold common stock (in whole or in part) from any award of
restricted shares granted at the time the Restricted Stock is taxed in
satisfaction of a Participant's tax obligations.
9. The Company states that maximum amount of Restricted Stock that
may be issued and outstanding will not at the time of issuance of any
Restricted Stock exceed 10% of the Company's outstanding voting
securities.\3\ In addition, the Company states that no Participant may
be granted more than 25% of the shares reserved for issuance under the
2021 Plan.
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\3\ For purposes of calculating compliance with this limit,
Capital Southwest counts as Restricted Stock all shares of its
common stock that are issued pursuant to the 2021 Plan, less any
shares that are forfeited back to Capital Southwest and cancelled as
a result of forfeiture restrictions not lapsing.
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10. The Company states that each issuance of Restricted Stock under
the 2021 Plan will be approved by the required majority, as defined in
section 57(o) of the Act,\4\ of the Company's directors on the basis
that the issuance is in the best interests of the Company and its
shareholders. The Company states that the date on which the required
majority approves an issuance of Restricted Stock will be deemed the
date on which the subject Restricted Stock is granted.
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\4\ Section 57(o) of the Act provides that the term ``required
majority,'' when used with respect to the approval of a proposed
transaction, plan, or arrangement, means both a majority of a BDC's
directors or general partners who have no financial interest in such
transaction, plan, or arrangement and a majority of such directors
or general partners who are not interested persons of such company.
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11. The Company states that the 2021 Plan was approved by the Board
as a whole, including the required majority as defined in section 57(o)
of the Act, on
[[Page 34068]]
March 26, 2021. The Company states that if the Commission issues the
Order, the 2021 Plan will become effective upon receipt of the approval
of the Company's shareholders.
Applicant's Legal Analysis
Sections 23(a) and (b), Section 63
1. Under section 63 of the Act, the provisions of section 23(a) of
the Act generally prohibiting a registered closed-end investment
company from issuing securities for services or for property other than
cash or securities are made applicable to BDCs. This provision would
prohibit the issuance of Restricted Stock as a part of the 2021 Plan.
2. Section 23(b) generally prohibits a registered closed-end
management investment company from selling its common stock at a price
below its current net asset value (``NAV''). Section 63(2) makes
section 23(b) applicable to BDCs unless certain conditions are met.
Because Restricted Stock that would be granted under the 2021 Plan
would not meet the terms of section 63(2), sections 23(b) and 63
prohibit the issuance of the Restricted Stock.
3. Section 6(c) provides, in part, that the Commission may, by
order upon application, conditionally or unconditionally exempt any
person, security, or transaction, or any class or classes of persons,
securities or transactions, from any provision of the Act, if and to
the extent that the exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act.
4. The Company requests an order pursuant to section 6(c) of the
Act granting an exemption from the provisions of sections 23(a) and (b)
and section 63 of the Act. The Company states that the concerns
underlying those sections include: (a) Preferential treatment of
investment company insiders and the use of options and other rights by
insiders to obtain control of the investment company; (b) complication
of the investment company's structure that makes it difficult to
determine the value of the company's shares; and (c) dilution of
shareholders' equity in the investment company. The Company states that
the 2021 Plan does not raise concerns about preferential treatment of
the Company's insiders because the 2021 Plan is a bona fide
compensation plan of the type common among corporations generally. In
addition, section 61(a)(3)(B) of the Act permits a BDC to issue to its
officers, directors and employees, pursuant to an executive
compensation plan, warrants, options and rights to purchase the BDC's
voting securities, subject to certain requirements. The Company states
that, for reasons that are unclear, section 61 and its legislative
history do not address the issuance by a BDC of restricted stock as
incentive compensation. The Company states, however, that the issuance
of Restricted Stock is substantially similar, for purposes of investor
protection under the Act, to the issuance of warrants, options, and
rights as contemplated by section 61 of the Act. The Company also
asserts that the 2021 Plan would not become a means for insiders to
obtain control of the Company because the number of shares of the
Company issuable under the 2021 Plan would be limited as set forth in
the application.
5. The Company further states that the 2021 Plan will not unduly
complicate the Company's structure because equity-based compensation
arrangements are widely used among corporations and commonly known to
investors. The Company notes that the 2021 Plan will be submitted to
its shareholders for their approval. The Company represents that a
concise, ``plain English'' description of the 2021 Plan, including its
potential dilutive effect, will be provided in the proxy materials that
will be submitted to the Company's shareholders. The Company also
states that it will comply with the proxy disclosure requirements in
Item 10 of Schedule 14A under the Exchange Act. The Company further
notes that the 2021 Plan will be disclosed to investors in accordance
with the requirements of the Form N-2 registration statement for
closed-end investment companies, and pursuant to the standards and
guidelines adopted by the Financial Accounting Standards Board for
operating companies. In addition, the Company will comply with the
disclosure requirements for executive compensation plans applicable to
BDCs.\5\ The Company thus concludes that the 2021 Plan will be
adequately disclosed to investors and appropriately reflected in the
market value of the Company's shares.
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\5\ See Executive Compensation and Related Party Disclosure,
Securities Act Release No. 8655 (Jan. 27, 2006) (proposed rule);
Executive Compensation and Related Party Disclosure, Securities Act
Release No. 8732A (Aug. 29, 2006) (final rule and proposed rule), as
amended by Executive Compensation Disclosure, Securities Act Release
No. 8765 (Dec. 22, 2006) (adopted as interim final rules with
request for comments).
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6. The Company acknowledges that, while awards granted under the
2021 Plan would have a dilutive effect on the shareholders' equity in
the Company, that effect would be outweighed by the anticipated
benefits of the 2021 Plan to the Company and its shareholders. The
Company asserts that it needs the flexibility to provide the requested
equity-based employee compensation in order to be able to compete
effectively with other financial services firms for talented
professionals. These professionals, the Company suggests, in turn are
likely to increase the Company's performance and shareholder value. The
Company also asserts that equity-based compensation will help align the
interests of the Company's employees with those of its shareholders. In
addition, the Company states that its shareholders will be further
protected by the conditions to the requested order that assure
continuing oversight of the operation of the 2021 Plan by the Company's
Board.
Section 57(a)(4), Rule 17d-1
7. Section 57(a) proscribes certain transactions between a BDC and
persons related to the BDC in the manner described in section 57(b)
(``57(b) persons''), absent a Commission order. Section 57(a)(4)
generally prohibits a 57(b) person from effecting a transaction in
which the BDC is a joint participant absent such an order. Rule 17d-1,
made applicable to BDCs by section 57(i), proscribes participation in a
``joint enterprise or other joint arrangement or profit-sharing plan,''
which includes a stock option or purchase plan. Employees and directors
of a BDC are 57(b) persons. Thus, the issuance of shares of Restricted
Stock could be deemed to involve a joint transaction involving a BDC
and a 57(b) person in contravention of section 57(a)(4). Rule 17d-1(b)
provides that, in considering relief pursuant to the rule, the
Commission will consider (i) whether the participation of the company
in a joint enterprise is consistent with the Act's policies and
purposes and (ii) the extent to which that participation is on a basis
different from or less advantageous than that of other participants.
8. The Company requests an order pursuant to sections 57(a)(4) and
57(i) of the Act and under rule 17d-1 to permit the Company to issue
Restricted Stock under the 2021 Plan. The Company states that the 2021
Plan, although benefiting the Participants and The Company in different
ways, is in the interests of the Company's shareholders because the
2021 Plan will help align the interests of the Company's employees and
officers with those of its shareholders, which will encourage conduct
on the part of those employees and officers designed to produce a
better return for the Company's shareholders.
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Additionally, section 57(j)(1) of the Act expressly permits any
director, officer or employee of a BDC to acquire warrants, options and
rights to purchase voting securities of such BDC, and the securities
issued upon the exercise or conversion thereof, pursuant to an
executive compensation plan which meets the requirements of section
61(a)(3)(B) of the Act. Applicant submits that the issuance of
Restricted Stock pursuant to the 2021 Plan poses no greater risk to
stockholders than the issuances permitted by section 57(j)(1) of the
Act.
Section 23(c)
9. Section 23(c) of the Act, which is made applicable to BDCs by
section 63 of the Act, generally prohibits a BDC from purchasing any
securities of which it is the issuer except in the open market pursuant
to tenders, or under other circumstances as the Commission may permit
to ensure that the purchases are made in a manner or on a basis that
does not unfairly discriminate against any holders of the class or
classes of securities to be purchased. Applicant states that the
withholding or purchase of shares of Restricted Stock and common stock
in payment of applicable withholding tax obligations or of common stock
in payment for the exercise price of a stock option might be deemed to
be purchases by the Company of its own securities within the meaning of
section 23(c) and therefore prohibited by the Act.
10. Section 23(c)(3) of the Act permits a BDC to purchase
securities of which it is the issuer in circumstances in which the
repurchase is made in a manner or on a basis that does not unfairly
discriminate against any holders of the class or classes of securities
to be purchased. Applicant believes that the requested relief meets the
standards of section 23(c)(3).
11. Applicant submits that these purchases will be made in a manner
that does not unfairly discriminate against Applicant's stockholders
because all purchases of Applicant's stock will be at the closing price
of the common stock on the Nasdaq Global Market (or any primary
exchange on which its shares of common stock may be traded in the
future) on the relevant date (i.e., the public market price on the date
of grant of Restricted Stock). Applicant submits that because all
transactions with respect to the 2021 Plan will take place at the
public market price for the Applicant's common stock, these
transactions will not be significantly different than could be achieved
by any stockholder selling in a market transaction. Applicant
represents that no transactions will be conducted pursuant to the
requested order on days where there are no reported market transactions
involving Applicant's shares.
12. Applicant represents that the withholding provisions in the
2021 Plan do not raise concerns about preferential treatment of
Applicant's insiders because the 2021 Plan is a bona fide compensation
plan of the type that is common among corporations generally.
Furthermore, the vesting schedule is determined at the time of the
initial grant of the Restricted Stock. Applicant represents that all
purchases may be made only as permitted by the 2021 Plan, which will be
approved by the Applicant's stockholders prior to any application of
the relief. Applicant believes that granting the requested relief would
be consistent with the policies underlying the provisions of the Act
permitting the use of equity compensation as well as prior exemptive
relief granted by the Commission under section 23(c) of the Act.
Applicant's Conditions
Applicant agrees that the order granting the requested relief will
be subject to the following conditions:
1. The 2021 Plan will be authorized by the Company's shareholders.
2. Each issuance of Restricted Stock to officers and employees will
be approved by the required majority, as defined in section 57(o) of
the Act, of the Company's directors on the basis that such grant is in
the best interests of the Company and its shareholders.
3. The amount of voting securities that would result from the
exercise of all of the Company's outstanding warrants, options, and
rights, together with any Restricted Stock issued and outstanding
pursuant to the 2021 Plan and any other compensation plans of the
Company, at the time of issuance shall not exceed 25% of the
outstanding voting securities of the Company, except that if the amount
of voting securities that would result from the exercise of all of the
Company's outstanding warrants, options, and rights issued to the
Company's directors, officers, and employees, together with any
Restricted Stock issued pursuant to the 2021 Plan and any other
compensation plans of the Company, would exceed 15% of the outstanding
voting securities of the Company, then the total amount of voting
securities that would result from the exercise of all outstanding
warrants, options, and rights, together with any Restricted Stock
issued pursuant to the 2021 Plan and any other compensation plans of
the Company, at the time of issuance shall not exceed 20% of the
outstanding voting securities of the Company.
4. The amount of Restricted Stock issued and outstanding will not
at the time of issuance of any Restricted Stock exceed 10% of the
Company's outstanding voting securities.
5. The Board will review the 2021 Plan at least annually. In
addition, the Board will review periodically the potential impact that
the issuance of Restricted Stock under the 2021 Plan could have on the
Company's earnings and NAV per share, such review to take place prior
to any decisions to grant Restricted Stock under the 2021 Plan, but in
no event less frequently than annually. Adequate procedures and records
will be maintained to permit such review. The Board will be authorized
to take appropriate steps to ensure that the issuance of Restricted
Stock under the 2021 Plan will be in the best interests of the
Company's shareholders. This authority will include the authority to
prevent or limit the granting of additional Restricted Stock under the
2021 Plan. All records maintained pursuant to this condition will be
subject to examination by the Commission and its staff.
For the Commission, by the Division of Investment Management,
under delegated authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13664 Filed 6-25-21; 8:45 am]
BILLING CODE 8011-01-P
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