PRE 14A 1 d82746dpre14a.htm PRE 14A PRE 14A
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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 Filed by the Registrant    x   Filed by a Party other than the Registrant    ¨

Check the appropriate box:

 

 x  

Preliminary Proxy Statement

 ¨  

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 ¨  

Definitive Proxy Statement

 ¨  

Definitive Additional Materials

 ¨  

Soliciting Material Pursuant to §240.14a-12

American Capital, Ltd.

(Name of Registrant as Specified in its Charter)

Payment of Filing Fee (Check the appropriate box):

 

 x       No fee required
 ¨   Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
  (1)  

  Title of each class of securities to which transaction applies:

 

  (2)  

  Aggregate number of securities to which transaction applies:

 

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

  (4)  

  Proposed maximum aggregate value of transaction:

 

  (5)  

  Total fee paid:

 

 ¨   Fee paid previously with preliminary materials
 ¨   Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)  

  Amount Previously Paid:

 

  (2)  

  Form, Schedule or Registration Statement No.:

 

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  Filing Party:

 

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  Date Filed:

 


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LOGO

 

AMERICAN CAPITAL, LTD.

NOTICE OF SPECIAL MEETING OF

STOCKHOLDERS TO BE HELD ON                     , 20

 

DATE AND TIME:

                    , 20    ;        :            .m.

 

PLACE:

Hyatt Regency Bethesda, 7400 Wisconsin Avenue, Bethesda, Maryland 20814

 

ITEMS OF BUSINESS:

To approve the following matters and other actions generally related to American Capital Ltd.’s strategy to focus primarily on the growth of our asset management business by transferring most of our existing investment assets to American Capital Income, Ltd. (“ACAP”) and distributing as a special dividend, all of the outstanding shares of common stock of ACAP to our stockholders:

 

  1)   To approve the withdrawal of our election to be regulated as a business development company under the Investment Company Act of 1940 following the spin-off of American Capital Income, Ltd.;

 

  2)   To approve the management agreement with American Capital Income, Ltd.;

 

  3)   To approve an amendment to our certificate of incorporation to effect a reverse stock split, subject to certain limitations;

 

  4)   To ratify the appointment of the directors of American Capital Income, Ltd.;

 

  5)   To approve the adoption of our 2016 equity incentive plan;

 

  6)   To authorize us, under limited circumstances, to sell shares of common stock below the net asset value per share;

 

  7)   To authorize the chairman of the Special Meeting to adjourn the Special Meeting if necessary or appropriate, in the discretion of the chairman, to obtain a quorum or to permit further solicitation of proxies if there are not sufficient votes at the time of the Special Meeting to approve any of the foregoing matters; and

 

  8)   To transact such other business as may properly come before the meeting or any adjournments or postponements thereof.

 

WHO CAN VOTE:

You are entitled to notice of, and to vote at, the Special Meeting and any adjournments or postponements of the meeting if you were a stockholder of record at the close of business on                     , 20    .

 

VOTING:

Your vote is important and we urge you to vote. You may vote in person at the Special Meeting, or you may cause your shares to be voted by submitting a proxy by telephone, through the internet or by mailing your completed proxy card (or voting instruction form, if you hold your shares through a broker, bank or other nominee). See Question 9 of “Questions and Answers About the Special Meeting and Voting” in the accompanying Proxy Statement for additional information regarding voting.

 

MEETING ADMISSION:

If you wish to attend the Special Meeting in person, we request that you register in advance with our Investor Relations department by following the instructions set forth in response to Question 17 of “Questions and Answers About the Special Meeting and Voting” in the accompanying Proxy Statement.


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DATE OF DISTRIBUTION:

This notice, the Proxy Statement and the accompanying proxy card are first being sent to our common stockholders on or about                     , 20        .

 

      By Order of the Board of Directors,
      Samuel A. Flax
      Executive Vice President, General Counsel,
      Chief Compliance Officer and Secretary

                    , 20        

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON                     , 20    

This Proxy Statement is available free of charge on the internet at http://www.ACAS.com/specialproxymaterials.


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PROXY STATEMENT

This Proxy Statement contains information about the Special Meeting of Stockholders (the “Special Meeting”) of American Capital, Ltd. (“American Capital,” “ACAS,” the “Company,” “we,” “our” and “us”).

Forward-Looking Statements

All statements contained herein that are not historical facts including, but not limited to, statements regarding anticipated activity are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: (i) changes in the economic conditions in which we operate negatively impacting our financial resources; (ii) certain of our competitors have greater financial resources than us, reducing the number of suitable investment opportunities offered to us or reducing the yield necessary to consummate the investment; (iii) there is uncertainty regarding the fair value of our privately-held securities that require our good faith estimate of fair value, and a change in estimate could affect our net asset value (“NAV”); (iv) our and our funds’ investments in securities of privately-held companies may be illiquid, which could affect our ability to realize the investment; (v) we use external financing to fund our business, which may not always be available; (vi) our ability to retain key management personnel; (vii) an economic downturn or recession could impair our and our funds’ portfolio companies and investments and therefore harm our operating results; (viii) our borrowing arrangements impose certain restrictions; (ix) changes in interest rates may affect our cost of capital and net operating income (“NOI”); (x) the Spin-Off discussed herein may not be completed, and even if it is completed, may not have the benefits we anticipate; (xi) our common stock price may be volatile; and (xii) general business and economic conditions and other risk factors described in our reports filed from time to time with the Securities and Exchange Commission (“SEC”). We caution you that forward-looking statements are not guarantees. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time unless otherwise required by law. You are advised to consult any additional disclosures that we may make directly to you or through reports that we file with the SEC in the future, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this Proxy Statement or in periodic reports we file under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act.

 

AMERICAN CAPITAL, LTD. – Proxy Statement    i


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Questions and Answers About the Special Meeting and Voting      1   
Background      6   

The Spin-Off

     6   

Pre- and Post-Spin-Off Structures

     6   

Description of the Companies Post Spin-Off

     8   

Reasons for the Spin-Off

     13   

American Capital, Ltd. Selected Historical Consolidated Financial Information

     15   

American Capital, Ltd. Unaudited Pro Forma Condensed Consolidated Financial Information

     17   

Risk Factors

     24   

The Special Meeting

     30   
Proposal 1: Approval of the Withdrawal of our Election to be Regulated as a Business Development Company under the Investment Company Act of 1940      31   

Introduction

     31   

Reasons for Proposed Withdrawal of BDC Election

     31   

Effect on Stockholders

     33   

Effect on Financial Statements and Tax Status

     34   

Anticipated Timeline

     34   

Vote Required

     35   

Conclusion and Recommendation

     35   
Proposal 2: Approval of the Management Agreement with American Capital Income, Ltd.      36   

General

     36   

Parties to the Management Agreement

     36   

Summary of the Management Agreement

     37   

Evaluation by ACAP’s Board of Directors

     39   

Vote Required

     40   

Conclusion and Recommendation

     40   
Proposal 3: Approval of an Amendment to our Certificate of Incorporation to Effect a Reverse Stock Split, Subject to Certain Limitations      41   

Introduction

     41   

Reasons for a Reverse Stock Split

     41   

Material Effects of a Reverse Stock Split

     42   

Procedure for Effecting a Reverse Stock Split and Exchange of Stock Certificates

     44   

Interests of Directors and Executive Officers

     44   

Reservation of Right to Not Implement Reverse Stock Split

     45   

Vote Required

     45   

Conclusion and Recommendation

     45   
Proposal 4: Ratification of the Appointment of the Directors of American Capital Income, Ltd.      46   

General Information

     46   

Director Biographies and Qualifications

     46   

Board Leadership Structure

     46   

Corporate Governance

     47   

Committees of the Board of Directors

     47   

Board and Committee Meetings

     48   

Risk Oversight

     49   

Director Nomination Process

     49   

Board Membership Criteria

     49   

Director Compensation

     50   

Vote Required

     50   

Conclusion and Recommendation

     50   

 

ii    AMERICAN CAPITAL, LTD. – Proxy Statement


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Proposal 5: Approval of the American Capital, Ltd. 2016 Equity Incentive Plan      51   

General Information

     51   

Summary of Material Provisions of the 2016 Equity Incentive Plan

     51   

New Plan Benefits

     53   

Summary of Certain Federal Income Tax Consequences

     53   

Vote Required

     54   

Conclusion and Recommendation

     54   
Proposal 6: To Authorize the Company, under Limited Circumstances, to Sell Shares of Common Stock Below the Net Asset Value Per Share      55   

Introduction

     55   

Background

     55   

Conditions to Sales Below Net Asset Value Per Share

     57   

Employee Lock-Up Agreements

     57   

Effect of Issuing Shares Below Net Asset Value Per Share

     57   

Hypothetical Comparison of Dilution from Option Exercises Versus a Tender Offer

     58   

Vote Required

     58   

Conclusion and Recommendation

     58   
Proposal 7: To Authorize the Chairman of the Special Meeting to Adjourn the Special Meeting if Necessary or Appropriate      59   

General

     59   

Vote Required

     59   

Conclusion and Recommendation

     59   
Director Compensation      60   

Stock Ownership Guidelines

     61   

Compensation, Corporate Governance and Nominating Committee Interlocks and Insider Participation

     61   
Executive Compensation      62   

Compensation Discussion and Analysis

     62   

Executive Summary

     62   

Compensation Philosophy and Objectives

     64   

Determining Compensation

     65   

Components of NEO Compensation and their Purposes

     66   

2014 Compensation Decisions

     70   

Changes in Process in 2015

     72   

Other Compensation Policies and Practices

     74   

Conclusion

     76   

Summary Compensation Table

     77   

Grants of Plan-Based Awards in Fiscal Year 2014

     78   

Outstanding Equity Awards at Fiscal Year-End

     79   

Option Exercises and Stock Vested

     83   

Severance and Change of Control Payments

     84   
Information Regarding Company Equity Securities      88   

Security Ownership of Management and Certain Beneficial Owners

     88   

Section 16(a) Beneficial Ownership Reporting Compliance

     88   

Repurchases of Common Stock

     88   
Questions and Answers About Stockholder Communications and Proposals      89   

 

AMERICAN CAPITAL, LTD. – Proxy Statement    iii


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Financial Statements Available      91   
Other Matters      92   
Exhibit I – American Capital Income, Ltd. Preliminary Information Statement      I-1   
Exhibit II – Management Agreement with American Capital Income, Ltd.      II-1   

Exhibit III –  Form of Certificate of Amendment to the Third Amended and Restated Certificate of Incorporation of American Capital, Ltd.

  

 

III-1

  

Exhibit IV – American Capital, Ltd. 2016 Equity Incentive Plan      IV-1   

 

iv    AMERICAN CAPITAL, LTD. – Proxy Statement


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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND VOTING

 

 

QUESTIONS AND ANSWERS

ABOUT THE SPECIAL MEETING AND VOTING

 

1. WHY DID I RECEIVE THESE PROXY MATERIALS?

 

We announced on November 5, 2014, and updated the announcement on May 6, 2015, that our Board of Directors had approved a plan to transfer most of our existing investment assets to a newly-formed subsidiary, American Capital Income, Ltd. (“American Capital Income” or “ACAP”), and distribute as a special dividend, all of the outstanding shares of common stock of ACAP to our stockholders (the “Spin-Off”), for the reasons discussed in Question 4, below.

Following the Spin-Off, (a) ACAP will be a publicly-traded company and will (i) elect to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), (ii) elect to be taxed as a regulated investment company (“RIC”), as defined in Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) and (iii) distribute annually at least 90% of its taxable income as dividends to its stockholders and (b) American Capital will no longer be an investment company and will focus primarily on operating as a leading, global alternative asset manager. Thus, in connection with the Spin-Off, American Capital is proposing that its stockholders approve the withdrawal of its election to be regulated as a BDC under the 1940 Act. In addition, we are seeking your approval or ratification, as applicable, of the management agreement with ACAP, an amendment to our certificate of incorporation to effect a              for              reverse stock split of our outstanding common stock, par value $0.01 per share (the “Common Stock”), the appointment of ACAP’s directors, an equity incentive plan for our employees and directors and the issuance of shares of our Common Stock below the NAV per share, under limited circumstances, each as discussed further in this Proxy Statement.

Our Board of Directors is furnishing this Proxy Statement to you to solicit proxies on its behalf to be voted on these matters at the Special Meeting on                     at         .m., Eastern Time, at the Hyatt Regency Bethesda, 7400 Wisconsin Avenue, Bethesda, Maryland 20814. The proxies also may be voted at any adjournments or postponements of the meeting.

American Capital is not required to obtain, and it is not seeking, approval of the Spin-Off. However, the Spin-Off will not take place as contemplated in this Proxy Statement unless stockholders approve each of proposals 1, 2, 3 and 4 at the Special Meeting, in addition to certain other conditions as set forth in ACAP’s Preliminary Information Statement attached as Exhibit I to this Proxy Statement.

2. WHAT INFORMATION IS INCLUDED IN THIS PROXY STATEMENT?

 

This Proxy Statement contains important information about the Special Meeting and the proposals to be voted on at the Special Meeting. It also includes (a) a preliminary version of the ACAP Information Statement as Exhibit I, which provides additional information about ACAP and the Spin-Off, (b) pro forma financial information for American Capital after giving effect to the Spin-Off and (c) a summary of certain risks involved in holding American Capital common stock following the Spin-Off. Assuming stockholder approval of proposals 1, 2, 3 and 4 is obtained at the Special Meeting and certain other conditions to the Spin-Off are satisfied, the final version of the ACAP Information Statement will be distributed to American Capital stockholders who hold Common Stock as of the record date for the Spin-Off.

You should read this Proxy Statement and the exhibits hereto carefully and in their entirety. By submitting a proxy, the enclosed voting materials allow you to have your shares voted at the Special Meeting without attending in person.

All properly executed written proxies, and all properly completed proxies submitted by telephone, by the internet or by mail that are delivered pursuant to this solicitation will be voted at the Special Meeting in accordance with the directions given in the proxy, unless the proxy is revoked before the completion of voting at the Special Meeting.

 

3. HOW DOES ACAS PLAN TO EFECT THE SPIN-OFF?

 

American Capital plans to effect the Spin-Off through a distribution to American Capital stockholders of all of the outstanding shares of common stock of ACAP, followed by a              for              reverse stock split of American Capital Common Stock. On the planned distribution date, each American Capital stockholder will receive             share of ACAP common stock for every             shares of ACAS Common Stock held as of the record date. The outstanding shares of American Capital Common Stock will then be combined in a             for             reverse stock split so that each American Capital stockholder will own             share of American Capital Common Stock for every             shares previously owned. Fractional shares resulting from the reverse stock split will not be issued and stockholders will be paid cash in respect of such fractional interests. Thus, immediately following the two transactions, American Capital’s stockholders will effectively own             share of common stock of ACAP and             share of ACAS

 

 

AMERICAN CAPITAL, LTD. – Proxy Statement    1


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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND VOTING

 

 

Common Stock for every             shares of ACAS Common Stock held prior to the Spin-Off, and American Capital’s stockholders will own all of the outstanding shares of common stock of ACAP.

 

4. WHAT ARE THE REASONS FOR THE SPIN-OFF?

 

Our Board of Directors has determined that the Spin-Off is in the best interests of American Capital and its stockholders because it will provide the following key benefits:

 

   

With two separate public companies having distinct business models and investment characteristics, investors will have the opportunity to value each against distinct sets of peers and investment metrics. This has the potential to increase the overall valuation of the companies, thus unlocking stockholder value;

 

   

Separating the businesses should allow increased transparency for stockholders and other constituents, such as creditors and rating agencies, regarding each company’s assets, growth profile, operating performance and profitability;

 

   

Immediately after the Spin-off, only American Capital, and not ACAP will have net operating loss (“NOL”) carryforwards. As a RIC, ACAP will generally not have NOL carryforwards. Limiting the applicability of NOL carryforwards to American Capital’s asset management business should allow more efficient use of tax attributes such as NOLs;

 

   

Because ACAP will generally not have NOL carryforwards, it can be expected to have taxable income, at least 90% of which it will generally be required to distribute annually to its stockholders in accordance with Subchapter M of the Code, so long as it is a RIC;

 

   

By separating American Capital’s asset management business from its investment business, American Capital’s assets under management will now include the ACAP assets. Also, the Company should have the opportunity to expand more easily its operations and assets under management through the organic growth of assets under management and the acquisition of third-party asset management contracts and businesses; and

 

   

It will enable us and our affiliates to align better our recruiting, retention and equity-based incentive plans with the respective operating and stock price performance of us and our managed funds, such as ACAP, and provide us with additional flexibility to implement performance measurement metrics and incentive structures.

5. WHAT ITEMS WILL BE VOTED ON AT THE SPECIAL MEETING?

 

 

Proposal   Board
Recommendations
 

See

Proxy

Page

 

1)     Approval of the Withdrawal of our Election to be Regulated as a Business Development Company under the Investment Company Act of 1940

  FOR     31   

2)     Approval of the Management Agreement with American Capital Income, Ltd.

  FOR     36   

3)     Approval of an Amendment to our Certificate of Incorporation to Effect a Reverse Stock Split, Subject to Certain Limitations

  FOR     41   

4)     Ratification of the Appointment of the Directors of American Capital Income, Ltd.

  FOR     46   

5)     Approval of the American Capital, Ltd. 2016 Equity Incentive Plan

  FOR     51   

6)     Authorization, under Limited Circumstances, to Sell Shares of our Common Stock Below the Net Asset Value Per Share

  FOR     55   

7)     Approval of the Adjournment Proposal

  FOR     59   

Our Board of Directors does not intend to bring other matters before the Special Meeting except items incidental to the conduct of the meeting. However, on all other matters properly brought before the meeting, or any adjournments or postponements thereof, by our Board of Directors or others, the persons named as proxies in the accompanying proxy, or their substitutes, will vote in their discretion.

 

6. WHAT IS A PROXY?

 

It is your legal designation of another person to vote the stock you own. That other person is called a proxy. If you designate someone as your proxy in a written document, that document also is called a proxy or a proxy card. Samuel A. Flax and John R. Erickson have been designated as proxies by the Board of Directors for the Special Meeting.

 

 

2    AMERICAN CAPITAL, LTD. – Proxy Statement


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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND VOTING

 

 

7. WHAT IS THE RECORD DATE AND WHAT DOES IT MEAN?

 

The record date for the Special Meeting is             (the “record date”). The record date is established by the Board of Directors and only stockholders of record at the close of business on the record date are entitled to:

 

a. receive notice of the meeting; and
b. vote at the meeting and any adjournments or postponements of the meeting.

Each stockholder of record on the record date is entitled to one vote for each share of our Common Stock held. On the record date, there were             shares of our Common Stock issued and legally outstanding.

 

8. WHAT IS THE DIFFERENCE BETWEEN A STOCKHOLDER OF RECORD AND A STOCKHOLDER WHO HOLDS STOCK IN STREET NAME?

 

If your shares of stock are registered in your name on the books and records of our transfer agent, you are a stockholder of record. If you are a stockholder of record you may provide a proxy to vote your shares and may attend the Special Meeting in person and vote your shares at the Special Meeting.

If your shares of stock are held for you through an intermediary in the name of your broker, bank or other nominee, your shares are held in street name and you are a beneficial owner, not a stockholder of record. Shares beneficially owned through an intermediary in the name of your broker, bank or other nominee may be voted only by the record holder, so you will need to provide voting instructions to the record holder as to how your shares are to be voted at the Special Meeting. While the holders of shares in street name can attend the Special Meeting with proper identification as described below, such holders may not vote at the Special Meeting unless they have a proxy from the record holder to vote at the Special Meeting.

It is important that you vote your shares or submit a proxy if you are a stockholder of record and, if you hold shares in street name, that you provide appropriate voting instructions to your broker, bank or other nominee as discussed in the answer to Question 13 below.

9. WHAT ARE THE DIFFERENT METHODS THAT I CAN USE TO VOTE MY SHARES OF COMMON STOCK?

 

You may submit your proxy or vote your shares of our Common Stock by any of the following methods:

By Telephone or the Internet—Stockholders can have their shares voted by submitting a proxy via telephone or the internet. The telephone and internet procedures are designed to authenticate a stockholder’s identity, to allow stockholders to vote their shares and to confirm that their instructions have been properly recorded.

By Mail—A stockholder who receives a paper proxy card or voting instruction form or requests a paper proxy card or voting instruction form by telephone or internet may elect to submit a proxy by mail and should complete, sign and date the proxy card or voting instruction form and mail it in the pre-addressed envelope that accompanies the delivery of the proxy card or voting instruction form. For stockholders of record, proxy cards submitted by mail must be received by the date and time of the Special Meeting. For stockholders who hold their shares through an intermediary, such as a broker, bank or other nominee, the voting instruction form submitted by mail must be mailed by the deadline imposed by your broker, bank or other nominee for your shares to be voted.

In Person—Shares held in your name as the stockholder of record on the record date may be voted by you in person at the Special Meeting. Shares held beneficially by you in street name on the record date may be voted by you in person at the Special Meeting only if you obtain a legal proxy from the broker, bank or other nominee that holds your shares giving you the right to vote the shares and bring that proxy to the meeting.

 

10. WHO COUNTS THE VOTES?

 

We will retain an independent tabulator to receive and tabulate the proxies and independent inspectors of election to certify the results.

 

11. WHAT IF A STOCKHOLDER DOES NOT SPECIFY A CHOICE FOR A MATTER WHEN RETURNING A PROXY?

 

Stockholders should specify their voting choice for each matter on the accompanying proxy. If no specific choice is made for one or more matters, proxies that are signed and returned will be voted “FOR” each of the proposals that are not marked.

 

 

AMERICAN CAPITAL, LTD. – Proxy Statement    3


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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND VOTING

 

 

12. WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD?

 

It means that you have multiple accounts with brokers and/or our transfer agent. Please submit proxies with respect to all of these shares.

We recommend that you contact your broker and/or our transfer agent to consolidate as many accounts as possible under the same name and address. Our transfer agent is Computershare Investor Services. Computershare’s address is P.O. Box 30170 College Station, TX 77842-3170; you can reach Computershare at 1-800-733-5001 (from within the United States or Canada) or 781-575-3400 (from outside the United States or Canada).

 

13. WILL MY SHARES BE VOTED IF I DO NOT PROVIDE MY PROXY?

 

Stockholders of Record: If you are a stockholder of record (see Question 8 above), your shares of Common Stock will not be voted if you do not provide your proxy unless you vote in person at the meeting. It is important that your shares are voted in person or by proxy.

Street Name Holders: If your shares are held in street name (see Question 8 above) and you do not provide your signed and dated voting instruction form to your broker, bank or other nominee, your shares of Common Stock may not be voted by your broker, bank or other nominee because none of the proposals to be voted upon at the Special Meeting is considered “routine” under applicable rules. It is, therefore, important that you vote your shares.

 

14. ARE ABSTENTIONS AND BROKER NON-VOTES COUNTED?

 

Abstentions are not treated as votes cast and therefore will not be included in vote totals and will not affect the outcome of the vote for proposals 4, 5 and 7, but will have the same effect as a vote against proposals 1, 2, 3 and 6 at the Special Meeting. Because none of the proposals to be voted on at the Special Meeting are considered “routine” matters for which brokers, banks or other nominees may vote uninstructed shares, there will be no broker non-votes.

 

15. HOW CAN I REVOKE A PROXY?

 

The enclosed proxy is solicited on behalf of the Board of Directors and is revocable at any time prior to the voting of the proxy at the Special Meeting, by the filing of an instrument revoking it, or a duly executed proxy bearing a later date, with our Secretary, addressed to our principal executive offices at 2 Bethesda Metro Center, 14th Floor, Bethesda, Maryland 20814. If you are a holder of record, in the event that you attend the Special Meeting, you may

revoke your proxy and cast your vote personally. Simply attending the Special Meeting will not revoke a prior proxy.

 

16. WHO WILL PAY THE COST OF THIS PROXY SOLICITATION?

 

The cost of this solicitation of proxies will be paid by American Capital. In addition to the use of mail, our officers and employees may solicit proxies by telephone or facsimile. Upon request, we will reimburse brokers, dealers, banks, and trustees, or their nominees, for reasonable expenses incurred by them in forwarding our proxy materials to beneficial owners of our Common Stock. It is contemplated that additional solicitation of proxies will be made in the same manner under the engagement and direction of Georgeson Inc., 480 Washington Blvd. 26th Floor, Jersey City, NJ 07310, at an anticipated cost of $            , plus reimbursement of out-of-pocket expenses.

 

17. HOW DO I OBTAIN ADMISSION TO THE SPECIAL MEETING?

 

If you wish to attend the Special Meeting in person, we request that you register in advance with our Investor Relations department either by email at IR@AmericanCapital.com or by telephone at (301) 951-5917. Attendance at the Special Meeting will be limited to persons presenting proof of stock ownership on the record date and picture identification. If you hold shares directly in your name as the stockholder of record, proof of ownership could include a copy of your account statement or a copy of your stock certificate(s). If you hold shares through an intermediary, such as a broker, bank or other nominee, proof of stock ownership could include a proxy from your broker, bank or other nominee or a copy of your brokerage or bank account statement.

 

18. HOW MANY VOTES MUST BE PRESENT TO HOLD THE SPECIAL MEETING?

 

In order for us to conduct the Special Meeting, holders representing a majority of our outstanding shares of Common Stock entitled to vote as of         , must be present in person or by proxy at the Special Meeting. This is referred to as a quorum. Your shares are counted as present at the meeting if you attend the meeting in person or if you properly return a proxy by internet, telephone or mail.

Abstentions and shares of record held by a broker, bank or other nominee that are instructed to be voted on any matter are included in determining the number of shares present. However, because no routine discretionary matters for which broker non-votes may be submitted will be considered at the Special Meeting, broker non-votes, if any, will not be treated as present at the Special Meeting or entitled to vote and will not be included in determining whether a quorum is present.

 

 

4    AMERICAN CAPITAL, LTD. – Proxy Statement


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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND VOTING

 

 

 

19. WHAT IS THE REQUIRED VOTE FOR EACH PROPOSAL TO BE APPROVED?

 

 

Proposal    Required Vote
1) Approval of the Withdrawal of our Election to be Regulated as a Business Development Company under the Investment Company Act of 1940    Approval of the withdrawal of our election to be regulated as a BDC requires an affirmative vote of a majority of our outstanding voting securities.* Abstentions will not count as affirmative votes and will therefore count against the proposal.
2) Approval of the Management Agreement with American Capital Income, Ltd.    Approval of the Management Agreement requires an affirmative vote of a majority of our outstanding voting securities.* Abstentions will not count as affirmative votes and will therefore count against the proposal.
3) Approval of an Amendment to our Certificate of Incorporation to Effect a Reverse Stock Split, Subject to Certain Limitations    The affirmative vote by the holders of a majority of the votes of all outstanding shares of our Common Stock as of the record date is necessary for approval of this proposal. Abstentions will not count as affirmative votes and will therefore count against the proposal.
4) Ratification of the Appointment of the Directors of American Capital Income, Ltd.    The affirmative vote of a majority of the votes cast by the holders of our Common Stock present or represented and entitled to vote at the Special Meeting is required to ratify the appointment of the directors of ACAP. Abstentions will have no effect on the outcome of the proposal.
5) Approval of the American Capital, Ltd. 2016 Equity Incentive Plan    The affirmative vote by the holders of a majority of the votes cast by the holders of our Common Stock present or represented and entitled to vote at the Special Meeting is necessary for approval of this proposal. Abstentions will have no effect on the outcome of the proposal.
6) Authorization, under Limited Circumstances, to Sell Shares of our Common Stock Below the Net Asset Value per Share    The approval of this proposal requires the affirmative vote of (1) a majority of our outstanding voting securities; and (2) a majority of our outstanding voting securities that are not held by affiliated persons of us, which includes directors, officers, employees and 5% stockholders.* Abstentions will not count as affirmative votes and will therefore count against the proposal.
7) Approval of the Adjournment Proposal    The affirmative vote by the holders of a majority of the votes cast by the holders of our Common Stock present or represented and entitled to vote at the Special Meeting is necessary for approval of this proposal. Abstentions will have no effect on the outcome of the proposal.

 

* For purposes of this proposal, a “majority” of the outstanding voting securities, as defined in the 1940 Act, means the vote of (i) 67% or more of the shares of our Common Stock present at the Special Meeting, if the holders of 50% or more of our outstanding shares of Common Stock are present or represented by proxy, or (ii) more than 50% of the outstanding shares of our Common Stock, whichever is the less.

 

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BACKGROUND

Set forth below is a summary of certain information regarding the Spin-Off, including a description of American Capital and ACAP following the transaction. It may not contain all of the information that is important to you. Certain additional information regarding the Spin-Off and ACAP is set forth in the ACAP’s Preliminary Information Statement, attached hereto as Exhibit I. To obtain a more complete description of the Spin-Off and the transactions contemplated by it, you should carefully read all of the information contained herein, including Exhibit I.

The Spin-Off

We announced on November 5, 2014, and updated the announcement on May 6, 2015, that our Board of Directors had approved a plan to transfer most of our existing investment assets to ACAP, a newly-formed subsidiary, and to distribute as a special dividend all of the outstanding shares of ACAP’s common stock to the holders of American Capital’s Common Stock. ACAP will elect to be regulated as a BDC under the 1940 Act, to elect to be taxed as a RIC, as defined in Subchapter M of the Code, and to distribute annually at least 90% of its investment company taxable income to its stockholders. ACAP will be externally managed by American Capital ACAP Management, LLC (the “Manager,” or “ACAP Manager”), which is indirectly, wholly-owned by American Capital. Following the Spin-Off, ACAP will invest primarily in U.S. companies in the middle-market (which we consider to be companies with annual sales between $10 million and $750 million) and large-market (which we consider to be companies with annual EBITDA greater than $50 million). American Capital will withdraw its election to be regulated as a BDC and will no longer be an investment company and will focus primarily on operating as a leading, global alternative asset manager.

American Capital plans to effect the Spin-Off through a distribution to American Capital stockholders of all of the outstanding shares of common stock of ACAP, followed by a             for             reverse stock split of American Capital Common Stock. On the planned distribution date, each American Capital stockholder will receive             share of ACAP common stock for every             shares of ACAS Common Stock held as of the record date. Immediately following the distribution, American Capital’s stockholders will own all of the outstanding shares of common stock of ACAP. After the Spin-Off, ACAP will be a separate, publicly-traded company (NASDAQ: ACAP) and will be externally managed by ACAP Manager. In connection with the Spin-Off, American Capital expects to effect a             for             reverse stock split so that each American Capital stockholder will own             share of ACAS Common Stock for every             shares previously owned. Thus, immediately following the Spin-Off and the reverse stock split, American Capital’s stockholders will own             share of common stock of ACAP and             share of common stock of ACAS for every             shares of ACAS Common Stock held prior to the Spin-Off, and American Capital’s stockholders will own all of the outstanding shares of common stock of ACAP. No fractional shares of American Capital or ACAP common stock will be issued in the reverse stock split or the special dividend. Holders of American Capital common stock that would otherwise be entitled to fractional shares as a result of the reverse stock split or the distribution will receive the cash value thereof, which cash payment will generally be taxable.

Pre- and Post-Spin-Off Structures

The Spin-Off is structured as a tax-free spin-off for American Capital stockholders. Our Board expects to provide final approval of the Spin-Off following the receipt of (1) a private letter ruling from the Internal Revenue Service confirming that certain discrete substantive items are consistent with tax-free spin-off treatment, (2) an opinion from our outside tax adviser concluding that the transaction as a whole should be treated as a tax free spin-off to American Capital and our stockholders and (3) the satisfaction of other conditions set forth in ACAP’s Preliminary Information Statement attached hereto as Exhibit I. There can be no assurances that any such conditions will be satisfied.

Prior to the Spin-Off, American Capital plans to transfer certain investment assets listed under “Portfolio Companies” in ACAP’s Preliminary Information Statement attached hereto as Exhibit I, $         in outstanding borrowings, certain other liabilities and $         in cash and cash equivalents to one or more wholly-owned subsidiaries of American Capital. Immediately prior to the Spin-Off, such subsidiaries and ACAS Funding I, LLC and ACAS Funding II, LLC, which are wholly-owned financing subsidiaries of American Capital that invest in leveraged loans, will be contributed by American Capital to ACAP. ACAS Funding I, LLC is the borrower under a $1.25 billion secured revolving credit facility (the “$1.25 Billion Revolving Credit Facility”) and ACAS Funding II, LLC is the borrower under a $500 million revolving credit facility (the

 

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“$500 Million Revolving Credit Facility”). Under such facilities, ACAP will have the ability to borrow, prepay and reborrow loans at any time prior to the commitment termination dates of February 6, 2017 and October 30, 2016, respectively, subject to certain terms and conditions. Any outstanding balance on the $1.25 Billion Revolving Credit Facility and the $500 Million Revolving Credit Facility as of the commitment termination date is repayable on the maturity date of March 6, 2017 and October 31, 2016, respectively.

The charts below illustrate the current organizational structure of the two companies and the structure immediately before and after the Spin-Off:

 

LOGO    LOGO

 

LOGO

 

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Description of the Companies Post Spin-Off

The following discussion describes the business and operations of American Capital and ACAP as they are expected to be conducted after giving effect to the Spin-Off, assuming that certain of the proposals are approved by our stockholders. Information about American Capital’s business and operations as they are currently conducted is available in our Annual Report on Form 10-K for the year ended December 31, 2014 and our Quarterly Report on Form 10-Q for the period ended June 30, 2015 and certain other documents incorporated by reference into this Proxy Statement. See Question 5 of “Questions and Answers About Stockholder Communications and Proposals” for instructions to obtain those documents.

American Capital, Ltd.

Following the Spin-Off, American Capital, Ltd. (NASDAQ: ACAS) will focus primarily on operating as a leading, global alternative asset manager with approximately $         billion of fee earning assets under management and $         billion of total assets under management by affiliated managers, including investments in middle-market private debt and equity, leveraged finance, real estate, energy and structured products. American Capital’s asset management business will continue to be conducted through American Capital Asset Management, LLC (“ACAM”), a wholly-owned investment adviser registered under the Investment Advisers Act of 1940, as amended, and ACAM’s subsidiaries. Upon completion of the Spin-Off, American Capital expects to be managing four publicly traded permanent capital vehicles (ACAP, American Capital Senior Floating, Ltd. (NASDAQ: ACSF), American Capital Mortgage Investment Corp. (NASDAQ: MTGE) and American Capital Agency Corp. (NASDAQ: AGNC)) and 14 private funds with investments in the United States, Europe, Africa and Asia. It will also have a broad and scalable asset management platform, with approximately 90 investment professionals in eight offices in the United States, Europe and Asia. American Capital will seek to deliver industry leading performance to its stockholders by using its extensive investment and asset management experience and utilizing its capital and other resources to grow organically by increasing the size of existing funds, raising new funds to manage across a variety of asset classes, capital structures and fund strategies, and acquiring other asset management contracts or businesses.

Specifically, American Capital expects to continue to “incubate” new investment funds on its balance sheet by utilizing experienced investment and asset management teams to originate investments in particular asset classes, with the purpose of selling or contributing the assets to investment vehicles in conjunction with raising third-party capital. Consistent with past practices, American Capital may also maintain significant co-investments initially in new managed funds to align better American Capital’s interest with that of other fund investors. American Capital believes that its ability to incubate investment vehicles on its balance sheet is a significant competitive advantage to attract new investment and asset management teams and in growing its assets under management. These incubation assets will generally be held in various wholly-owned subsidiaries based on asset class, which will be consolidated by American Capital. In addition, American Capital expects to retain investment company accounting on the consolidation of the wholly-owned subsidiaries, which means that “controlled” fund incubation assets (i.e., controlled investments held in a consolidated fund incubation entity) will be accounted for at fair value in American Capital’s financial statements rather than consolidated.

American Capital’s assets under management grew significantly since 2010 driven by its ability to incubate and grow new funds. The following tables reflect assets under management and earning assets under management by business line as of June 30, 2015 and December 31, 2014, 2013, 2012, 2011 and 2010 (in millions):

 

Assets Under Management    June 30,
2015
     2014      2013      2012      2011      2010  
Publicly Traded BDCs    $ 8,365       $ 7,922       $ 6,009       $ 6,319       $ 5,961       $ 6,084   
Publicly Traded REITs      69,105         74,797         84,632         108,149         60,107         14,476   
CLO Funds      2,805         2,359         1,465         682         365         388   
Private Funds      1,199         1,344         1,104         1,650         1,673         1,697   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets Under Management (1)

   $ 81,474       $ 86,422       $ 93,210       $ 116,800       $ 68,106       $ 22,645   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Assets under management are as of the end of the period presented and include both (i) the total assets of American Capital and (ii) the total assets of the funds under management by ACAM, excluding any direct investment American Capital has in those funds.

 

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Earning Assets Under Management   June 30,
2015
    2014     2013     2012     2011     2010  
Publicly Traded BDCs   $ 8,367      $ 7,926      $ 6,009      $ 6,319      $ 5,961      $ 6,084   
Publicly Traded REITs     10,449        10,546        10,419        10,852        6,288        1,616   
CLO Funds     2,805        2,359        1,465        682        365        364   
Private Funds     1,131        1,276        710        789        882        925   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Earning Assets Under Management (2)

  $ 22,752      $ 22,107      $ 18,603      $ 18,642      $ 13,496      $ 8,989   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) Earning assets under management are as of the end of the period presented and include both (i) the total assets of American Capital and (ii) the total third-party earning assets under management by ACAM from which the associated base management fees are calculated, excluding any direct investment American Capital has in those funds.

 

 

LOGO

Competitive Strengths Post Spin-Off

American Capital believes that its track record as an asset manager with a proven capability of raising and managing publicly-traded permanent capital vehicles, as well as its demonstrated ability to incubate new fund platforms, will enable it to continue to grow its asset management business. American Capital will utilize its experienced personnel and resources to continue to manage the daily operations for its managed funds. American Capital’s corporate, investment and operating platforms are well established, allowing it to realize economies of scale and other strengths, including the following:

Time-tested Management Expertise. American Capital has a highly-experienced team of investment and asset management professionals who possess significant investment, operational and management experience in numerous industries. We believe the accumulated experience of our management team allows us to identify opportunities and deploy capital of our managed funds across a broad spectrum of potential investments fluidly in response to changes in market and economic conditions in the U.S. and abroad.

Investment and Asset Management Experience. American Capital has developed a reputation as a leading asset manager because of its strong performance record in managing $             billion in assets under management as of             for it and its managed funds making investments in the U.S., Europe, Africa and Asia. American Capital is also a diversified asset manager with multiple investment funds, both private and public, across a variety of asset classes and industries. American Capital believes that it can leverage its investment experience and asset management skills to structure and manage the investments of ACAP and its other managed funds effectively and efficiently.

 

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Capital Markets Experience. American Capital has a proven track record of accessing the public and private capital markets in the U.S. and abroad, on behalf of American Capital and its managed funds, demonstrating its experience and ability to structure and finance assets efficiently. American Capital and its managed funds have raised more than $         billion of public equity capital in more than         transactions and $         billion of private equity capital in more than         transactions over the past 18 years in the U.S. and abroad. In addition, they have raised more than $         billion in public and private debt capital over the same time. American Capital expects to continue to access a wide range of secured, unsecured and structured debt and public and private equity capital sources for its managed funds to finance their investment activities and grow their assets.

Public Company Reporting, Investment Company, REIT and CLO Experience. American Capital has extensive experience managing publicly traded companies, including investment companies and REITs, in the U.S. and abroad, as well as managing and investing in multiple CLOs. Its management team is skilled in public company investor relations, reporting and compliance with the requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as the 1940 Act and stock exchange regulations, and is skilled in complying with the requirements under the Code to obtain RIC or REIT status and to maintain the ability to be taxed as a RIC or REIT for U.S. federal income tax purposes, as well as experienced in managing European Alternative Investment Funds under the regulatory framework of the Alternative Investment Fund Managers directive. American Capital believes its existing infrastructure is a competitive advantage in recruiting investment and asset management teams to incubate new fund platforms.

Flexibility to Sponsor Additional Vehicles and Assist with Growth. American Capital expects its balance sheet scale and flexibility will aid its growth initiatives, including the further build-out of American Capital’s existing investment management strategies, accelerated growth of new vehicles and strategies and the pursuit of acquisition opportunities.

Regulatory and Compliance Matters

Our operations are subject to regulation and supervision in several jurisdictions. The level of regulation and supervision to which we are subject varies from jurisdiction to jurisdiction and is based on the type of business activity involved. The regulatory and legal requirements that apply to our activities are subject to change from time to time and may become more restrictive. The SEC, the U.S. Commodity Futures Trading Commission (“CFTC”) and various other regulatory and self-regulatory organizations have in recent years increased their regulatory activities, including regulation, examination and enforcement in respect of asset management firms. Our businesses have operated for many years within a legal framework that requires our being able to monitor and comply with a broad range of legal and regulatory developments that affect our activities. Rigorous legal and compliance analysis of our businesses and investments is important to our culture. We strive to maintain a culture of compliance through the use of policies and procedures, such as codes of conduct, compliance systems, communication of compliance guidance and employee education and training. Employees in our legal and compliance departments monitor our compliance with all of the regulatory requirements to which we are subject and manage our compliance policies and procedures. Our compliance policies and procedures address a variety of regulatory and compliance risks including, but not limited to, the handling of material non-public information, position reporting, personal securities trading, valuation of investments on a vehicle-specific basis, document retention, potential conflicts of interest and the allocation of investment opportunities in the U.S. and abroad. See also the discussion of our regulation as a BDC under “Proposal 1: Approval of the Withdrawal of our Election to be Regulated as a Business Development Company under the Investment Company Act of 1940” on page     .

Financing Strategy

Prior to the Spin-Off, American Capital plans to refinance or pay off certain of its existing indebtedness. We expect to use any additional proceeds from new indebtedness for general corporate purposes. In addition, immediately prior to the Spin-Off, American Capital will contribute ACAS Funding I, LLC and ACAS Funding II, LLC, which are wholly-owned financing subsidiaries of American Capital that invest in leveraged loans, to ACAP. ACAS Funding I, LLC is the borrower under a $1.25 billion secured revolving credit facility and ACAS Funding II, LLC is the borrower under a $500 million revolving credit facility. American Capital also plans to capitalize ACAP with certain of the assets it will own prior to the Spin-Off and to assist ACAP with obtaining appropriate term and/or revolving loan financing for its current and future assets.

Following the Spin-Off, American Capital will no longer be an investment company and subject to the asset coverage limitations under the 1940 Act. Thus, there will not be a regulatory limit on American Capital’s capacity to use leverage. American Capital’s financing objective following the Spin-Off will be to manage its capital structure effectively in order to provide sufficient capital to execute its business strategy for the benefit of its stockholders.

 

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Risk Management

Risk management includes the ability to manage assets of our managed funds in a manner that is appropriate for the specific fund strategy. American Capital maintains a comprehensive fund management process, which generally includes investment and operating guidelines for the fund manager, daily oversight, periodic management meetings and a quarterly performance review process designed to enable it to evaluate and proactively manage fund performance.

Employees

As of             , American Capital and ACAM, its wholly-owned asset management company, had             employees operating out of six offices in the U.S. and two offices outside the U.S. American Capital believes that one of its major strengths is the quality and dedication of its people.

American Capital Income, Ltd.

American Capital Income, Ltd., a newly-organized Maryland corporation, intends to operate as a non-diversified closed-end management investment company and to elect to be regulated as a BDC under the 1940 Act, to elect to be taxed as a RIC, as defined in Subchapter M of the Code, and to distribute annually at least 90% of its investment company taxable income to its stockholders.

American Capital Income’s investment objective will be to provide investors with attractive, risk-adjusted total returns over the long-term primarily through current income while also seeking to preserve its capital, by owning and managing a portfolio composed primarily of diversified investments in (a) first and second lien senior, unitranche and mezzanine debt and minority equity co-investments in middle-market and large-market private companies sponsored by private equity funds (“Sponsor Finance Investments”), (b) first and second lien senior floating rate loans to large-market U.S. based companies (“Senior Floating Rate Loans” or “SFRL”), (c) structured finance investments (“Structured Products”), including the equity tranches of collateralized loan obligation (“CLO”) securities and collateralized debt obligation securities and (d) first and second lien senior and mezzanine debt and minority and controlling equity investments in middle-market companies with attractive franchise values that have experienced periods of excess leverage, operational and/or financial underperformance or other special circumstances (“Special Situations Investments”). In addition to these assets, American Capital Income’s initial portfolio will include first and second lien senior, unitranche and mezzanine debt and controlling equity in buyouts of private companies previously sponsored by American Capital (“American Capital One Stop Buyouts®”). ACAP intends to utilize leverage (limited to no more than one-to-one debt to equity) to enhance stockholder returns, and believes that, when properly financed, its investment strategy can produce attractive risk-adjusted returns. ACAP intends to apply to have its common stock listed on The NASDAQ Global Select Market under the trading symbol “ACAP.”

Competitive Strengths Post-Spin-Off

We expect ACAP will have competitive advantages over other entities investing in sponsor finance, leveraged loan, structured finance and special situations investments in the U.S. middle-market and large-market. We expect that these advantages will assist ACAP in seeking to provide attractive risk-adjusted returns to its stockholders. ACAP’s advantages include the following characteristics:

Proven and Experienced Senior Management. ACAP’s senior management is led by Malon Wilkus, who is the Chief Executive Officer of ACAP and ACAP Manager. ACAP’s other executive officers include (a) Brian Graff, President of ACAP and ACAP Manager, (b) John R. Erickson, ACAP’s Executive Vice President, Chief Financial Officer and Assistant Secretary and Executive Vice President and Treasurer of ACAP Manager, (c) Samuel A. Flax, Executive Vice President, Chief Compliance Officer and Secretary of ACAP and ACAP Manager and (d) Gordon O’Brien, Executive Vice President of ACAP and ACAP Manager.

In addition to ACAP’s executive officers, the other members of ACAP Manager’s senior management include Ryan Brauns, Senior Vice President and Managing Director, Sponsor Finance, Mark Pelletier, Senior Vice President and Managing Director, Leveraged Finance, Myung Yi, Senior Vice President and Managing Director, Special Situations, Jeff Schumacher, Senior Vice President and Managing Director, Syndications, Thomas McHale, Senior Vice President, Finance, and Roland Cline, Senior Vice President and Managing Director. ACAP Manager’s senior management team has an average of         years

 

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of collective experience in underwriting, investing in and managing Sponsor Finance Investments, Senior Floating Rate Loans, Structured Products, Special Situations Investments and American Capital One Stop Buyouts® and has managed portfolios of these assets through various credit cycles and market disruptions. As of                     , 2015, ACAP Manager’s senior management team managed approximately $         billion of investments on behalf of American Capital and its affiliates, including $         billion of Sponsor Finance Investments, $         billion of Senior Floating Rate Loans, $         billion of Structured Products, $         billion of Special Situations Investments and $         billion of American Capital One Stop Buyouts®.

We expect the extensive experience of ACAP Manager’s senior management team in identifying and investing in middle-market and large-market U.S. companies and structured finance investments to be a competitive advantage relative to ACAP’s competitors.

Established Platform. Through the Management Agreement (defined below) with the ACAP Manager and the Administration Agreement (defined below) with a subsidiary of American Capital as administrator, ACAP will have access not only to our employees, including senior management, investment professionals and operations, compliance, legal, capital markets, accounting, treasury, tax, investor relations and information technology staffs, who are experienced in sourcing, structuring, analyzing, executing and monitoring a broad range of private investments, but also to our infrastructure, operations, business relationships and management expertise. We expect that the American Capital investment platform will provide a competitive advantage to ACAP and will assist it in delivering value to its stockholders.

Large Capital Base. We expect ACAP to have a large capital base with approximately $         billion in equity as of                     , 2015, which will permit it to underwrite and hold generally up to $         million and $         million, respectively, in a single Sponsor Finance Investment or Special Situation Investment and to invest up to $         million in a single Structured Products Investment. We expect that at the time of the Spin-Off, ACAP will be one of the largest BDCs, which will differentiate it in the marketplace and make it a more desirable and flexible capital provider, particularly since it will have the ability to syndicate and/or hold larger investments than many of its competitors. We expect that ACAP will be flexible with the types of investments it makes and the terms associated with those investments. We believe that this approach and experience will provide ACAP a competitive advantage in identifying attractive investment opportunities throughout economic and capital market cycles and across a company’s life cycle and capital structure so it can make investments consistent with its stated investment objective and preserve principal while seeking appropriate risk adjusted returns. Additionally, we believe that ACAP’s ability to provide capital at both the senior and subordinated levels of the balance sheet will provide a strong value proposition to middle-market and large-market borrowers, and that its senior debt capabilities will provide superior deal origination and relative value analysis capabilities compared to traditional “mezzanine only” lenders.

Broad Syndications Capability. The senior members who will be on ACAP administrator’s syndications team have an average of     years of collective experience, and have underwritten and distributed $         billion in first and second lien senior, unitranche and mezzanine debt and minority equity co-investments in middle-market and large-market private companies. We believe that the syndications capability provides a competitive advantage by potentially increasing net income and earnings through syndication, increasing originated deal flow flexibility, broadening market relationships and investment opportunities and allowing it to optimize its portfolio composition.

Disciplined Approach to Portfolio Management. ACAP Manager will manage ACAP’s portfolio through a well-defined underwriting and portfolio management process that will leverage the established platform of American Capital and its affiliates. We believes this will reduce the downside risk to ACAP’s stockholders and provides a scalable framework for investing in the future.

Extensive Experience Investing in Middle-Market and Large-Market U.S. Companies. We expect ACAP will benefit from American Capital’s historical focus on, and the extensive experience of ACAP Manager’s senior management team in, evaluating and investing in middle-market and large-market companies. This team has an extensive network of relationships with private equity firms, investment banks, commercial banks, financial services firms, mezzanine debt funds, trade organizations, attorneys and business and financial brokers focused on middle-market and large-market companies, which will be extremely useful in sourcing prospective portfolio company investments that have the potential to generate attractive returns. They have also developed and maintain a proprietary industry-wide database of reported middle-market and large-market transactions, which will enable ACAP to monitor the middle-market and large-market investing environment and to assess the degree to which ACAP is covering its target markets.

 

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Financing Strategy

American Capital Income’s primary sources of liquidity will be its investment portfolio, cash and cash equivalents and the available capacity under the revolving credit facilities to be transferred to ACAP prior to the Spin-Off. In addition, ACAP may seek to finance certain of its assets, subject to market conditions, through other debt arrangements, including warehouse and revolving credit facilities, term loans and other asset-backed securitizations, and the additional issuance of equity securities. ACAP’s financing alternatives will be restricted in that it may not enter into debt transactions that would cause its asset coverage ratio to fall below 200%, as defined in the 1940 Act, and its ability to issue stock is limited if it is trading below NAV per share.

Immediately following the Spin-Off, ACAP is expected to have $         million of cash and cash equivalents, $         million of restricted cash and cash equivalents, $         million of outstanding indebtedness and $         million of available capacity under new credit facilities. ACAP believes that it will generate sufficient cash flow through the receipt of interest, dividend and fee payments from its investment portfolio, as well as cash proceeds from the realization of select portfolio investments, to allow it to service its debt, pay its operating costs and expenses, fund capital to its portfolio companies and originate new investments.

Portfolio Management

Following stockholder approval of the Management Agreement, the ACAP Manager will establish an investment committee (the “Investment Committee”), consisting of at least four members of ACAP Manager’s senior management team, depending on asset class. The Investment Committee will review and generally approve all of ACAP’s investments or investment strategies. The Investment Committee intends to meet on a regular basis as frequently as it believes is required to maintain prudent oversight of ACAP’s investment activities. The Investment Committee expects to set and monitor ACAP’s investment policies and guidelines and to receive notification in the event that ACAP may operate outside of such policies or guidelines. The Investment Committee and/or ACAP’s Board of Directors may change these policies or guidelines at any time without approval from ACAP’s stockholders.

Employees

Subject to stockholder approval of the Management Agreement, each of ACAP’s and ACAP Manager’s officers will be an employee of American Capital or one of its affiliates and none of them will be required to devote his or her time to ACAP exclusively. Each of ACAP’s and ACAP Manager’s officers will have significant responsibilities to American Capital and certain of its affiliated entities or managed funds. Each of ACAP’s and ACAP Manager’s senior management team will provide services to ACAP and may provide services to other investment vehicles that have been or may be sponsored by American Capital in the future and may have similar investment strategies. As such, conflicts may arise as employees of American Capital and any such affiliates may have conflicts between their duties to ACAP and their duties to, and interest in, other funds or entities to which they provide services. Our policy is to resolve any such conflicts in good faith.

Reasons for the Spin-Off

The American Capital Board of Directors, including a majority of the directors who are not “interested persons” of American Capital, as such term is defined in the 1940 Act, has determined that the Spin-Off is in the best interests of American Capital and its stockholders, and that separating most of American Capital’s investment assets from its asset management business will provide benefits to both American Capital and ACAP that could not be achieved as a combined company, including the ability to: (a) unlock stockholder value; (b) offer greater investor choice and transparency through separate entities; (c) provide greater tax efficiency; (d) expand American Capital’s asset management business; and (e) enhance strategic alignment of compensation structures.

Unlock stockholder value. American Capital’s Board of Directors believes that, following the Spin-Off, the combined value of American Capital’s common stock and ACAP’s common stock could, over time and assuming similar market conditions, be greater than the value of American Capital’s common stock had the Spin-Off not occurred, resulting in greater long-term value to American Capital stockholders and greater flexibility for each of American Capital and ACAP to make new investments to advance their business plans. As a combined company, American Capital has no exact peers, which we believe

 

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causes the market to undervalue the combined company. With two separate public companies having distinct business models and investment characteristics, investors will have the opportunity to value each against distinct sets of peers and investment metrics. This has the potential to increase the overall valuation of the companies, thus unlocking stockholder value. The increased market value of the common stock of each company should provide additional flexibility for each company to pursue its business strategy.

Offer greater investor choice and transparency through separate entities. The Spin-Off will separate most of American Capital’s investment assets from its asset management business. American Capital’s Board of Directors believes this will increase transparency for stockholders and other constituents, such as creditors and rating agencies, regarding each company’s assets, growth profile, operating performance and profitability, facilitating the creation of a more natural and interested investor base for each company. The Spin-Off will provide investors with two individual investment options that may be more attractive to them than an investment in the combined company. The Spin-Off will allow investors to make independent decisions with respect to each of American Capital and ACAP based on, among other actors, their desired investment strategy, return profile and risk tolerance.

Provide greater tax efficiency. From the date of its initial public offering in August 1997 through October 2008, American Capital paid quarterly dividends to the holders of its common stock. Beginning with American Capital’s tax year ended September 30, 2011, American Capital’s status changed from a RIC subject to taxation under Subchapter M of the Code to a corporation subject to taxation under Subchapter C of the Code. Thus, American Capital is now subject to federal and applicable state corporate income taxes on its taxable ordinary income and capital gains and is no longer subject to the annual distribution requirements under Subchapter M of the Code. However, under Subchapter C of the Code, American Capital is able to carry forward any NOLs historically incurred to succeeding years, which it would not be able to do if it were subject to taxation as a RIC under Subchapter M of the Code. By separating American Capital’s existing NOLs from its investment assets in the Spin-Off, American Capital will have greater tax efficiency by preserving the use of its NOLs and tax attributes while allowing ACAP to immediately have taxable income that it can distribute to stockholders. Because ACAP will generally not have NOL carryforwards, it can be expected to have taxable income, at least 90% of which it will generally be required to distribute annually to its stockholders in accordance with Subchapter M of the Code, so long as it is a RIC.

Expand American Capital’s asset management business. By separating American Capital’s asset management business from its investment business, American Capital’s assets under management will now include the ACAP assets. Also, the Company should have the opportunity to expand more easily its operations and assets under management through the organic growth of assets under management and the acquisition of third-party asset management contracts and businesses. American Capital’s Board of Directors believes this is possible due to American Capital’s proposed structure being better aligned with the business and regulatory environment for asset managers coupled with the ability to retain earnings and issue multiple forms of capital to finance new and existing business opportunities.

Enhance strategic alignment of compensation structures. The Spin-Off is expected to enable American Capital and its affiliates to align better their recruiting, retention and equity-based incentive plans with the respective operating and stock price performances of American Capital and its managed funds, such as ACAP. After the Spin-Off, American Capital will have additional flexibility to implement different performance measurement metrics and incentive structures to compensate employees in accordance with American Capital’s and its managed funds’ respective strategic and financial plans.

 

14    AMERICAN CAPITAL, LTD. – Proxy Statement


Table of Contents

BACKGROUND

 

 

American Capital, Ltd. Selected Historical Consolidated Financial Information

The selected consolidated financial information as of and for the years ended December 31, 2014, 2013, 2012, 2011 and 2010 has been derived from American Capital’s consolidated financial statements which were audited by Ernst & Young LLP and with respect to the years ended December 31, 2014, 2013 and 2012 are incorporated herein. The interim selected historical consolidated financial information as of and for the six months ended June 30, 2015 and 2014 has been derived from American Capital’s unaudited consolidated financial statements, which are incorporated herein. The interim selected historical consolidated financial information, in the opinion of American Capital’s management, reflects all adjustments (consisting only of normal recurring adjustments) that are necessary to present fairly the results for such interim periods. Interim results as of and for the six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for American Capital for the year ended December 31, 2015.

The selected historical consolidated financial information presented below should be read in conjunction with the consolidated financial statements of American Capital and the accompanying notes to those financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which may be found in American Capital’s Annual Report on Form 10-K for the year ended December 31, 2014 and American Capital’s Quarterly Report on Form 10-Q for the period ended June 30, 2015, which are incorporated herein by reference. The selected historical consolidated financial information below does not include all of the revenues, expenses, expense reductions and expense reimbursements that would have impacted us had we been two separate independent companies. As a result, the selected historical consolidated financial information is not indicative of our future performance and does not reflect what our leverage, financial condition, revenue, costs and results of operations would have been had we operated as independent, publicly-traded companies during the periods presented, including changes that will occur in our operations as a result of the Spin-Off.

 

AMERICAN CAPITAL, LTD. – Proxy Statement    15


Table of Contents

BACKGROUND

 

 

AMERICAN CAPITAL, LTD.

SELECTED HISTORICAL FINANCIAL INFORMATION

(dollars in millions)

 

    Six Months Ended
June 30,
    Year Ended December 31,  
    2015     2014     2014     2013     2012     2011     2010  
    (unaudited)                                
Total operating revenue   $ 322      $ 184      $ 471      $ 487      $ 646      $ 591      $ 600   
Total operating expenses     147        127        288        255        263        288        396   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net operating income before income taxes     175        57        183        232        383        303        204   
Tax (provision) benefit (1)     (58     (26     (66     (76     14        145          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net operating income (“NOI”)     117        31        117        156        397        448        204   
Loss on extinguishment of debt, net of tax                                 (3              
Net realized (loss) gain, net of tax (1)     (436     14        152        (55     (270     (310     (576
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net realized (loss) earnings     (319     45        269        101        124        138        (372
Net unrealized appreciation, net of tax (1)     396        237        165        83        1,012        836        1,370   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations (“Net earnings”)

  $ 77      $ 282      $ 434      $ 184      $ 1,136      $ 974      $ 998   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Per share data:              

NOI:

             

Basic

  $ 0.43      $ 0.12      $ 0.44      $ 0.53      $ 1.24      $ 1.30      $ 0.63   

Diluted

  $ 0.41      $ 0.11      $ 0.42      $ 0.51      $ 1.20      $ 1.26      $ 0.62   

Net earnings:

             

Basic

  $ 0.28      $ 1.05      $ 1.62      $ 0.63      $ 3.55      $ 2.83      $ 3.06   

Diluted

  $ 0.27      $ 1.00      $ 1.55      $ 0.61      $ 3.44      $ 2.74      $ 3.02   
Balance sheet data:              

Total assets

  $ 8,085      $ 6,394      $ 7,640      $ 6,009      $ 6,319      $ 5,961      $ 6,084   

Total debt

  $ 2,107      $ 791      $ 1,703      $ 791      $ 775      $ 1,251      $ 2,259   

Total shareholders’ equity

  $ 5,456      $ 5,305      $ 5,472      $ 5,126      $ 5,429      $ 4,563      $ 3,668   

NAV per share

  $ 20.35      $ 20.12      $ 20.50      $ 18.97      $ 17.84      $ 13.87      $ 10.71   
Other data (unaudited):              

Number of portfolio companies at period end

    439        267        402        132        139        152        160   

New investments (2)

  $ 1,928      $ 1,134      $ 3,610      $ 1,107      $ 719      $ 317      $ 234   

Realizations (3)

  $ 819      $ 850      $ 2,765      $ 1,208      $ 1,498      $ 1,066      $ 1,293   

Weighted average effective interest rate on debt investments, excluding SFRLs, at period end (4)

    8.8     9.3     8.2     10.0     11.4     10.7     10.2

Weighted average effective interest rate on debt investments at period end (4)

    6.4     7.8     6.6     10.0     11.4     10.7     10.2

LTM NOI before income taxes return on average shareholders’ equity (5)

    5.6     2.9     3.5     4.3     7.4     7.2     6.9

LTM NOI return on average shareholders’ equity (5)

    3.7     1.7     2.2     2.9     7.7     10.7     6.8

LTM net earnings return on average shareholders’ equity (5)

    4.2     1.9     8.2     3.4     22.1     23.3     33.5

Assets under management (6)

  $ 81,474      $ 82,904      $ 86,422      $ 93,210      $ 116,800      $ 68,106      $ 22,645   

Earning assets under management (7)

  $ 22,752      $ 19,450      $ 21,807      $ 18,603      $ 18,642      $ 13,496      $ 8,989   

 

(1) Beginning in 2011, we were no longer taxed as a RIC under Subchapter M of the Code and instead became subject to taxation as a corporation under Subchapter C of the Code. As a result, we recorded a net deferred tax asset of $428 million in 2011 recorded as a deferred tax benefit of $145 million in NOI, $75 million in net realized (loss) gain and $208 million in net unrealized appreciation.
(2) New investments include amounts as of the investment dates that are committed.
(3) Realizations represent cash proceeds received upon the exit of investments including payment of scheduled principal amortization, debt prepayments, proceeds from loan syndications and sales, payment of accrued PIK notes, and dividends and payments associated with accreted original issue discounts (“OID”) and sale of equity and other securities.
(4) Weighted average effective interest rate on debt investments as of period end is computed as (a) annual stated interest rate or yield earned plus the net annual amortization of OID and market discount earned on accruing debt investments, divided by (b) total debt investments at amortized cost.
(5) Return represents net increase or decrease in net assets resulting from operations. Average equity is calculated based on the quarterly shareholders’ equity balances. For the 2015 and 2014 interim periods, LTM represents the twelve month period from July 1, 2014 to June 30, 2015 and July 1, 2013 to June 30, 2014, respectively.
(6) Assets under management are as of the end of the period presented and include both (i) the total assets of American Capital and (ii) the total assets of the funds under management by ACAM, excluding any direct investment American Capital has in those funds.
(7) Earning assets under management are as of the end of the period presented and include both (i) the total assets of American Capital and (ii) the total third-party earning assets under management by ACAM from which the associated base management fees are calculated, excluding any direct investment American Capital has in those funds.

 

16    AMERICAN CAPITAL, LTD. – Proxy Statement


Table of Contents

BACKGROUND

 

 

American Capital, Ltd. Unaudited Pro Forma Condensed Consolidated Financial Information

The following tables present our unaudited pro forma condensed consolidated financial statements (“Pro Forma Financial Statements”) consisting of unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2014 and the six months ended June 30, 2015, and an unaudited pro forma condensed consolidated balance sheet as of June 30, 2015. Our Pro Forma Financial Statements are derived from and should be read in conjunction with the historical consolidated financial statements of American Capital and accompanying notes incorporated herein by reference. The Pro Forma Financial Statements are based on the assumptions and adjustments described in the accompanying notes which management believes are reasonable. However, our Pro Forma Financial Statements may not necessarily reflect our financial condition and results of operations in the future or what they would have been had we been two separate entities during the periods presented, nor are they representative of our future financial condition or results of operations.

As a non-diversified closed-end investment company that has elected to be regulated as a BDC under the 1940 Act, American Capital is required to prepare financial statements in accordance with Article 6 of Regulation S-X (“Article 6”). It is also subject to the specialized accounting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 946, Financial Services-Investment Companies (“ASC 946”) and the SEC Division of Investment Management Guidance Update No. 2014-11, Investment Company Consolidation (“IM Update 2014-11”) under which it is precluded from consolidating any entity other than another investment company that acts as an extension of its investment operations and facilitates the extension of its investment strategy. As such, American Capital does not currently consolidate its wholly-owned asset management company, ACAM. Effective with the Spin-Off, American Capital will no longer be regulated by the 1940 Act and subject to the financial reporting requirements of Article 6 and instead will be subject to Article 5 of Regulation S-X (“Article 5”). Furthermore, it will no longer be subject to the specialized consolidation guidance in ASC 946 and IM Update 2014-11 but rather will be required to consolidate majority-owned and controlled subsidiaries in accordance with FASB ASC Topic No. 810, Consolidation (“ASC 810”). The Pro Forma Financial Statements include adjustments required to consolidate ACAM and to reflect the presentational change in financial statement reporting from Article 6 to Article 5.

The Pro Forma Financial Statements below include the following adjustments to give effect to the transactions contemplated by the Spin-Off:

 

   

the contribution by American Capital of most of its investment assets, cash and cash equivalents and certain liabilities to ACAP as described in the Distribution Agreement;

 

   

the consolidation of ACAM by ACAS as further described herein;

 

   

the impact of a reverse stock split by American Capital immediately following the distribution as further described herein; and

 

   

the management fees earned in accordance with the Management Agreement and the reimbursement of costs for various services described in the Administration Agreement.

The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2014 and the six months ended June 30, 2015 assume the Spin-Off and the related transactions occurred on January 1, 2014. The unaudited pro forma condensed consolidated balance sheet assumes the Spin-Off and the related transactions occurred on June 30, 2015. The pro forma adjustments are based on currently available information and assumptions we believe are reasonable, factually supportable, directly attributable to the Spin-Off, and for purposes of the pro forma condensed consolidated statements of operations, are expected to have a continuing impact on us.

Our Pro Forma Financial Statements were prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to our Pro Forma Financial Statements. The Pro Forma Financial Statements are presented for illustrative purposes only and do not purport to reflect the results we may achieve in future periods or the historical results that would have been obtained had the above transactions been completed on January 1, 2014 or June 30, 2015, as the case may be. Our Pro Forma Financial Statements also do not give effect to the potential impact of current financial conditions, any anticipated changes in leverage, revenues, operating costs or increased expense reimbursements that may result from the transactions described above, other than those related to the Management Agreement and Administration Agreement discussed above.

 

AMERICAN CAPITAL, LTD. – Proxy Statement    17


Table of Contents

BACKGROUND

 

 

AMERICAN CAPITAL, LTD.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

As of June 30, 2015

(dollars in millions)

 

    ACAS
Historical
    ACAP
Spin-Off
Adjustments
(Note 1)
    ACAM
Consolidation

Adjustments
(Note 2)
    Other
Pro Forma
Adjustments
    Notes     Reclassifications     Notes     ACAS
Pro Forma
 
ASSETS                
Investments at fair value   $ 7,260      $ (5,832   $ (1,134   $        $ (39     (4 )    $ 255   
Fund incubation assets                                   39        (4 )      39   
Cash and cash equivalents     274        (247     42        (66     (5 )               3   

Restricted cash and cash equivalents

    78        (57     16                          37   

Management and incentive fee receivable

                  105                          105   
Interest and dividend receivable     50        (17     (32                       1   
Deferred tax asset, net     264                      209        (3 )               473   
Other assets     159        (85     59                          133   

Assets of consolidated CLO entities

                  3,501                          3,501   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total assets

  $ 8,085      $ (6,238   $ 2,557      $ 143        $        $ 4,547   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

               
Debt   $ 2,107      $ (2,107   $      $        $        $   
Trade date settlement liability     402        (401                              1   
Other liabilities     120        (39     45                          126   

Non-recourse liabilities of consolidated CLO entities:

               

Senior and subordinated note obligations, at fair value

                  2,963                          2,963   

Accrued interest

                  16                          16   

Unsettled trade obligations and other liabilities

                  307                          307   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total liabilities

    2,629        (2,547     3,331                          3,413   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 
Total shareholders’ equity     5,456        (3,691     (774     143        (3 )(5)               1,134   
Non-controlling interests                   28                          28   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total American Capital shareholders’ equity

    5,456        (3,691     (802     143                   1,106   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total liabilities and shareholders’ equity

  $ 8,085      $ (6,238   $ 2,557      $ 143        $        $ 4,547   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

See accompanying notes to the American Capital, Ltd. Unaudited Pro Forma Condensed Consolidated Financial Statements.

 

18    AMERICAN CAPITAL, LTD. – Proxy Statement


Table of Contents

BACKGROUND

 

 

AMERICAN CAPITAL, LTD.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

Year Ended December 31, 2014

(dollars in millions)

 

    ACAS
Historical
    ACAP
Spin-Off
Adjustments
(Note 1)
    ACAM
Consolidation

Adjustments
(Note 2)
    Other
Pro Forma
Adjustments
    Notes     Reclassifications     Notes     ACAS
Pro  Forma
    Notes  
OPERATING REVENUE                  
Interest and dividend income   $ 413      $ (266   $ (92   $        $ (54     (4 )(9)    $ 1     

Interest and dividend income–Fund incubation assets

                                  43        (4 )(9)      43     
Fee income     58        (23     (20              (15     (9         
Management fee income                   151        98        (6              249     
Incentive fee income                   37                          37     
Expense reimbursements                   11        32        (7              43     

Interest and other investment income on consolidated CLO entities

                  92                          92     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Total operating revenue

    471        (289     179        130          (26       465     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
OPERATING EXPENSES                  
Interest     54        (54                                  
Salaries and benefits     112               67                 (8     (8     171        (11 ) 
Stock-based compensation     56               101                 (11     (8     146        (11 ) 
General and administrative     66        19        16        (1     (10     (5     (8     95     
Severance and restructuring costs                                   24        (8     24     

Interest and other expense on consolidated CLO entities

                  61                          61     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Total operating expenses

    288        (35     245        (1                497     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

NET OPERATING INCOME (LOSS) BEFORE INCOME TAXES

    183        (254     (66     131          (26       (32  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
Tax (provision) benefit     (66     101        26        (52     (3     (9     (3         
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
NET OPERATING INCOME (LOSS)     117        (153     (40     79          (35       (32  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
OTHER INCOME (EXPENSE)                  

Total net realized and unrealized gain (loss), net of taxes

    317        (145     (185     35        (3     (98     (3     (76  
Other non-operating income                                   26        (9     26     

Net realized and unrealized gains on consolidated CLO entities

                  11                          11     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

NET INCOME (LOSS) BEFORE INCOME TAXES

    434        (298     (214     114          (107       (71  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
Tax benefit                                   107        (3     107     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
NET INCOME (LOSS)   $ 434      $ (298   $ (214   $ 114        $        $ 36     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
Non-controlling interests                   13                          13     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

NET INCOME (LOSS) ATTRIBUTABLE TO AMERICAN CAPITAL

  $ 434      $ (298   $ (227   $ 114        $        $ 23        (13
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
NET INCOME PER COMMON SHARE                  
Basic   $ 1.62                  $   0.26        (12
Diluted   $ 1.55                  $ 0.25        (12
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING             
Basic     268.2                    89.4        (12
Diluted     280.7                    93.6        (12

See accompanying notes to the American Capital, Ltd. Unaudited Pro Forma Condensed Consolidated Financial Statements.

 

AMERICAN CAPITAL, LTD. – Proxy Statement    19


Table of Contents

BACKGROUND

 

 

AMERICAN CAPITAL, LTD.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

Six Months Ended June 30, 2015

(dollars in millions)

 

    ACAS
Historical
    ACAP
Spin-Off
Adjustments
(Note 1)
    ACAM
Consolidation
Adjustments
(Note 2)
    Other
Pro Forma
Adjustments
    Notes     Reclassifications     Notes     ACAS
Pro  Forma
    Notes  
OPERATING REVENUE                  
Interest and dividend income   $ 289      $ (221   $ (56   $        $ (10     (4 )(9)    $ 2     

Interest and dividend income - Fund incubation assets

                                  6        (4 )(9)      6     
Fee income     33        (11     (13              (9     (9         
Management fee income                   74        53        (6              127     
Incentive fee income                   14                          14     
Expense reimbursements                   5        16        (7              21     

Interest and other investment income on consolidated CLO entities

                  69                          69     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Total operating revenue

    322        (232     93        69          (13       239     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
OPERATING EXPENSES                  
Interest     37        (37                                  
Salaries and benefits     57               39                 (6     (8     90        (11
Stock-based compensation     15               7                 (4     (8     18        (11
General and administrative     38        (1     9        (1     (10              45     
Severance and restructuring costs                                   10        (8     10     

Interest and other expense on consolidated CLO entities

                  45                          45     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Total operating expenses

    147        (38     100        (1                208     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

NET OPERATING INCOME (LOSS) BEFORE INCOME TAXES

    175        (194     (7     70          (13       31     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
Tax (provision) benefit     (58     75        3        (27     (3     7        (3         
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
NET OPERATING INCOME (LOSS)     117        (119     (4     43          (6       31     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
OTHER INCOME (EXPENSE)                  

Total net realized and unrealized (loss) gain, net of taxes

    (40     22        6               (3     41        (3     29     
Other non-operating income                                   13        (9     13     

Net realized and unrealized gains on consolidated CLO entities

                  5                          5     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

NET INCOME (LOSS) BEFORE INCOME TAXES

    77        (97     7        43          48          78     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
Tax provision                                   (48     (3     (48  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
NET INCOME (LOSS)   $ 77        (97   $ 7      $ 43        $        $ 30     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
Non-controlling interests                   8                          8     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

NET INCOME (LOSS) ATTRIBUTABLE TO AMERICAN CAPITAL

  $ 77      $ (97   $ (1   $ 43        $        $ 22        (13
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   
NET INCOME PER COMMON SHARE                  
Basic   $ 0.28                  $   0.24        (12
Diluted   $ 0.27                  $ 0.23        (12
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING               
Basic     271.8                    90.6        (12
Diluted     283.2                    94.4        (12

See accompanying notes to the American Capital, Ltd. Unaudited Pro Forma Condensed Consolidated Financial Statements.

 

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NOTES TO THE AMERICAN CAPITAL, LTD. UNAUDITED PRO FORMA

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1) Represents adjustments to reflect the transfer by American Capital to ACAP of most of its investment assets, cash and cash equivalents and liabilities associated with the investment assets, as described in the Distribution Agreement. The Spin-Off is assumed to have occurred as of January 1, 2014 for the purposes of the unaudited pro forma condensed consolidated statements of operations, and as of June 30, 2015, for the purposes of the unaudited pro forma condensed consolidated balance sheet.

 

     In addition, the ACAP Spin-Off adjustments reflect the consolidation of our wholly-owned subsidiary, European Capital, as of January 1, 2014 as a result of the change to the financial reporting requirements pursuant to Article 5. Therefore, the impact of our consolidation of European Capital as of October 1, 2014 is excluded from the unaudited pro forma condensed consolidated statements of operations.

 

2) Adjustments reflect the consolidation of ACAM in accordance with FASB ASC Topic 810, Consolidation (“ASC 810”) as if it occurred as of January 1, 2014, for the purposes of the unaudited pro forma condensed consolidated statements of operations and as of June 30, 2015, for the purposes of the unaudited pro forma condensed consolidated balance sheet. Adjustments include consolidation entries to eliminate intercompany revenues from ACAM to American Capital for management fee revenue and dividend income and the recognition of certain expenses that are required to be treated as compensation costs by ACAM on its consolidation with American Capital. The expenses are a reclassification on a consolidated basis and do not impact the unaudited pro forma condensed consolidated net income (loss).

 

     Adjustments include consolidation entries to eliminate intercompany revenues from ACAM to American Capital for management fee income and dividend income and the impact on ACAM of adjustments arising on consolidation to conform to the accounting and reporting treatment of certain compensation costs in the consolidated American Capital financial statements.

 

3) Represents adjustments to tax effect the pro forma adjustments at an estimated statutory rate of 40% and 39% for the year ended December 31, 2014 and the six months ended June 30, 2015, respectively. As of June 30, 2015, American Capital has a valuation allowance against a significant portion of its net capital deferred tax asset. The proposed Spin-Off does not impact our conclusion on the ability to realize the net capital deferred tax asset. Therefore, for the year ended December 31, 2014, the pro forma adjustments related to equity investments treated as capital for tax purposes were recorded net of a valuation allowance, thereby reducing the effective tax rate to zero for these transactions.

 

4) Reflects adjustments to reclassify fund incubation assets and revenues into separate financial statement reporting line items for American Capital post Spin-Off. American Capital expects to continue to “incubate” new investment funds by utilizing experienced investment and asset management teams to originate investments in particular asset classes, and then sell or contribute the assets to investment vehicles in conjunction with raising third-party capital. These incubation assets will be held in a wholly-owned subsidiary that will be considered an investment company for accounting purposes in accordance with FASB ASC Topic No. 946, Financial Services—Investment Companies, as amended (“ASC 946”). As such, these wholly-owned fund incubation investment companies will be consolidated post Spin-Off with American Capital retaining investment company accounting for the fund incubation investments held by these companies in accordance with ASC 946. Therefore, “controlled” fund incubation assets will be accounted for at fair value on American Capital’s balance sheet rather than consolidated in accordance with ASC 810.

 

5) Reflects an adjustment to cash and cash equivalents to reflect the transfer of approximately 90%, or $38 million, of ACAM’s cash and cash equivalents as of June 30, 2015 as well as the payment of $28 million in estimated fees on behalf of ACAP associated with the proposed debt refinancing and paydowns.

 

6) Reflects adjustments to management fee income of $98 million and $53 million for the year ended December 31, 2014 and the six months ended June 30, 2015, respectively, pursuant to the management agreement with ACAP, the terms of which are described in Exhibit II—Management Agreement with American Capital Income, Ltd. in this Proxy Statement. Assumes the transfer by American Capital to ACAP of most of its investment assets, cash and cash equivalents and certain liabilities has occurred as of June 30, 2015.

 

7)

Reflects adjustments to expense reimbursements of $32 million and $16 million for the year ended December 31, 2014 and the six months ended June 30, 2015, respectively, pursuant to the Administration Agreement with ACAP, the terms of which are described in Exhibit I—American Capital Income, Ltd. Preliminary Information Statement in this Proxy Statement. The adjustments to expense reimbursements are based on an estimate of employees of American Capital and

 

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  its affiliates that would have been required to provide non-investment advisory services to ACAP as an externally managed, publicly-traded BDC during the periods presented. The operating expenses (employee compensation costs and general and administrative expenses) associated with these employees were allocated using a variety of allocation methodologies such as employee time surveys, assets under management and allocated employee headcount.

 

8) Reflects an adjustment to reclassify to a separate line item in our unaudited pro forma condensed consolidated statements of operations non-recurring severance and restructuring costs of $24 million and $10 million for the year ended December 31, 2014 and the six months ended June 30, 2015, respectively. Due to changes in the composition of our investment portfolio and market conditions, we conducted strategic reviews of our business in 2014 and 2015, which resulted in a workforce reduction of approximately 13% of our employees and the closing of one of our offices as well as the elimination of certain office functions.

 

9) Reflects reclassification adjustments of certain operating income to non-operating income as a result of the change in financial statements presented in accordance with Article 6 prior to the Spin-Off to financial statements presented in accordance with Article 5 after the Spin-Off.

 

10) Reflects adjustments to general and administrative expense of $1 million for the year ended December 31, 2014 and the six months ended June 30, 2015 representing the elimination of the advisory, legal and accounting expenses incurred by American Capital in connection with the Spin-Off, which are not expected to have a continuing impact on results of operations.

 

11) Included in the salaries and benefits and stock-based compensation expense line items are approximately $21 million and $9 million of unreimbursed compensation costs related to our FACT, Operations, Syndications and Legal teams for the year ended December 31, 2014 and the six months ended June 30, 2015, respectively, that we generally consider to be variable in nature. We expect to receive future revenues from certain ACAP portfolio companies to partially offset these variable expenses. These revenues are not included as pro forma adjustments as they are not factually supportable as required by the pro forma guidance provided in Article 11 of Regulation S-X.

 

12) The number of ACAS shares used to compute basic and diluted earnings per share for the year ended December 31, 2014 and the six months ended June 30, 2015 is based on the historical weighted average shares of common stock outstanding for the respective periods adjusted assuming a three for one reverse stock split by American Capital immediately following the Spin-Off so that each ACAS stockholder will own one share of ACAS Common Stock for every three shares previously owned.

 

13) Pro Forma Non-GAAP Financial Measure:

 

     We believe that economic net income (“ENI”) provides investors and management with a meaningful indicator of operating performance. Management also uses ENI, among other measures, to evaluate profitability. We believe that ENI is useful because it adjusts net income (loss) attributable to American Capital for a variety of non-cash, one-time and certain non-recurring items.

 

     We calculate ENI by subtracting from or adding to net income (loss) attributable to American Capital the following items: non-cash stock-based compensation, depreciation and amortization, non-cash income tax provision (benefit) and transaction and other costs. In future periods, such adjustments may include other one-time events pursuant to changes in U.S. GAAP and certain other non-recurring items.

 

     ENI should not be considered as an alternative to net income (loss) attributable to American Capital, determined in accordance with U.S. GAAP, as an indicator of operating performance. In addition, our methodology for calculating ENI may differ from the methodologies used by other comparable companies when calculating the same or similar supplemental financial measures and may not be comparable with these companies.

 

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     The following table presents a reconciliation of pro forma ENI to net income attributable to American Capital for the year ended December 31, 2014 and the six months ended June 30, 2015 (dollars in millions):

 

  

 

 

 
     Year Ended
December 31, 2014
    Six Months Ended
June 30, 2015
 
Pro forma net income attributable to American Capital    $ 23      $ 22   

Adjustments:

    

Non-cash stock-based compensation

     66        18   

Non-cash income tax (benefit) provision

     (107     48   

Net realized and unrealized loss (gain), net of taxes

     76        (29

Depreciation and amortization, net

     16        7   

Severance and restructuring costs

     24        10   
  

 

 

   

 

 

 

Pro forma economic net income

   $ 98      $ 76   
  

 

 

   

 

 

 

 

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Risk Factors

Following the Spin-Off, American Capital and ACAP will be subject to numerous risks and uncertainties, including the risk factors set forth below. Our stockholders should carefully consider the risks described below, together with the risks and all of the other information included in this Proxy Statement, including ACAP’s Preliminary Information Statement attached hereto as Exhibit I, in evaluating American Capital, ACAP and their common stock. If any of these risks actually occur, the business, financial results, financial condition and stock price of American Capital and/or ACAP could be materially adversely affected.

Relating to American Capital’s Business

The asset management business is highly competitive

The asset management business is highly competitive, driven by a variety of factors including asset performance, the quality of services provided to our managed funds, brand recognition and business reputation. A number of factors serve to increase our competitive risks:

 

   

other asset managers may have greater financial, technical, marketing and other resources and more personnel than we do;

 

   

our managed funds may not perform as well as the funds of other asset managers;

 

   

several other asset managers and their clients have significant amounts of capital and many of them have similar management objectives to ours, which may create additional competition for management opportunities;

 

   

some of these other asset managers’ clients may have a lower cost of capital and access to funding sources that are not available to our managed funds, which may create competitive disadvantages for us with respect to funding opportunities;

 

   

some of these other asset managers’ clients may have higher risk tolerance, different risk assessment or a lower return threshold, which could allow them to facilitate the acquisition by their clients and management of a wider variety of assets and allow them to consider a broader range of investments and to advise their clients to bid more aggressively for investment opportunities on which we would advise our managed funds to bid;

 

   

there are relatively few barriers to entry impeding new asset management firms and the successful efforts of new entrants into the asset management business is expected to continue to result in increased competition;

 

   

some other asset managers may have better expertise or be regarded by potential clients as having better expertise with regard to specific assets;

 

   

other asset managers may have more scalable platforms and may operate more efficiently than us;

 

   

other asset managers may have better brand recognition than we do and there is no assurance that we will maintain a positive brand in the future; and

 

   

other industry participants may from time to time seek to recruit members of our management team and other employees away from us.

Our inability to compete effectively in these and other areas may have an adverse effect on our business, results of operations and financial condition.

The termination of any of our management agreements with our managed funds could have a material adverse effect on our business, results of operations and financial condition

The agreements under which we provide management and other services to our public and private managed funds, including our management agreement with ACAP, may generally be terminated by each fund with or without cause upon advance notice. There can be no assurance that these agreements will not expire or be terminated. Any such termination could have a material adverse effect on our business, results of operations, financial condition and prospects.

In particular, the termination of our management agreement with American Capital Agency Corp. (NASDAQ: AGNC), could be materially adverse to us post Spin-Off, given its size. AGNC is a mortgage real estate investment trust that invests

 

24    AMERICAN CAPITAL, LTD. – Proxy Statement


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primarily in agency mortgage-backed securities. As of June 30, 2015, AGNC’s investment portfolio and stockholders’ equity was $59.2 billion and $8.7 billion, respectively. We receive a management fee for managing AGNC, which is payable monthly in arrears, in an amount equal to one-twelfth of 1.25% of AGNC’s month-end stockholders’ equity, adjusted to exclude the effect of any unrealized gains or losses included in either retained earnings or accumulated other comprehensive income, each as computed in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The management agreement may only be terminated by either us or AGNC without cause, as defined in the management agreement, after the completion of the current one-year renewal term, which ends on May 20, 2016, or the expiration of any automatic subsequent renewal term, provided that either party provides 180-days prior written notice of non-renewal of the management agreement. If AGNC were not to renew the management agreement without cause, AGNC must pay a termination fee on the last day of the applicable term, equal to three times the average annual management fee earned by AGNC’s Manager during the prior 24-month period immediately preceding the most recently completed month prior to the effective date of termination.

We are dependent upon our key management personnel for our future success

We are dependent on the diligence, expertise and skill of our senior management and other members of management for raising capital and the selection, structuring, monitoring of our funds and their underlying portfolio companies. In addition, we believe that their relationships with our investors and with members of the business community on whom our funds depend for investment opportunities and financing are each critical elements in operating and expanding our business. We believe our performance is correlated to the performance of these individuals. Thus, our future success depends to a significant extent on the continued service of our senior management and other members of management. Our failure to raise additional capital to enhance the growth of our business, or our failure to provide appropriate opportunities for or to compensate competitively senior management and other members of management may make it difficult to retain such individuals. If any of our senior officers were to join or form a competitor, some of our investors could choose to invest with that competitor rather than in our funds. The departure of certain executive officers or key employees could materially adversely affect our ability to implement our business strategy. We do not maintain “key man” life insurance on any of our officers or employees, which could provide us with proceeds in the event of their death or disability.

Each of our members of senior management has an employment agreement with us, which renews on a daily basis. If a senior executive’s employment is terminated, the executive will be subject to 12 to 24 month post-employment covenants requiring him not to compete with us.

There is no guarantee that our senior executives will not resign, join our competitors or form a competing company to the extent not prohibited under the non-competition provisions in their employment agreements, or that the non-competition provisions in the employment agreements would be upheld by a court. If any of these events were to occur, our business, prospects, financial condition and results of operations could be materially adversely affected.

The organization and management of our managed funds and any future companies we may manage may create conflicts of interest

We are or will be party to management and other agreements with our managed funds. These managed funds, along with any new future funds or similar type entities we may manage, will acquire assets consistent with their investment objectives and that are allocated to them in accordance with our investment allocation policy for such asset classes, which we have or will adopt to ensure that investments are allocated fairly and appropriately among our managed funds over time. When determining the entity for which an investment opportunity would be the most suitable, the factors that our investment professionals may consider include, among other factors, the following:

 

   

investment objectives, strategy and criteria;

 

   

cash requirements;

 

   

effect of the investment on the diversification of the portfolio, including by geography, size of investment, type of investment and risk of investment;

 

   

leverage policy and the availability of financing for the investment by each entity;

 

   

anticipated cash flow of the asset to be acquired;

 

   

income tax effects of the purchase;

 

   

the size of the investment;

 

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the amount of funds available;

 

   

cost of capital;

 

   

risk return profiles;

 

   

targeted distribution rates;

 

   

anticipated future pipeline of suitable investments;

 

   

the expected holding period of the investment and the remaining term of our managed funds, if applicable; and

 

   

affiliate and/or related party considerations.

If, after consideration of the relevant factors, we determine that an investment is equally suitable for more than one of our current managed funds, the investment generally will be allocated among each of the applicable entities on a rotating basis. If, after an investment has been allocated to one managed fund, a subsequent event or development, such as delays in structuring or closing on the investment, makes it, in the opinion of our investment professionals, more appropriate for another entity to fund the investment, we may determine to place the investment with the more appropriate entity while still giving credit to the original allocation. In certain situations, we may determine to allow more than one investment vehicle to co-invest in a particular investment.

There is no assurance that this policy will remain in place during the entire period we are seeking investment opportunities on behalf of our managed funds, increasing the risk of conflicts of interest. In addition, we may manage additional investment vehicles in the future and, in connection with the creation of such investment vehicles, may revise these allocation procedures. The result of a revision to the allocation procedures may, among other things, be to increase the number of parties who have the right to participate in investment opportunities sourced by us, increasing the risk of conflicts of interest.

Additionally, our executives and other professionals may face conflicts of interest in allocating their time among our managed funds, including ACAP. Although as a company we will seek to make these decisions in a manner that we believe is fair and consistent with the governing documents of these investment vehicles, the transfer or allocation of these assets may give rise to investor dissatisfaction or litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially adversely affect our business and our ability to attract investors for future vehicles.

We may determine to grow our business through the acquisition of asset management contracts or companies, which entails substantial risk

We may determine to grow our business through the acquisition of asset management contracts or companies. Such acquisitions entail substantial risk. During our due diligence of such acquisitions, we may not uncover all relevant liabilities and we may have limited, if any, recourse against the sellers. We also may not successfully integrate the asset management contracts or companies that we acquire into our business and operations, which could have a material adverse effect on our results of operation and financial condition. Additionally, to the extent such acquisitions result in us entering new lines of business, we may become subject to new laws and regulations with which we are not familiar, or from which we are currently exempt, potentially leading to increased litigation and regulatory risk. Moreover, we may grow our business through joint ventures, in which case we will be subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to systems, control and personnel that are not under our control.

We believe Economic Net Income will provide a meaningful indicator of our operating performance; however, Economic Net Income should not be considered as an alternative to net income (loss) determined in accordance with U.S. GAAP as an indicator of operating performance

Management views “Economic Net Income” (defined below) as a performance measure that provides investors and management with a meaningful indicator of operating performance. Economic Net Income is a non-GAAP financial measure. Management uses Economic Net Income, among other measures, to evaluate profitability. We believe that Economic Net Income will be useful because it adjusts net income (loss) for a variety of non-cash items. We will calculate “Economic Net Income” by subtracting from or adding to net income (loss) attributable to American Capital: non-cash stock-based

 

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compensation, depreciation and amortization, non-cash income tax provision (benefit) and transaction and other costs. In future periods, such adjustments may include other one-time events pursuant to changes in U.S. GAAP and certain other non-recurring items.

Economic Net Income should not be considered as an alternative to net income (loss) attributable to American Capital, determined in accordance with U.S. GAAP, as an indicator of operating performance. In addition, our methodology for calculating Economic Net Income may differ from the methodologies used by other comparable companies when calculating the same or similar supplemental financial measures and may not be comparable with these companies.

Our historical financial statements and our unaudited pro forma condensed consolidated financial statements will not be representative of our results as a stand-alone asset manager

Certain of the historical financial information we have included in this Proxy Statement does not necessarily reflect what our financial position, results of operations or cash flows would have been had we operated as a separate company during the periods presented. The historical costs and expenses reflected in our Unaudited Pro Forma Condensed Consolidated Financial Statements include an allocation for certain indirect items including salaries, equity-based compensation and general and administrative expenses pro rata based on an estimate of expenses had the business been run as a stand-alone business. The allocation methods include relative head count and management’s knowledge of the respective operations of the company. The historical financial information does not necessarily indicate what our results of operations, financial position, cash flows or costs and expenses will be in the future. Our pro forma financial information set forth under “American Capital Unaudited Pro Forma Condensed Consolidated Financial Information” reflects changes that may occur in our financial position and operations as a result of the Spin-Off. However, there can be no assurances that the unaudited pro forma financial statements will reflect our results as a stand-alone asset manager.

Several of our managed funds have “key person” provisions pursuant to which the failure of our senior employees to be actively involved in the business provides investors with the right to limit our rights to manage the funds. The loss of the services of any one of such senior employees could have a material adverse effect on certain of our funds to which such key person provisions relate and in some circumstances on us

Certain of our existing funds have key person provisions relating to our senior employees, and the resignation or termination of such senior employees could result in a material adverse effect on the applicable fund or funds and on us. For instance, investors in most of our private funds may generally remove us as the manager of such funds if the relevant key persons cease to perform their functions with respect to the fund and we are unable to provide an acceptable replacement for such person.

We may not be successful in expanding our asset management business

We actively consider the opportunistic expansion of our asset management business, both geographically and into complementary new fund strategies. We may not be successful in consummating future funds that we undertake, or we may consummate them at investment levels far lower than those currently anticipated. Attempts to expand our asset management business involve a number of risks, including the diversion of management’s attention from our existing funds under management, entry into markets or businesses in which we may have limited or no experience and a potential increase in investor concentration.

A disruption in capital markets or the regulatory environment could negatively affect the ability of our funds and their portfolio companies to obtain attractive financing for their investments and may increase the cost of such financing if it is obtained, which could lead to lower-yielding investments and potentially decreasing our net income

In the event that our funds are unable to obtain sufficient access to the capital markets, they may be forced to curtail their business operations or they may not be able to pursue new business opportunities. If they are not able to renew or replace maturing borrowings, they may have to sell some or all of their assets, possibly under adverse market conditions. In addition, if the regulatory capital requirements imposed on their lenders change, they may be required to significantly increase the cost of the financing that they provide to our funds. These lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among other factors, the regulatory environment and their management of perceived risk. Furthermore, disruptive conditions in the financial industry and the impact of new legislation in response to those conditions could restrict our funds’ business operations and could adversely impact their results of operations and financial condition. Our funds may have difficulty completing otherwise profitable acquisitions or may generate profits that are lower than would otherwise be the case, either of which could lead to a decrease in the management

 

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fees earned by us. These situations may arise due to circumstances that we may be unable to control, such as inaccessibility to the credit markets, a severe decline in the value of the U.S. dollar, an economic downturn or an operational problem that affects third-parties or us, and could materially damage our business. Moreover, we are unable to predict when economic and market conditions may become more favorable or worsen. Even if such conditions improve broadly and significantly over the long term, adverse conditions in particular sectors of the financial markets could adversely impact our business.

The U.S. government’s increased focus on the regulation of the financial services industry may adversely affect our and our funds’ business

Our asset management business may be adversely affected by new or revised legislation or regulations imposed by the U.S. government, the SEC, the CFTC or other U.S. governmental regulatory bodies or self-regulatory organizations that supervise the financial markets. We may also be adversely affected by changes in the interpretation or enforcement of existing laws and rules. The Dodd–Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank, imposes significant new rules on almost every aspect of the U.S. financial services industry, including aspects of our and our funds’ business and the markets in which we and they operate, which may adversely affect our and our funds’ business. Although many of the regulations under Dodd-Frank have been adopted, we are continuing to review how significantly they will affect us. Dodd-Frank and the regulations promulgated thereunder may require us and our funds to modify our business practices to comply with new regulations, increase our and our funds’ costs of operating in the financial markets and impose restrictions on our and our funds’ business activities.

Relating to the Spin-Off

If we are deemed an investment company under the 1940 Act our business would be subject to applicable restrictions under the 1940 Act, which could make it impracticable for us to continue our business as contemplated and could have a material adverse impact on the market price of our Common Stock

Following the Spin-Off, we do not believe that we will be an “investment company” under the 1940 Act because our operations and the nature of our assets will exclude us from the definition of an investment company under the 1940 Act. We intend to conduct our operations so that we will not be deemed an investment company. We will primarily be engaged, and hold ourselves out as being primarily engaged, in the investment management business and not in the business of investing, re-investing or trading in securities. If we were to be deemed an investment company, however, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our businesses and the price of our Common Stock.

We will incur significant costs as a result of having two publicly traded companies instead of one

ACAP, as a separate publicly-traded company, will incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act, and other rules implemented by the SEC and the listing standards of the NASDAQ Stock Market. Upon filing ACAP’s second annual report, ACAP’s independent registered public accounting firm will be required to attest to the effectiveness of its internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, which will increase costs associated with ACAP’s periodic reporting requirements.

If the Spin-Off or certain internal transactions undertaken in anticipation of the Spin-Off are determined in the future to be taxable for U.S. federal income tax purposes, ACAP, its stockholders that are subject to U.S. federal income tax and/or American Capital could incur significant U.S. federal income tax liabilities

American Capital has requested a private letter ruling from the IRS regarding the U.S. federal income tax consequences of the Spin-Off to American Capital stockholders substantially to the effect that, for U.S. federal income tax purposes, (a) the business conducted by a controlled portfolio company of American Capital to be transferred to ACAP prior to the Spin-Off meets the “active trade or business” requirement in order for the Spin-Off to qualify as a tax-free reorganization under Sections 368(a)(1)(D) and 355 of the Code and (b) the receipt of ACAP common stock in the Spin-Off by certain trusts owned by American Capital and ACAM, which hold shares of American Capital common stock for grants of stock-based awards to employees, is not being retained pursuant to a plan having as one of its principal purposes the avoidance of federal tax. In addition to obtaining the private letter ruling, American Capital expects to receive an opinion from PricewaterhouseCoopers LLP that the Spin-Off should qualify as a tax-free reorganization under Sections 368(a)(1)(D) and 355 of the Code. The private letter ruling and the opinion will rely on certain facts and assumptions and certain representations and undertakings

 

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BACKGROUND

 

 

from us and ACAP regarding the past and future conduct of our respective businesses and other matters. Notwithstanding the private letter ruling and the opinion, the IRS could determine on audit that the Spin-Off or the internal transactions should be treated as taxable transactions if it determines that any of these facts, assumptions, representations or undertakings is not correct or has been violated, or that the Spin-Off or the internal transactions should be taxable for other reasons. If the Spin-Off ultimately is determined to be taxable, the Spin-Off could be treated as a taxable dividend or capital gain to you for U.S. federal income tax purposes, and you could incur significant U.S. federal income tax liabilities. In addition, American Capital would recognize gain in an amount equal to the excess of the fair market value of shares of ACAP common stock distributed to American Capital stockholders on the distribution date over American Capital’s tax basis in such shares, but such gain, if recognized, would be expected to be significantly offset by capital loss carryforwards, net operating loss carryforwards or other attributes and so should not result in significant current U.S. federal income tax but could result in a significant reduction in tax attributes recorded as part of American Capital’s deferred tax asset. However, we or ACAP could incur significant U.S. federal income tax liabilities if it is ultimately determined that certain internal transactions undertaken in anticipation of the Spin-Off are taxable.

Certain future events that may or may not be within our or ACAP’s control, including sales and redemptions of our or ACAP’s stock for cash or other property (other than certain stock-for-stock acquisitions and other permitted transactions) and certain asset dispositions by us or ACAP following the distribution, and the generation by us of earnings and profits may cause the distribution to fail to qualify for tax-free treatment, and in such event the distribution would be taxable to both American Capital and holders of American Capital common stock. The analysis and determination in respect of whether a sale or exchange of our or ACAP’s stock after the distribution could cause the distribution to be treated as a “device” for the distribution of earnings and profits or a recovery of basis and thus a taxable transaction for U.S. federal income tax purposes to both American Capital and the holders of American Capital common stock is complex and dependent upon the facts and circumstances. In addition, there may be no controlling authority directly on point, and any such sale or exchange may not be within our or ACAP’s control.

Even if the distribution otherwise qualifies under Sections 355 and 368(a)(1)(D) of the Code, the distribution could result in a significant U.S. federal income tax liability to American Capital (but not to holders of American Capital common stock) under Section 355(e) of the Code if one or more persons acquire a 50% or greater interest (measured by vote or value) in the stock of ACAP or in our stock as part of a plan or series of related transactions that includes the distribution. Current tax law generally creates a presumption that any acquisition of stock of ACAP or our stock within two years before or after the distribution is part of a plan that includes the distribution, although the parties may be able to rebut that presumption. The process of determining whether an acquisition is part of a plan under these rules is complex, inherently factual and subject to an analysis of the facts and circumstances of a particular case. Notwithstanding the private letter ruling from the IRS or the tax opinion we expect to receive from PricewaterhouseCoopers LLP, ACAP or we could incur significant U.S. federal income tax liabilities attributable to the distribution upon such a prohibited change in ACAP or our ownership.

Pursuant to the Tax Matters Agreement that we will enter into with ACAP in connection with the distribution (the “Tax Matters Agreement”), ACAP generally will be required to indemnify American Capital and its subsidiaries for taxes and losses resulting from the failure of the Spin-off to qualify as a tax-free transaction under Section 355, Section 368(a)(1)(D) and related provisions of the Code, as applicable, to the extent such failure to qualify is attributable to certain actions, events or transactions relating to ACAP’s stock, assets or business, a breach of representations or covenants made by ACAP in the Tax Matters Agreement or in the materials submitted by ACAP in connection with the IRS ruling or in connection with the tax opinion. ACAP’s indemnification obligations to American Capital, its subsidiaries and certain related persons will not be limited in amount or subject to any cap. If ACAP is required to indemnify American Capital, its subsidiaries or such related persons under the circumstances set forth in the Tax Matters Agreement, ACAP may be subject to substantial liabilities, which could materially adversely affect its financial position.

Legislative or other actions affecting spin-offs or RICs could have a negative effect on us

The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury (the “Treasury”). Changes to the tax laws or interpretations thereof, with or without retroactive application, could materially and adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury regulations, administrative interpretations or court decisions could significantly and negatively affect the tax treatment of the Spin-off or ACAP’s ability to qualify as a RIC or the U.S. federal income tax consequences to ACAP’s investors and ACAP of such qualification.

On September 14, 2015, the IRS promulgated Rev. Proc. 2015-43 and Notice 2015-59, each addressing certain issues relating to spin-offs, including (a) where the “active trade or business” a spun-off corporation (or distributing corporation)

 

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BACKGROUND

 

 

relies on to meet the “active trade or business” test is small relative to the overall size of the corporation or (b) where the spun-off corporation (or the distributing corporation) plans to make an election to be treated as a RIC under Subchapter M of the Code. In such cases, the IRS will no longer grant private letter rulings for requests submitted after the date of the Rev. Proc. and Notice. It is unclear whether this new guidance will impact American Capital’s ability to receive the requested rulings. In addition, the IRS has expressed concern with such transactions and have questioned whether such transactions may present evidence of a “device” for the distribution of earnings and profits, whether such transactions lack an adequate business purpose, or whether such transactions violate other Section 355 requirements. Accordingly, no assurance can be given that future regulatory or administrative guidance will not adversely affect (a) the qualification of the Spin-Off as a tax-free transaction under Section 355 of the Code or (b) ACAP’s ability to elect to be treated and to qualify each year as a RIC. Moreover, in reaching certain of its conclusions, PricewaterhouseCoopers LLP’s opinion assumes that ACAP will not have current or accumulated earnings and profits as of the end of the year in which the Spin-Off occurs, and no assurance can be given that this assumption will prove true. If any of the facts, representations, assumptions, or undertakings described or made in connection with the PricewaterhouseCoopers LLP opinion are not correct or are incomplete, our ability to rely on the opinion could be jeopardized. It is uncertain whether any future legislation, regulatory or administrative guidance affecting us and entities desiring to elect RIC status, will be enacted and whether any such legislation will apply to us or ACAP because of its proposed effective date or otherwise.

American Capital may be unable to achieve some or all of the benefits that it expects to achieve from the Spin-Off

As a standalone, publicly traded company, not regulated under the 1940 Act, we believe that our business will benefit from, among other things, an enhanced ability to pursue our investment management business strategy, which we expect as a result of the Spin-Off. However, by separating ACAP from American Capital, we may be more susceptible to market fluctuations and other adverse events than we would have prior to the Spin-Off. Furthermore, the anticipated benefits of the Spin-Off are based on a number of assumptions, which may prove incorrect. For example, we believe that investors and analysts will regard our asset management and investment businesses more favorably as separate companies and thus place a greater value on them following the Spin-Off. In the event that the Spin-Off does not have this and other expected benefits, the costs associated with the transaction, including certain expected increases in general and administrative expenses, could have a negative effect on our financial condition.

You will have limited control over changes in our policies and operations and will not have all the protections afforded to stockholders by the 1940 Act, which increases the uncertainty and risks you face as a stockholder

The American Capital Board of Directors determine our major policies, including our policies regarding financing, growth, debt capitalization and distributions. The American Capital Board of Directors may amend or revise these and other policies without your vote. The American Capital Board of Director’s broad discretion in setting policies and your inability to exert control over those policies increases the uncertainty and risks you face as a stockholder. Further, American Capital will not be subject to the 1940 Act and will not have all the protections afforded to stockholders by the 1940 Act.

Risks Related to ACAP

For a detailed discussion of the risks related to ACAP please see “Risk Factors” included in ACAP’s Preliminary Information Statement attached hereto as Exhibit I.

The Special Meeting

In connection with the Spin-Off, American Capital is proposing that its stockholders approve: (1) the withdrawal of its election to be regulated as a BDC under the 1940 Act, (2) the management agreement with ACAP, (3) an amendment to American Capital’s certificate of incorporation to effect a reverse stock split, subject to certain limitations, (4) the ratification of the appointment of the directors of ACAP, (5) an equity incentive plan for American Capital and (6) the authorization, under limited circumstances, to sell shares of Common Stock below the NAV per share, for the reasons set forth below for each proposal. We are not required to obtain, and we are not seeking, approval of the Spin-Off at the Special Meeting. However, the Spin-Off will not take place as contemplated in this Proxy Statement unless stockholders approve each of proposals 1, 2, 3 and 4 at the Special Meeting and certain other conditions are satisfied. 

 

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PROPOSAL 1: APPROVAL OF THE WITHDRAWAL OF OUR ELECTION TO BE REGULATED AS

A BUSINESS DEVELOPMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940

 

 

PROPOSAL 1:

APPROVAL OF THE WITHDRAWAL OF OUR

ELECTION TO BE REGULATED AS A BUSINESS DEVELOPMENT COMPANY

UNDER THE INVESTMENT COMPANY ACT OF 1940

Introduction

In connection with our initial public offering in 1997, we elected to be regulated under the 1940 Act as a BDC. At that time, we operated as a closed-end investment company primarily engaged in the business of making loans to and investing in small and medium sized private U.S. companies. Since then, we have significantly expanded our operations to also become a leading, global alternative asset manager, with over $             billion of assets under management. In fact, for the past three years, the largest investment in our portfolio has been in ACAM, the wholly-owned entity through which we conduct our asset management business.

Following an extensive evaluation of our operations and the evolving nature of our assets, our Board of Directors has determined that it is in our best interest to spin-off to our stockholders a separate managed fund, which will own most of our investment assets and which we will manage, so that we can continue to expand our asset management business through various organic and strategic growth strategies. We would be primarily engaged in the business of providing investment management services and no longer be an investment company. As a result, in connection with the Spin-Off, our Board of Directors has recommended the approval of a proposal to withdraw our election to be regulated as a BDC. Pursuant to the 1940 Act, such election cannot be withdrawn without the approval of the holders of a majority of our outstanding voting securities, as such term is defined in the 1940 Act.

We have undertaken several steps to meet the requirements for withdrawal of our election to be regulated as a BDC, including (i) preparing a plan of operations in contemplation of such a change to our status, (ii) evaluating our assets and operations as we expect them to exist after the Spin-Off so as to ensure that we will not meet the definition of “investment company” under the 1940 Act, (iii) evaluating potential acquisitions that would allow us to grow our asset management business, (iv) reviewing our revised investment strategy with investment banks and potential capital providers and (v) consulting with outside counsel as to the requirements for withdrawing our election as a BDC. If we receive stockholder approval of this proposal and certain of the other proposals on the agenda for this meeting, we anticipate withdrawing our election to be regulated as a BDC by filing a Form N-54C with the SEC. Following the withdrawal of the election, we will continue to be a reporting company under the Exchange Act, but will operate so that we will not be subject to the provisions of the 1940 Act.

Reasons for Proposed Withdrawal of BDC Election

Our Board of Directors has evaluated our business as a whole as an investment company and as an asset manager, and determined that the Spin-Off is in the best interests of American Capital and its stockholders, as discussed above. Specifically, our Board of Directors evaluated and discussed in depth the benefits and disadvantages of us not proceeding with the Spin-Off, and in particular continuing as a BDC. If the Spin-Off proceeds, American Capital will no longer be considered as an investment company because it will focus primarily on operating as a global alternative asset manager as opposed to investing, reinvesting or trading in securities. After considering our historical performance, the regulatory compliance restraints placed on BDCs, the substantial growth of our asset management business and the anticipated potential to unlock stockholder value when using a sum-of-the-parts valuation with two separate publicly traded companies focused on distinct business strategies, a majority of our Board of Directors approved the proposal to seek stockholder approval to authorize us to withdraw our election to be regulated as a BDC under the 1940 Act. In making their decision, our Board also considered that American Capital will have the opportunity to expand through retained earnings, organic growth of assets under management and the acquisition of third-party asset management contracts and businesses.

Increased Flexibility to Achieve Investment Objective

Following the Spin-Off, our assets will consist of our ownership interest in ACAM and those investment securities not contributed to ACAP, which will collectively have an aggregate value less than 40% of the value of our total assets on an unconsolidated basis, excluding cash and U.S. government securities.

 

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PROPOSAL 1: APPROVAL OF THE WITHDRAWAL OF OUR ELECTION TO BE REGULATED AS

A BUSINESS DEVELOPMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940

 

 

We currently manage $             billion of assets, including assets on our balance sheet and fee earning assets under management by affiliated managers, with $             billion of total assets under management (including levered assets) and intend to focus on growing fee earning assets under management. Our asset management business is currently conducted through ACAM, a wholly-owned investment adviser registered under the Investment Advisers Act of 1940, and its subsidiaries. ACAM and its subsidiaries currently manage the assets and affairs of the following investment funds pursuant to management agreements with those funds:

 

   

American Capital Agency Corp. (NASDAQ: AGNC)

 

   

American Capital Mortgage Investment Corp. (NASDAQ: MTGE)

 

   

American Capital Senior Floating, Ltd. (NASDAQ: ACSF)

 

   

American Capital Equity I, LLC

 

   

American Capital Equity II, LP

 

   

American Capital Equity III, LP

 

   

American Capital CLO Fund I, LP

 

   

European debt fund

 

   

European Capital UK SME Debt Limited

 

   

ACAS CLO 2007-1, Ltd.

 

   

ACAS CLO 2012-1, Ltd.

 

   

ACAS CLO 2013-1, Ltd.

 

   

ACAS CLO 2013-2, Ltd.

 

   

ACAS CLO 2014-1, Ltd.

 

   

ACAS CLO 2014-2, Ltd.

 

   

ACAS CLO 2015-1, Ltd.

 

   

ACAS CLO 2015-2, Ltd.

In addition to entering into management contracts for the various funds under management, ACAM takes a minority ownership interest in certain of its managed funds in order to comply with certain credit risk retention requirements under U.S. and foreign securities laws and to promote the alignment of ACAM’s interest with that of a fund’s investors. We believe this alignment is important to many investors and assists in the raising of the funds. By withdrawing our BDC election, we will no longer have to satisfy the requirement under the 1940 Act that 70% of our investment portfolio be comprised of “qualifying assets” (the “70% test”) and many of these interests did not meet the 70% test. Thus, we expect that we will have additional flexibility to take such minority ownership interests in funds that we manage, which may assist us in securing more management contracts and growing our assets under management, although there are other strategic considerations that could affect the amount of investments made in funds that we manage.

Increased Operational Flexibility

As a BDC, we are subject to significant regulation of our activities under the 1940 Act. Following the withdrawal of our BDC election and the Spin-Off, we would expect to have greater operational flexibility in several areas. For instance, our employees will be able to co-invest with external investors in our private funds, which we believe promotes the alignment of interests between investors and managers, but is generally prohibited for a BDC’s employees by the 1940 Act. We would also be able to create registered investment advisers for new managed funds without first having to obtain exemptive relief from the SEC, which has previously delayed our launch of various new funds and access to capital by several months. In addition, we will no longer be subject to 1940 Act restrictions on our ability to provide certain types of compensation to our directors and employees, including the 1940 Act prohibition on profit sharing plans if a BDC has an option plan, and the awarding of restricted stock.

 

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PROPOSAL 1: APPROVAL OF THE WITHDRAWAL OF OUR ELECTION TO BE REGULATED AS

A BUSINESS DEVELOPMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940

 

 

Increased Flexibility in Our Capital Structure and Capital Raising

The 1940 Act provides several restrictions on a BDC’s capital structure and its ability to raise capital. Following the withdrawal of our BDC election and the Spin-Off, we should also have greater flexibility in these areas. The 1940 Act restrictions limit the ability of a BDC to issue common shares below their NAV, to issue options, warrants and convertible securities and to issue preferred stock and debt, and these restrictions have affected our capital structure in numerous ways. For instance, because our stock price has been below our NAV for several years, we have generally been unable to access the equity capital markets without stockholder approval in order to raise equity capital to support our investing and asset management activities, which can generate higher returns than the cost of equity capital. The 1940 Act also limits the ability of a BDC to issue “senior securities,” which generally include all types of debt securities and borrowings, as well as preferred stock.

While we have utilized various forms of leverage – including term and revolving credit facilities, senior notes, securitized debt and other borrowings – like most BDCs, because of the 1940 Act limitations, we have found it economically impractical to raise capital by issuing preferred stock, a common financing strategy utilized by many operating companies. In addition, the 1940 Act limits the ability of a BDC to issue securities with common equity participation features (such as warrants and convertible notes) and/or additional classes of stock (such as convertible preferred) in order to facilitate capital formation. Following the Spin-Off, we may find it appropriate to raise additional capital to support our asset management business and the underlying nature and pricing flexibility of such securities may be helpful to us as an additional funding source. Moreover, the use of preferred and convertible securities may provide a means of mitigating potential dilution of holders of common stock. We also intend to enter into new secured and unsecured credit facilities following the Spin-Off.

Effect on Stockholders

Upon the withdrawal of our election to be treated as a BDC, we will no longer be subject to regulation under the 1940 Act, which is designed to protect the interests of investors in investment companies. Specifically, our stockholders would no longer have the following protections of the 1940 Act:

 

   

We would no longer be subject to the requirement in Section 61 of the 1940 Act that we maintain a ratio of assets to senior securities (such as senior debt or preferred stock) of at least 200%.

 

   

We would no longer be prohibited from protecting any director or officer against any liability to the Corporation or our stockholders arising from willful malfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of that person’s office, although there are similar limitations under Delaware law and our charter documents that would still apply.

 

   

We would no longer be required to provide and maintain an investment company blanket bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. However, we do expect to carry insurance that would cover these identical perils using a traditional crime bond.

 

   

We would no longer be required to ensure that a majority of our directors are persons who are not “interested persons,” as that term is defined in the 1940 Act, and certain persons that would be prevented from serving on our Board if we were a BDC (such as investment bankers) would be able to serve on our Board. However, we will remain subject to NASDAQ listing standards that require the majority of directors of a listed company and all members of its compensation, audit and nominating committees to be “independent” as defined under NASDAQ rules. We do not expect a change to our composition of directors in connection with the Spin-Off.

 

   

We would no longer be subject to provisions of the 1940 Act regulating transactions between BDCs and certain affiliates, except for transactions with funds we manage that are registered or regulated under the 1940 Act.

 

   

We would no longer be subject to provisions of the 1940 Act restricting our ability to issue shares below NAV or in exchange for services or to issue warrants and options.

 

   

We would be able to change the nature of our business and fundamental investment policies without having to obtain the approval of our stockholders. However, since 2005, we have had no fundamental policies that would require stockholder approval to change.

 

   

We would no longer require exemptive relief from the SEC before forming registered investment advisers to manage new funds.

 

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PROPOSAL 1: APPROVAL OF THE WITHDRAWAL OF OUR ELECTION TO BE REGULATED AS

A BUSINESS DEVELOPMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940

 

 

 

   

We would no longer be subject to the provisions of the 1940 Act limiting our ability to grant stock based compensation to officers, directors and employees or to provide a profit sharing program for them.

The following table outlines certain key similarities and differences in our structure and governance if the proposal is approved:

 

     

Before Withdrawal

Of BDC Election

 

After Withdrawal

Of BDC Election

Regulated by the 1940 Act    Yes   No
Subject to the BDC 70% Test    Yes   No
Subject to the Exchange Act    Yes   Yes
Subject to NASDAQ Listing Requirements    Yes   Yes
Annual Base Management Fee    N/A   N/A
Incentive Management Fee    N/A   N/A
Maximum Leverage    50%   No Legal Limit
Independent Directors    Majority   Majority

Effect on Financial Statements and Tax Status

Our change in business so as not to be an investment company and our election to withdraw as a BDC under the 1940 Act will result in a significant change in our required method of accounting. Our BDC financial statements are presented and accounted for under the specialized method of accounting applicable to investment companies, which requires us to recognize our investments, including controlled investments, at fair value. As a BDC, we are precluded from consolidating any entity other than another investment company that acts as an extension of our investment operations and facilitates the execution of our investment strategy or an investment in a controlled operating company that provides substantially all of its services to us. Operating companies are required to account for investments based on the degree of control or influence they can exert over the entity and therefore are required to consolidate controlled entities and use either the equity method of accounting, fair value option or historical cost method of accounting for the financial statement presentation and accounting of other securities held. Following the Spin-Off, with the exception of controlled investments held in a consolidated fund incubation entity which will retain the specialized accounting applicable to investment companies on consolidation, we expect to consolidate our investments in controlled entities, including our investment in ACAM, and elect the fair value option for our investments in other securities. Accordingly, the change in our accounting method could have a material impact on the presentation of our financial statements commencing on the day we withdraw our BDC election.

We do not believe that the withdrawal of our election to be treated as a BDC will have any impact on our federal income tax status, since we are currently not treated as a RIC under Subchapter M of the Code, but rather are subject to corporate level federal income tax on our income (without regard to any distributions we make to our stockholders) as a “regular” corporation under Subchapter C of the Code.

Anticipated Timeline

If this proposal is approved at the Special Meeting, along with proposals 2, 3 and 4 and upon consummation of the Spin-Off, the withdrawal will become effective upon receipt by the SEC of our Notification of Withdrawal on Form N-54C. As of the date hereof, the Board of Directors believes that we will meet the requirements for filing the notification to withdraw our election to be regulated as a BDC following the receipt of the approval of our stockholders and consummation of the Spin-Off. After the Notification of Withdrawal of our BDC election is filed with the SEC, we will no longer be subject to the regulatory provisions of the 1940 Act applicable to BDCs generally, including regulations related to insurance, custody, composition of its board of directors, affiliated transactions and any compensation arrangements.

 

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PROPOSAL 1: APPROVAL OF THE WITHDRAWAL OF OUR ELECTION TO BE REGULATED AS

A BUSINESS DEVELOPMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940

 

 

Vote Required

Under the 1940 Act, approval of the withdrawal of our election to be regulated as a BDC requires an affirmative vote of a majority of all of the Company’s outstanding voting securities, regardless of whether the holders of such shares are present and entitled to vote at the Special Meeting. For purposes of this proposal, a “majority” of the outstanding voting securities, as defined in the 1940 Act, means the vote of (i) 67% or more of the shares present at the Special Meeting, if the holders of 50% or more of our outstanding shares of Common Stock are present or represented by proxy or (ii) more than 50% of our outstanding shares of Common Stock, whichever is the less. Abstentions will not count as affirmative votes and will therefore count against the proposal.

Conclusion and Recommendation

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE WITHDRAWAL OF OUR ELECTION TO BE REGULATED AS A BUSINESS DEVELOPMENT COMPANY UNDER THE 1940 ACT.

 

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PROPOSAL 2: APPROVAL OF MANAGEMENT AGREEMENT WITH AMERICAN CAPITAL INCOME, LTD.

 

 

PROPOSAL 2:

APPROVAL OF MANAGEMENT

AGREEMENT WITH AMERICAN CAPITAL INCOME, LTD.

General

In connection with the Spin-Off, we, through a subsidiary of ACAM, will be managing ACAP pursuant to a management agreement, which is attached as Exhibit II to this Proxy Statement (the “Management Agreement”). For the reasons discussed below, the Board of Directors of ACAP, including a majority of the directors who are not “interested persons” of ACAP as defined in the 1940 Act (the “Independent Directors”), has approved the Management Agreement and determined that the Management Agreement is in the best interests of ACAP and its stockholders and recommended approval of the Management Agreement by ACAP’s stockholders. See “Evaluation by ACAP’s Board of Directors” below for a discussion of the ACAP Board of Directors’ consideration in connection with approving the Management Agreement.

In addition, the Board of Directors of American Capital, including a majority of the directors who are not “interested persons” of ACAS as defined in the 1940 Act, have also reviewed and evaluated the proposed Management Agreement and recommended approval of the Management Agreement by ACAS’s Stockholders. The Spin-Off will not proceed absent the approval of the proposed Management Agreement by the stockholders of ACAP. American Capital is currently the sole stockholder of ACAP. Prior to the completion of the Spin-Off, American Capital will “pass-through” its votes to its common stockholders and vote all of its shares in ACAP in the same proportion and in the same manner as American Capital stockholders vote their shares of American Capital Common Stock for this proposal.

Parties to the Management Agreement

As previously discussed, American Capital Income is a newly-organized Maryland corporation that intends to operate as a non-diversified closed-end management investment company and to elect to be regulated as a BDC under the 1940 Act and to be taxed as a RIC, as defined in Subchapter M of the Code.

American Capital Income’s investment objective will be to provide investors with attractive, risk-adjusted total returns over the long-term primarily through current income while also seeking to preserve its capital, by owning and managing a portfolio composed primarily of diversified investments in (a) Sponsor Finance Investments, (b) Senior Floating Rate Loans, (c) Structured Products and (d) Special Situations Investments. In addition to these assets, American Capital Income’s initial portfolio will include first and second lien senior, unitranche and mezzanine debt and controlling equity previously originated in American Capital One Stop Buyouts®.

American Capital ACAP Management, LLC, the proposed investment manager of ACAP (“ACAP Manager”), is indirectly wholly-owned by American Capital, and will be registered as an investment adviser under the Investment Advisers Act of 1940. See the charts under “Pre- and Post-Spin-Off Structures” on page . All of the officers of ACAP and ACAP Manager will be employees of American Capital or one of its affiliates. See also “Proven and Experienced Senior Management” on page . ACAP does not have any employees. ACAP Manager will provide ACAP with investment management services and be responsible for administering its day-to-day investment operations, subject to the supervision and oversight of ACAP’s Board of Directors. ACAP will enter into an administration agreement (“Administration Agreement”) with American Capital Administration, LLC (“Administrator”), which is indirectly, wholly-owned by American Capital. The Administrator will be responsible for administering all of ACAP’s business activities (except for investment activities) and will provide ACAP with administrative services, personnel and facilities necessary for ACAP’s operations. ACAP will not pay any of these individuals any compensation. Rather, ACAP will pay ACAP Manager management and incentive fees pursuant to the Management Agreement and pay the Administrator certain costs and expenses pursuant to the Administration Agreement. ACAP, or its portfolio companies, may also pay us or one of our affiliates for any consulting services that they engage us to provide. Compensation for services to ACAP or its controlled portfolio companies shall be subject to the review and approval of ACAP’s Independent Directors.

The following ACAP officers are also officers and employees of ACAP Manager: Malon Wilkus is the Chief Executive Officer of ACAP and ACAP Manager; Brian Graff is the President of ACAP and ACAP Manager; John Erickson is the

 

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PROPOSAL 2: APPROVAL OF MANAGEMENT AGREEMENT WITH AMERICAN CAPITAL INCOME, LTD.

 

 

Executive Vice President, Chief Financial Officer and Assistant Secretary of ACAP and Executive Vice President and Treasurer of ACAP Manager; Gordon O’Brien is the Executive Vice President of ACAP and ACAP Manager; and Samuel Flax is the Executive Vice President, Chief Compliance Officer and Secretary of ACAP and ACAP Manager. Thus, they have an indirect interest in the management fees to be paid to ACAP Manager under the Management Agreement. See “Our Manager, American Capital, Management Agreement and Administration Agreement” in ACAP’s Preliminary Information Statement attached hereto as Exhibit I. All of these officers also own Common Stock and options for Common Stock of American Capital and thus, will receive the special dividend of ACAP common stock as a result of the Spin-Off (assuming in the case of stock options that such options were exercised prior to the record date for the distribution). See “Security Ownership of Management and Certain Beneficial Owners” on page        of the Proxy Statement for information on their ownership of American Capital Common Stock.

Summary of the Management Agreement

Investment Advisory Services

Pursuant to the Management Agreement, the ACAP Manager will oversee ACAP’s investment activities and provide ACAP with investment advisory services in conformity with its investment policies and guidelines. The ACAP Manager at all times will be subject to the supervision and direction of ACAP’s Board of Directors, the terms and conditions of the Management Agreement and such further limitations or parameters as may be imposed from time to time by ACAP’s Board of Directors. The ACAP Manager will generally be responsible for the investment and reinvestment of ACAP’s assets. The ACAP Manager is responsible for and will perform the following services and activities relating to ACAP’s investments as may be appropriate:

 

   

determine the composition and allocation of ACAP’s investment portfolio and the nature and timing of any changes therein;

 

   

advise ACAP with respect to the periodic review of its investments and make recommendations with respect thereto;

 

   

advise ACAP with respect to selecting, purchasing, monitoring, hedging and disposing of its investments;

 

   

invest and re-invest any of ACAP or ACAP’s subsidiaries’ monies and securities (including in short-term investments);

 

   

make recommendations to ACAP’s Board of Directors concerning the payment of dividends or distributions to its stockholders;

 

   

monitor and report periodically on the performance of ACAP’s investment portfolio to its Board of Directors; and

 

   

vote any securities held by ACAP, including proxies solicited by an issuer of such securities.

Management Fees

Pursuant to the Management Agreement, ACAP will pay the ACAP Manager the base management fee and the incentive fee as set forth in the Management Agreement. ACAP will pay, or reimburse ACAP Manager, for all costs and expenses incurred on its behalf, other than compensation expenses of personnel of ACAP Manager who provide investment advisory services to ACAP pursuant to the Management Agreement, to the extent of such services provided to ACAP.

Base Management Fee. The amount of the base management fee is equal to 1.75% per annum of the average value of ACAP’s gross assets, including its restricted and unrestricted cash and cash equivalents and assets purchased with borrowed funds or for which exposure is obtained through derivative agreements, each as determined under U.S. GAAP at the end of each of the two most recently completed calendar quarters or if prior to completion of two quarters since the Spin-Off, at the distribution date and the first completed calendar quarter. The base management fee is payable quarterly in arrears, and the base management fee for any partial quarter will be prorated based on the number of days in such quarter.

 

AMERICAN CAPITAL, LTD. – Proxy Statement    37


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PROPOSAL 2: APPROVAL OF MANAGEMENT AGREEMENT WITH AMERICAN CAPITAL INCOME, LTD.

 

 

Incentive Fee. The incentive fee will be divided into two parts, one based on ACAP’s income and one based on ACAP’s capital gains. The two components are independent of each other such that one component may be payable even if the other is not. The incentive fees for any partial period will be appropriately prorated.

Incentive Fee Based on Income. Beginning with the calendar quarter that commences on the distribution date, the incentive fee based on income will be determined and paid quarterly in arrears at the end of each calendar quarter by reference to ACAP’s aggregate net investment income, as adjusted as described below, from the calendar quarter then ending and the eleven preceding calendar quarters (or if shorter, the number of quarters that have occurred since the distribution date). We refer to such period as the “Trailing Twelve Quarters.” ACAP Manager will be entitled to receive the incentive fee based on income if ACAP’s Ordinary Income (as defined below) exceeds a quarterly “hurdle rate” of 2.0% as described below. For this purpose, the hurdle is computed by reference to ACAP’s NAV and will not take into account changes in the market price of ACAP’s common stock. The hurdle amount for the incentive fee based on income will be determined on a quarterly basis, and will equal 2.0% multiplied by ACAP’s NAV at the beginning of each applicable calendar quarter comprising the relevant Trailing Twelve Quarters. The hurdle amount is calculated after making appropriate adjustments for subscriptions (which shall include all issuances by ACAP of shares of its common stock, including issuances pursuant to its dividend reinvestment plan, if any) and distributions that occurred during the relevant Trailing Twelve Quarters. For the portion of the incentive fee based on income, ACAP will pay ACAP Manager a quarterly incentive fee based on the amount by which (a) aggregate net investment income (“Ordinary Income”) in respect of the relevant Trailing Twelve Quarters exceeds (b) the hurdle amount for such Trailing Twelve Quarters. The amount of the excess of (a) over (b) described in this paragraph for such Trailing Twelve Quarters is referred to as the “Excess Income Amount.” For the avoidance of doubt, Ordinary Income is net of all fees and expenses, including the base management fee but excluding any incentive fee.

The incentive fee based on income for each quarter is determined as follows:

 

   

No incentive fee based on income is payable to ACAP Manager for any calendar quarter for which there is no Excess Income Amount determined with reference to the Trailing Twelve Quarterly period;

 

   

100% of the Ordinary Income, if any, that exceeds the hurdle amount, but is less than or equal to an amount, which we refer to as the “Catch-up Amount,” determined as the sum of 2.5% multiplied by ACAP’s NAV at the beginning of each applicable calendar quarter comprising the relevant Trailing Twelve Quarters is included in the calculation of the incentive fee based on income; and

 

   

20% of the Ordinary Income for the Trailing Twelve Quarterly period that exceeds the Catch-up Amount is included in the calculation of the incentive fee based on income.

The amount of the incentive fee based on income that will be paid to ACAP Manager for a particular quarter will equal the excess of the incentive fee so calculated minus the aggregate incentive fees based on income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters but not in excess of the Incentive Fee Cap (as defined below).

The incentive fee based on income that is paid to ACAP Manager for a particular quarter is subject to a cap (the “Incentive Fee Cap”). The Incentive Fee Cap for any quarter is an amount equal to (a) 20% of the Cumulative Net Return (as defined below) during the relevant Trailing Twelve Quarters minus (b) the aggregate incentive fees based on income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters.

“Cumulative Net Return” means (a) the Ordinary Income in respect of the relevant Trailing Twelve Quarters minus (b) any Net Capital Loss, if any, in respect of the relevant Trailing Twelve Quarters. If, in any quarter, the Incentive Fee Cap is zero or a negative value, ACAP Manager will receive no incentive fee based on income for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is a positive value but is less than the incentive fee based on income that is payable to ACAP Manager for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, ACAP Manager will receive an incentive fee based on income equal to the Incentive Fee Cap for such quarter. If, in any quarter, the Incentive Fee Cap for such quarter is equal to or greater than the incentive fee based on income that is payable to ACAP Manager for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, ACAP Manager will receive an incentive fee based on income equal to the incentive fee calculated as described above for such quarter without regard to the Incentive Fee Cap.

 

38    AMERICAN CAPITAL, LTD. – Proxy Statement


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PROPOSAL 2: APPROVAL OF MANAGEMENT AGREEMENT WITH AMERICAN CAPITAL INCOME, LTD.

 

 

“Net Capital Loss” in respect of a particular period means the difference, if positive, between (a) aggregate capital losses, whether realized or unrealized, in such period and (b) aggregate capital gains, whether realized or unrealized, in such period.

Incentive Fee Based on Capital Gains. ACAP Manager will also be entitled to a quarterly incentive fee based on capital gains, equal to (a) 20% of the difference, if positive, of the sum of ACAP’s aggregate realized capital gains as determined under U.S. GAAP, if any, computed net of ACAP’s aggregate realized capital losses, if any, and ACAP’s aggregate unrealized capital depreciation, for the calendar quarter then ending and the preceding nineteen calendar quarters, or, if shorter, the number of quarters that have occurred since the distribution date (such period is referred to as the Trailing Twenty Quarters) as described below minus (b) the aggregate amount of incentive fees based on capital gains previously paid to ACAP Manager over the Trailing Twenty Quarters. For the avoidance of doubt, unrealized capital gains are excluded from the calculation in clause (a) above. Realized capital gains, realized capital losses and unrealized capital depreciation will be determined by reference to and correspond to realized gains, realized losses and unrealized depreciation as determined under U.S. GAAP. However, in accordance with U.S. GAAP, ACAP will accrue, but not pay, a portion of the incentive fee based on capital gains with respect to net unrealized appreciation. In calculating the accrual for the incentive fee based on capital gains, ACAP will consider the cumulative aggregate unrealized capital appreciation in the calculation, since an incentive fee based on capital gains would be payable if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the Management Agreement. This accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital appreciation or depreciation. If such amount is positive at the end of a period, then ACAP Manager will record a capital gains incentive fee equal to 20% of such amount, minus the aggregate amount of incentive fees based on capital gains paid in the trailing twenty quarters or since the Spin-Off and the incentive fee based on capital gains accrual as of the end of the prior period. If such amount is negative, the incentive fee based on capital gains accrual will be reduced to zero. There can be no assurance that such unrealized capital appreciation will be realized in the future.

Duration and Termination

The Management Agreement will have an initial term that expires two years after the Spin-Off. Unless terminated earlier, the Management Agreement will remain in effect from year-to-year thereafter if approved annually by ACAP’s Board of Directors or by the affirmative vote of the holders of a majority of ACAP’s outstanding voting securities, and, in either case, if also approved by a majority of ACAP’s Independent Directors. The Management Agreement will automatically terminate in the event of its assignment, as defined in the 1940 Act, by the ACAP Manager. The Management Agreement may also be terminated at any time, without the payment of any penalty, upon 60 days’ written notice, by (i) holders of a majority of ACAP’s outstanding voting securities, (ii) ACAP’s Board of Directors or (iii) the ACAP Manager.

Evaluation by ACAP’s Board of Directors

ACAP’s Board of Directors, including a majority of the Independent Directors of ACAP, has considered and approved the Management Agreement with ACAP Manager. In connection with the ACAP Board’s consideration of the Management Agreement, we provided the ACAP Board with written materials in advance of the meeting. The Board members relied on their own business judgment in determining the material factors to be considered in evaluating the Management Agreement and the weight to be given to each such factor. Each ACAP director evaluated the information provided and may have afforded different weight to the different factors in reaching his or her conclusions with regards to the Management Agreement. The Board took into consideration:

 

   

the nature, extent and quality of the advisory and other services to be provided to ACAP by ACAP Manager;

 

   

the historical investment performance of American Capital;

 

   

the size and quality of the Administrator’s back office, including accounting, information technology, legal, valuation, compliance, risk management, reporting and administration, necessary to manage an investment company the size and complexity of ACAP;

 

   

the expected costs of the services to be provided to ACAP and the profits expected to be realized by ACAP Manager and its affiliates;

 

AMERICAN CAPITAL, LTD. – Proxy Statement    39


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PROPOSAL 2: APPROVAL OF MANAGEMENT AGREEMENT WITH AMERICAN CAPITAL INCOME, LTD.

 

 

 

   

a comparison of management fees and expense ratios of other BDCs;

 

   

the extent to which economies of scale may be realized as ACAP grows;

 

   

the organizational capability and financial condition of ACAP Manager; and

 

   

other factors the Board determined to be relevant.

Based on a consideration of all of these factors in their totality, ACAP’s Board of Directors, including a majority of the ACAP Independent Directors, determined that the management fee was fair and reasonable with respect to the quality and quantity of services to be provided and in light of the others factors considered and described herein. Attention was given to all information provided, and the ACAP Board of Directors did not identify any single piece of information discussed below that was determinative or controlling in reaching its decision. Accordingly, the ACAP Board of Directors voted to approve the Management Agreement and recommend its approval to stockholders.

Vote Required

Under the 1940 Act, approval of the Management Agreement requires an affirmative vote of a majority of all of the Company’s outstanding voting securities, regardless of whether the holders of such shares are present and entitled to vote at the Special Meeting. For purposes of this proposal, a “majority” of the outstanding voting securities, as defined in the 1940 Act, means the vote of (i) 67% or more of the shares present at the Special Meeting, if the holders of 50% or more of our outstanding shares of Common Stock are present or represented by proxy or (ii) more than 50% of our outstanding shares of Common Stock, whichever is less. Abstentions will not count as affirmative votes and will therefore count against the proposal.

Conclusion and Recommendation

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE MANAGEMENT AGREEMENT WITH AMERICAN CAPITAL INCOME.

 

40    AMERICAN CAPITAL, LTD. – Proxy Statement


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PROPOSAL 3: APPROVAL OF AN AMENDMENT TO OUR CERTIFICATE OF INCORPORATION

TO EFFECT A REVERSE STOCK SPLIT, SUBJECT TO CERTAIN LIMITATIONS

 

 

PROPOSAL 3:

APPROVAL OF AN AMENDMENT TO OUR

CERTIFICATE OF INCORPORATION TO EFFECT A

REVERSE STOCK SPLIT, SUBJECT TO CERTAIN LIMITATIONS

Introduction

In connection with the Spin-Off, our Board of Directors is recommending that our stockholders approve an amendment to our certificate of incorporation (an “Amendment”) to effect a             for             reverse stock split of the issued and outstanding shares of our Common Stock so that each American Capital stockholder will own             share of ACAS Common Stock for every             shares previously owned, at any time prior to the earlier of (i) the distribution date for the Spin-Off and (ii) the one-year anniversary of the date of the Special Meeting (the “Expiration Date”). We will not issue fractional shares in connection with the reverse stock split. Stockholders will receive cash in lieu of fractional shares. The reverse stock split will reduce the number of outstanding shares of our Common Stock by combining all outstanding shares of our Common Stock into a proportionately fewer number of shares of Common Stock. This action would also result in a relative increase in the available number of authorized but unissued shares of our Common Stock because the number of shares authorized for issuance is not being changed by the reverse stock split. Our authorized capital stock currently consists of 1,000,000,000 shares of Common Stock and 5,000,000 shares of preferred stock, par value $0.01 per share. The Amendment will be in the form attached as Exhibit III hereto.

The reverse stock split will not affect any stockholder’s proportional equity interest in the Company in relation to other stockholders or rights, preferences, privileges or priorities, with the exception that those stockholders with fractional shares resulting from the reverse stock split will receive cash in lieu of their fractional interests and thus will have a reduced proportionate ownership in the Company.

In determining the reverse stock split ratio, the Board of Directors has considered various factors, such as: the historical trading price and trading volume of our Common Stock; the anticipated trading price and trading volume of our Common Stock and the expected impact of the reverse stock split on the trading market for our Common Stock in the short- and long-term; which reverse stock split ratio would result in the least administrative cost to us; and general market and economic conditions.

If the stockholders approve the Amendment, the Board of Directors will have the authority to file the Amendment with the Secretary of State of the State of Delaware. The reverse stock split will become effective upon the filing of the Amendment with the Secretary of State of the State of Delaware (the “Effective Date”). After the Effective Date, the number of issued and outstanding shares of our Common Stock would be reduced proportionately to the             for             reverse stock split ratio. We will also obtain a new CUSIP number for our Common Stock as of the Effective Date.

If our stockholders approve this proposal, but our Board of Directors does not affect the reverse stock split prior to the Expiration Date, the authority granted in this proposal would terminate automatically.

Reasons for a Reverse Stock Split

Following the Spin-Off, substantially all of our investment assets will no longer be owned by American Capital, but instead be owned by ACAP, and it can be expected that investors will effectively allocate American Capital’s pre-Spin-Off share price between the two companies. As such, we would expect that the trading price of our Common Stock would decrease after the Spin-Off, absent the proposed Amendment.

The primary purpose for effecting the proposed Amendment is to increase the per share trading price of our Common Stock after the Spin-Off so as to:

 

   

bring the share price of our Common Stock after the Spin-Off into a range more in line with other asset managers with comparable market capitalization;

 

AMERICAN CAPITAL, LTD. – Proxy Statement    41


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PROPOSAL 3: APPROVAL OF AN AMENDMENT TO OUR CERTIFICATE OF INCORPORATION

TO EFFECT A REVERSE STOCK SPLIT, SUBJECT TO CERTAIN LIMITATIONS

 

 

 

   

broaden the range of investors that may be interested in investing in American Capital after the Spin-Off by attracting new investors who would prefer not to invest in shares that trade at low share prices and make our Common Stock a more attractive investment to institutional investors; and

 

   

reduce the relatively high transaction costs and commissions that may be incurred by our stockholders, due to the lower per share trading price that would be expected following the Spin-Off, absent the proposed Amendment.

In determining whether or not to recommend the proposed Amendment, our Board considered, among other things, that, following the Spin-Off, a sustained higher per share price of our Common Stock, which should result from the reverse stock split, might increase the interest of the financial community in American Capital and potentially broaden the pool of investors that may consider investing in American Capital, possibly increasing the trading volume and liquidity of our Common Stock. Our Board has determined that investors who would otherwise be potential investors in our Common Stock, including institutional investors, would prefer to invest in shares that trade at a higher price range. Our Board has recommended the approval of the             for             reverse split of all outstanding shares of our Common Stock with the expectation that the proposed Amendment would result in a per share price in a more appropriate range for an asset manager with comparable market capitalization following the Spin-Off.

Additionally, our Board considered that the structure of trading commissions, which are often set at a fixed price, tend to have a negative impact on holders of lower-priced securities because the brokerage commissions on a sale of lower-priced securities generally represent a higher percentage of the sales prices than the commissions on relatively higher-priced issues, which may discourage trading in such lower-priced securities. If we complete a reverse stock split in connection with the Spin-Off, our stock may trade at a price level for our Common Stock that could reduce the negative effect trading commissions have on the tendencies of certain stockholders to trade in our Common Stock. Furthermore, the proposed Amendment would reduce the actual transaction costs imposed on those investors who pay commissions on trades of our Common Stock based on the number of shares actually traded.

Material Effects of a Reverse Stock Split

If our stockholders approve this proposal and our Board of Directors files the Amendment to effect a reverse stock split, the issued and outstanding shares of our Common Stock would decrease in accordance with the exchange ratio determined by our Board of Directors. Thus, the number of issued and outstanding shares of our Common Stock as of             would decrease from              to             .

A reverse stock split would affect all of our stockholders uniformly and would not affect any stockholder’s percentage ownership interests in us (except for possible changes due to the treatment of fractional shares, discussed below), nor would it affect the relative voting or other rights that accompany the shares of our Common Stock. However, stockholders will own a fewer number of shares than they currently own (a number equal to the number of shares owned immediately prior to the Effective Date divided by              and rounded down to the nearest whole number). Although we expect that a reverse stock split would result in an increase in the per share price of our Common Stock, there can be no assurance that this will be the case, and the history of similar reverse stock splits for companies in similar circumstances is varied. Even if the stock price were to increase, the increase per share may not be in proportion to the reduction in the number of shares of our Common Stock outstanding. Furthermore, there is no guarantee that any increase would be permanent, since our stock price is dependent on many factors that may be unrelated to the number of shares outstanding. Although a reverse stock split would not be dilutive to our stockholders, a reverse stock split would reduce the proportion of shares owned by our stockholders relative to the number of shares authorized for issuance, since there will be no change in the number of authorized shares of our Common Stock. This would effectively increase the authorized shares available for issuance and we may in the future determine it to be in the best interests of us and our stockholders to enter into transactions that may include the issuance of shares of our Common Stock, although we have no current plans to do so.

A reverse stock split would not affect total stockholders’ equity on our consolidated balance sheet. As a result of a reverse stock split the stated capital component attributable to our Common Stock would be reduced to an amount equal to          of its present amount and the additional paid-in capital component would be increased by the amount by which the stockholder’s equity is reduced. The historical per share net earnings (loss) and net asset value per share of our Common Stock would be

 

42    AMERICAN CAPITAL, LTD. – Proxy Statement


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PROPOSAL 3: APPROVAL OF AN AMENDMENT TO OUR CERTIFICATE OF INCORPORATION

TO EFFECT A REVERSE STOCK SPLIT, SUBJECT TO CERTAIN LIMITATIONS

 

 

adjusted as a result of a reverse stock split since there would be fewer shares of our Common Stock outstanding. We do not anticipate that a reverse stock split would result in any other material accounting consequences.

Based upon the ratio of the reverse stock split, proportionate adjustments are generally required to be made to the per share exercise price and the number of shares issuable upon the exercise of all outstanding options entitling the holders to purchase, exchange for, or convert into, shares of Common Stock. This would result in approximately the same aggregate price being paid under such options and warrants upon exercise, and approximately the same value of shares of Common Stock being delivered upon such exercise, immediately following a reverse stock split as was the case immediately preceding such split. The number of shares deliverable upon settlement or vesting of restricted stock awards will be similarly adjusted, subject to our treatment of fractional shares. The number of shares reserved for issuance pursuant to these securities will be proportionately based upon the ratio of the reverse stock split, subject to our treatment of fractional shares.

A reverse stock split would not affect our securities law reporting and disclosure obligations under the Exchange Act. A reverse stock split may also result in some stockholders owning “odd-lots” of fewer than 100 shares of our Common Stock. Brokerage commissions and other transaction costs in odd-lots are generally higher than the transaction costs in “round-lots” of even multiples of 100 shares.

The following table contains approximate information relating to the Common Stock under the reverse stock split ratio described herein, without giving effect to any cash payment for fractional shares of Common Stock, as of                     , 20     :

 

Status    Number of Shares of
Common Stock Authorized
   Number of Shares of Common
Stock Issued and  Outstanding
   Number of Shares of Common
Stock Authorized by Unissued
Pre-Reverse Stock Split         
Post-Reverse Stock Split               

No Appraisal Rights

Under Delaware law, holders of our Common Stock will not be entitled to dissenter’s rights or appraisal rights with respect to the reverse stock split and Amendment and will not independently provide stockholders with any such right.

Certain U.S. Federal Income Tax Consequences

The discussion below is only a summary of certain U.S. federal income tax consequences relating to the reverse stock split and does not purport to be a complete discussion of all possible tax consequences to our stockholders. This summary assumes that those stockholders who hold their pre-reverse stock split shares of Common Stock as “capital assets,” as defined in the Code, will also hold the post-reverse split shares of Common Stock as capital assets. This discussion does not address all U.S. federal income tax considerations that may be relevant to particular stockholders in light of their individual circumstances or to stockholders that are subject to special rules, such as financial institutions, tax-exempt organizations, insurance companies, dealers in securities, foreign stockholders, partnerships, limited liability companies and other pass-through entities, broker-dealers, stockholders subject to the alternative minimum tax provisions of the Code, stockholders who hold their stock as part of a hedge, wash sale, appreciated financial position, straddle, conversion transaction, synthetic security or other risk reduction transaction or integrated investment, and stockholders who have acquired their stock upon exercise of employee stock options or otherwise as compensation. The following summary is based upon the current provisions of the Code, applicable Treasury Regulations thereunder, judicial decisions and administrative rulings, all of which are subject to change, possibly on a retroactive basis, and such a change could alter or modify the statements set forth herein. This description does not address tax consequences under state, local, foreign, and other laws. Each stockholder should consult his, her or its own tax advisor as to the particular facts and circumstances that may be unique to such stockholder and also as to any estate, gift, state, local or foreign tax considerations arising out of the reverse stock split. A reverse stock split will qualify as a recapitalization for U.S. federal income tax purposes. As a result:

 

   

Stockholders should not recognize any gain or loss as a result of a reverse stock split, except as discussed below to the extent of cash received instead of a fractional share;

 

   

The aggregate basis of a stockholder’s pre-reverse stock split shares will become the aggregate basis of the shares held by such stockholder immediately after the reverse stock split (including any fractional share of Common Stock for which cash is received);

 

AMERICAN CAPITAL, LTD. – Proxy Statement    43


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PROPOSAL 3: APPROVAL OF AN AMENDMENT TO OUR CERTIFICATE OF INCORPORATION

TO EFFECT A REVERSE STOCK SPLIT, SUBJECT TO CERTAIN LIMITATIONS

 

 

 

   

The holding period of the shares owned immediately after the reverse stock split will include the stockholder’s holding period before the reverse stock split;

 

   

A cash payment in lieu of a fractional share will generally be treated as if the stockholder received a fractional share in the reverse stock split and then received the cash in exchange for that fractional share. As a result, a stockholder should generally recognize capital gain or loss equal to the difference between the amount of cash received and the portion of the basis of the pre-reverse stock split allocable to the fractional share. The gain or loss will be long-term capital gain or loss if the stock is considered to have been held for more than one year at the time of the reverse stock split. The deductibility of capital losses is subject to limitations; and

 

   

We ourselves would not realize any taxable gain or loss as a result of a reverse stock split.

The above discussion of U.S. federal tax issues is not intended or written to be used, and cannot be used by any person, for the purpose of avoiding penalties that may be imposed under the Code. It was written solely in connection with preparing the proposal on a reverse stock split of our Common Stock for approval by our stockholders at the Special Meeting.

Procedure for Effecting a Reverse Stock Split and Exchange of Stock Certificates

If this proposal is approved by our stockholders at the Special Meeting, along with proposals 1, 2 and 4, our Board of Directors, in its sole discretion, expects to file the Amendment with the Secretary of State of the State of Delaware on the planned date of distribution of all of the outstanding shares of ACAP common stock to our stockholders as of the record date for the distribution. Upon the filing of the Amendment, and without any further action by us or our stockholders, the issued and outstanding shares of our Common Stock held by stockholders of record as of the Effective Date would be converted and reclassified into a lesser number of shares of our Common Stock calculated in accordance with the above reverse stock split ratio.

Certificated Shares

After the Effective Date, our transfer agent will act as our exchange agent and assist holders of our Common Stock in exchanging their pre-split Common Stock (“Old Shares”) by sending them a letter of transmittal that will contain instructions on how a stockholder should surrender any certificates representing Old Shares to the exchange agent in exchange for the appropriate number of post-split Common Stock. These post-split shares will be issued as Direct Registration Statement shares (“DRS Shares”). No DRS Shares will be issued to a stockholder until such stockholder has surrendered any Old Share certificates in their account, together with a properly completed and executed letter of transmittal to our exchange agent. From and after the Effective Date, certificates previously representing Old Shares will evidence the number of shares of Common Stock into which the Old Shares previously represented by such certificate were combined in the reverse stock split, and any Old Shares that are submitted for transfer, whether pursuant to a sale, disposition or otherwise, will, if properly presented, be exchanged for DRS Shares. STOCKHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY CERTIFICATE(S) UNTIL REQUESTED TO DO SO.

Fractional Shares

We will not issue fractional shares in connection with the reverse stock split. Stockholders will receive cash in lieu of fractional shares. We may either (i) directly pay each registered “book-entry” stockholder (i.e., stockholders that are registered on our transfer agent’s books and records but do not hold certificates) who would otherwise have been entitled to a fraction of a share an amount in cash equal to the closing sale price of our Common Stock, as quoted on the NASDAQ Global Select Market on the Effective Date, multiplied by the fractional share amount, or (ii) make arrangements with our transfer agent or exchange agent to aggregate all fractional shares otherwise issuable in a reverse stock split and sell these whole shares as soon as possible after the Effective Date at the then prevailing market prices on the open market on behalf of those holders, and then pay each such holder his, her or its pro rata portion of the sale proceeds. Our Board of Directors will consider the administrative costs of each option in determining which option to choose.

Interests of Directors and Executive Officers

Our directors and executive officers do not have direct or indirect substantial interests in the matters set forth in this proposal, except to the extent of their ownership of shares of our Common Stock and options to purchase Common Stock.

 

44    AMERICAN CAPITAL, LTD. – Proxy Statement


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PROPOSAL 3: APPROVAL OF AN AMENDMENT TO OUR CERTIFICATE OF INCORPORATION

TO EFFECT A REVERSE STOCK SPLIT, SUBJECT TO CERTAIN LIMITATIONS

 

 

Reservation of Right to Not Implement Reverse Stock Split

As explained above, even if this proposal is approved by our stockholders at the Special Meeting, we will not implement the reverse stock split unless proposals 1, 2 and 4 are also approved. In addition, we reserve the right to not implement the reverse stock split by abandoning the Amendment if our Board of Directors does not deem it to be in the best interests of us and our stockholders. By voting in favor of this proposal to authorize our Board of Directors to file the Amendment to effect the reverse stock split prior to the Expiration Date, you are also expressly authorizing the Board of Directors to not implement the reverse stock split by abandoning the Amendment if our Board in its sole discretion should determine that such action is in the best interests of us and our stockholders.

Vote Required

The affirmative vote by the holders of a majority of the votes of all outstanding shares of our Common Stock as of the record date is necessary for approval of this proposal. Abstentions will not count as votes cast and will therefore count against the proposal.

Conclusion and Recommendation

The Board of Directors believes that it is in our best interests and in the best interests of the stockholders to provide our Board of Directors with discretionary authority to amend our certificate of incorporation to effect a reverse stock split at any time prior to the Expiration Date, subject to the limitations set forth herein. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT TO OUR CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT.

 

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PROPOSAL 4: RATIFICATION OF THE APPOINTMENT OF THE DIRECTORS OF AMERICAN CAPITAL INCOME, LTD.

 

 

PROPOSAL 4:

RATIFICATION OF THE APPOINTMENT OF

THE DIRECTORS OF AMERICAN CAPITAL INCOME, LTD.

General Information

At a meeting on                     , 20    , American Capital, as the sole stockholder of American Capital Income, elected the following persons to the Board of Directors of American Capital Income. Upon completion of the Spin-Off, ACAP’s directors will be divided into three classes, each serving for staggered terms of three years, with the term of office of only one of these three classes of directors expiring each year, beginning with the first annual meeting of ACAP to be held in 2017.

American Capital is currently the sole stockholder of ACAP. However, prior to the completion of the Spin-Off, American Capital will “pass-through” its votes to its common stockholders and vote all of its shares in ACAP in the same proportion and in the same manner as American Capital stockholders vote their shares of American Capital Common Stock for this proposal.

Director Biographies and Qualifications1

 

IRA WAGNER, 63          

 

Mr. Wagner is a general business consultant. From August 2008 to March 2015,
Mr. Wagner was the President, European Private Finance of American Capital.
Previously, he served as Executive Vice President and Chief Operating Officer of
American Capital from 2001 to 2008. Mr. Wagner also serves on the board of directors
of European Capital Limited, a consolidated subsidiary of American Capital, and its
manager, European Capital Financial Services Limited, and certain of their affiliates.

       

 

Director Since:                 

 

Board Committees:

Executive

Mr. Wagner’s expertise in investing in the middle-market, broad experience with the day-to-day management and operations of similar investment companies and significant background in the financial services industry, strengthen American Capital Income’s Board’s collective qualifications, skills, experience and viewpoints.      

Board Leadership Structure

ACAP’s Board of Directors currently consists of one director, Mr. Wagner. Prior to the Spin-Off, ACAP’s Board of Directors is expected to consist of             members,             of whom             (which number constitutes a majority) are not “interested persons” of ACAP, ACAP Manager or their respective affiliates, as defined in Section 2(a)(19) of the 1940 Act, and are “independent,” as defined in Rule 5605(a)(2) of The NASDAQ Global Select Market’s marketplace rules (the “NASDAQ rules”). Similarly, only Mr. Wagner and             are “interested persons” of ACAP under the 1940 Act.

ACAP does not anticipate combining the positions of Chair and Chief Executive Officer. ACAP’s Board of Directors believes that it is in the best interests of ACAP’s investors for Mr. Wagner to chair the Board of Directors because of his expertise in investing in the middle-market, broad experience with the day-to-day management and operation of investment funds with a similar investment focus and significant background in the financial services industry, as described above. Although the Chair is an “interested person” of ACAP under the 1940 Act, ACAP recognizes the importance of strong independent leadership on the Board. ACAP believes that its Board’s independent oversight will be substantial.

It is expected to be the ACAP Board’s policy, as a matter of good corporate governance, to have a majority of ACAP’s directors who are not “interested persons” meet regularly without persons who are members of management or employee directors present to facilitate the ACAP Board’s effective independent oversight of management. These directors will periodically designate a director who is “independent,” as defined in the NASDAQ rules and the 1940 Act, to serve as the “lead independent director” and preside at these meetings. ACAP’s disinterested directors will meet during the ACAP Board’s quarterly in-person meetings and may hold additional meetings at the request of the lead independent director or another disinterested director. The designation of a lead independent director is expected to generally be for a three-year term or until his or her successor is elected, and a lead independent director may be re-appointed at the end of a term. If the lead

 

1 

Note: While one director is currently identified, the rest of the Board will be added for the Definitive Proxy Statement.

 

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PROPOSAL 4: RATIFICATION OF THE APPOINTMENT OF THE DIRECTORS OF AMERICAN CAPITAL INCOME, LTD.

 

 

independent director is unavailable for a meeting, his or her immediate predecessor will serve as lead independent director for such meeting. ACAP expects             to be appointed its lead independent director prior to the Spin-Off.

The ACAP Board’s Audit, Compliance and Valuation Committee and its Compensation, Corporate Governance and Nominating Committee are each expected to be composed entirely of independent directors. These independent committees of the ACAP Board will have the authority under their respective charters to hire independent advisors and consultants, at ACAP’s expense, to assist them in performing their duties.

Corporate Governance

ACAP’s Board of Directors is expected to develop corporate governance practices to help it fulfill its responsibility to stockholders to oversee the work of management in the conduct of its business. The governance practices will be memorialized in corporate governance guidelines to assure that the ACAP Board will have the necessary authority and practices in place to review and evaluate ACAP’s business operations as needed and to make decisions that are independent of management. These guidelines, in conjunction with ACAP’s charter, bylaws and committee charters of the Audit, Compliance and Valuation Committee and the Compensation, Corporate Governance and Nominating Committee, will form the framework for ACAP’s governance. All of these documents will be available in the Investor Relations section of ACAP’s web site at www.AmericanCapitalIncome.com or www.ACAP.com.

Committees of the Board of Directors

We expect ACAP’s Board of Directors to establish three standing committees, the primary functions of which are described below. ACAP’s Board of Directors may from time to time establish other committees.

Executive Committee

This committee will have the authority to exercise all powers of ACAP’s Board of Directors except for actions that must be taken by its full Board of Directors under the Maryland General Corporation Law or the 1940 Act. Members of the Executive Committee are expected to be             , with Mr. Wagner serving as Chair.

Audit, Compliance and Valuation Committee

This committee will assist the ACAP Board of Directors in overseeing:

 

   

ACAP’s accounting and financial reporting processes;

 

   

the integrity and audits of ACAP’s financial statements;

 

   

ACAP’s compliance with legal and regulatory requirements;

 

   

the qualifications and independence of ACAP’s independent registered public accounting firm; and

 

   

the performance of ACAP’s independent registered public accounting firm and any internal auditors.

In addition, the Audit, Compliance and Valuation Committee will review and provide a recommendation to the Board of Directors with regard to its approval of the valuations of ACAP’s investments presented by management. In such review, the committee will discuss the proposed valuations with ACAP’s independent auditors and other relevant consultants. The Audit, Compliance and Valuation Committee will also be responsible for engaging an independent registered public accounting firm, reviewing with the independent registered public accounting firm the plans and results of the audit engagement, approving professional services provided by the independent registered public accounting firm and considering the range of audit and non-audit fees. The committee’s meetings will include, whenever appropriate, executive sessions with each of ACAP’s independent external auditors and ACAP Manager’s internal auditors, without the presence of management. The Audit, Compliance and Valuation Committee is expected to be composed of             , with             serving as Chair. Each member of the proposed committee is expected to be determined by ACAP’s Board of Directors to be independent, as defined in Rules 5605(a)(2) and 5605(c)(2) of the NASDAQ rules and Rule 10A-3 of the Exchange Act. ACAP’s Board of Directors is

 

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expected to determine that             , the chair of the Audit, Compliance and Valuation Committee, is an “audit committee financial expert,” as defined in Item 407 of Regulation S-K under the Securities Act.

Compensation, Corporate Governance and Nominating Committee

This committee’s principal functions will be to:

 

   

evaluate the performance of ACAP Manager and the Administrator;

 

   

review the compensation and fees payable to ACAP Manager under the ACAP Management Agreement;

 

   

review the fees payable to the Administrator under the Administration Agreement;

 

   

recommend to the ACAP Board of Directors whether to renew or terminate the ACAP Management Agreement;

 

   

recommend to the ACAP Board of Directors whether to renew or terminate the ACAP Administration Agreement;

 

   

evaluate and make recommendations to the ACAP Board of Directors concerning the compensation and fees payable to the members of the ACAP Board of Directors;

 

   

review and assist with the development of ACAP’s executive succession plans;

 

   

review ACAP Manager’s executive succession plans; and

 

   

produce a report on executive compensation required to be included in ACAP’s proxy statement for its annual meetings (although it is intended that ACAP will have no executive compensation expenses).

The Compensation, Corporate Governance and Nominating Committee will also serve as the ACAP Board of Director’s standing nominating committee and as such will perform the following functions:

 

   

identifying, recruiting and recommending to the ACAP Board of Directors qualified candidates for election as directors and recommending a slate of nominees for election as directors by ACAP’s common stockholders at the annual meeting of stockholders;

 

   

developing and recommending to the ACAP Board of Directors corporate governance guidelines, including the committee’s selection criteria for director nominees;

 

   

reviewing and making recommendations on matters involving the general operation of the ACAP Board of Directors, its committees and ACAP’s corporate governance;

 

   

recommending to the ACAP Board of Directors nominees for each committee of the Board of Directors; and

 

   

annually facilitating the assessment of the ACAP Board of Directors’ and committees’ performance as a whole and of the individual directors and reports thereon to the ACAP Board of Directors.

The Compensation, Corporate Governance and Nominating Committee is expected to be composed of             , with              serving as Chair. Each member of the proposed committee is expected to be determined by ACAP’s Board of Directors to be independent, as defined in Rules 5605(a)(2) and 5605(d)(2) of the NASDAQ rules.

Board and Committee Meetings

Under ACAP’s Bylaws and Maryland law, the ACAP Board of Directors is permitted to take actions at regular or special meetings and by written consent. The Board of Directors will generally hold regular quarterly meetings and meet on other occasions as necessary. As noted above, the independent directors will also meet separately in executive sessions to discuss various matters, including ACAP’s performance and the performance of ACAP Manager.

Each of the Audit, Compliance and Valuation Committee and the Compensation, Corporate Governance and Nominating Committee will schedule regular meetings to coincide with the quarterly in-person meetings of the Board of Directors and also meet at the request of senior management or at such other times as it determines. ACAP’s Secretary, in consultation with the chair of the committee, will set agendas for the meetings. Each committee will report regularly to the Board of Directors on its activities at the next regularly scheduled Board meeting following their committee meetings and when appropriate. Although ACAP does not have a policy on director attendance at its annual meetings, directors are encouraged to attend the annual meeting.

 

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Risk Oversight

One of the roles of ACAP’s Board of Directors is being responsible for the general oversight of ACAP, including the performance of its executive officers, ACAP Manager, the Administrator and the Company’s risk management processes, to assure that the long-term interests of its stockholders are being served. In performing its risk oversight function, the ACAP Board, directly or through its standing committees, will regularly review material strategic, operational, financial, legal, compensation and compliance risks with ACAP Manager and senior management. In particular, the ACAP Board will receive updates at each regular meeting on ACAP’s strategic plan, which addresses, among other things, the risks and opportunities facing ACAP.

The ACAP Board of Directors also recognizes the importance of effective executive leadership to ACAP’s success and will be actively engaged in overseeing the operational risks related to succession planning. The ACAP Board of Directors will routinely discuss ACAP Manager’s staffing of critical roles, and potential replacements for key personnel will be given exposure to the ACAP Board of Directors during meetings and other events. In addition, the ACAP Board of Directors will be regularly updated on ACAP Manager’s strategies for recruiting, developing and retaining outstanding personnel at ACAP Manager and its affiliates, as applicable.

The ACAP Board is expected to delegate certain risk management oversight responsibility to its committees as follows:

Regulatory Compliance Risk: The ACAP Board, both directly and through the Audit, Compliance and Valuation Committee, will receive regular reports from ACAP Manager’s legal, accounting and internal audit representatives on regulatory matters, including ACAP’s compliance with the BDC qualification and leverage requirements under the 1940 Act, compliance with ACAP’s Code of Ethics and Conduct (“Code of Ethics”) and ACAP Manager’s compliance with the Investment Advisers Act of 1940.

Financial and Accounting Risk: The Audit, Compliance and Valuation Committee will oversee ACAP’s management of its financial, accounting, internal controls and liquidity risks through regular meetings with its Chief Financial Officer, senior representatives of ACAP Manager’s accounting, tax, auditing and legal departments and representatives of ACAP’s independent public accountant.

Litigation Risk: The Compensation, Corporate Governance and Nominating Committee will monitor ACAP’s litigation, if any.

Compensation and Benefit Plan Risk: The Compensation, Corporate Governance and Nominating Committee will consider the extent to which ACAP’s director compensation and any benefit plan programs that it may adopt may create risk for ACAP.

Governance Risk: The Compensation, Corporate Governance and Nominating Committee will oversee risks related to ACAP’s Board organization, membership and structure and corporate governance.

Director Nomination Process

Nominations for election to the ACAP Board of Directors may be made by the Compensation, Corporate Governance and Nominating Committee of the ACAP Board of Directors, or by any common stockholder entitled to vote for the election of directors. Candidates recommended by common stockholders will be evaluated by the Compensation, Corporate Governance and Nominating Committee under the same criteria that are applied to other candidates.

Board Membership Criteria

Although ACAP has not adopted a formal list of qualifications, in discharging its responsibilities to nominate candidates for election to the ACAP Board of Directors, the Compensation, Corporate Governance and Nominating Committee will endeavor to identify, recruit and nominate candidates based on the following eligibility and experience criteria: a candidate’s integrity and business ethics, strength of character, judgment, experience and independence, as well as factors relating to the composition of the ACAP Board of Directors, including its size and structure, the relative strengths and experience of current directors and principles of diversity, including diversity of experience, personal and professional backgrounds, race, gender

 

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and age. Although the committee will not have formal objective criteria for determining the amount of diversity needed on the ACAP Board of Directors, it is one of the factors the committee will consider in its evaluation. In nominating candidates to fill vacancies created by the expiration of the term of a member of the ACAP Board of Directors, the committee will determine whether the incumbent director is willing to stand for re-election. If so, the committee will evaluate his or her performance in office to determine suitability for continued service, taking into consideration the value of continuity and familiarity with our business.

Director Compensation

ACAP has not paid any cash compensation to any of the members of its Board of Directors since its organization. ACAP does not have, and it does not currently intend to adopt, any plans or programs for its directors that provide for equity-based awards, pension benefits or the deferral of compensation. Any member of its Board of Directors who is an employee of ACAP Manager, American Capital or their affiliates will not receive any compensation from ACAP for serving on its Board of Directors.

Each such non-employee director will be paid a retainer for service on the ACAP Board of Directors at an annual rate of $125,000, payable quarterly in advance. In addition, the Chair of the ACAP’s Board of Directors and the Chair of ACAP’s Audit, Compliance and Valuation Committee will be paid a retainer at an annual rate of $30,000, the Chair of ACAP’s Compensation, Corporate Governance and Nominating Committee will be paid an annual retainer of $20,000, and ACAP’s lead independent director will be paid an annual retainer of $30,000, each payable quarterly in advance. In addition, each non-employee member of the Audit, Compliance and Valuation Committee, Compensation, Corporate Governance and Nominating Committee and Executive Committee will receive an additional annual retainer of $15,000, payable quarterly in advance. Directors will be reimbursed for travel expenses incurred in connection with ACAP’s Board and committee meetings and ACAP’s Board-related functions.

Vote Required

The affirmative vote of a majority of the votes cast by the holders of our Common Stock present or represented and entitled to vote at the Special Meeting is required to ratify the appointment of the directors of ACAP. Abstentions will have no effect on the outcome of the proposal.

Conclusion and Recommendation

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF THE DIRECTORS OF AMERICAN CAPITAL INCOME.

 

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PROPOSAL 5: APPROVAL OF THE AMERICAN CAPITAL, LTD. 2016 EQUITY INCENTIVE PLAN

 

 

PROPOSAL 5:

APPROVAL OF THE AMERICAN CAPITAL, LTD.

2016 EQUITY INCENTIVE PLAN

General Information

The Board reviewed our existing option and incentive compensation plans and concluded that the number of shares authorized and available for grant under these plans following the Spin-Off will be insufficient to provide flexibility with respect to stock-based compensation for our employees and independent directors. Additionally, because option holders are not able to participate in the Spin-Off and option holders have thus had to exercise vested options earlier than necessary and at lower than optimal prices, the options previously granted under our existing plans have lost significant retention value.

The Compensation, Corporate Governance and Nominating Committee (the “Compensation Committee”) and the Board of Directors believe that stock-based incentive compensation is a key element of employee and independent director compensation by helping to help attract, motivate and retain outstanding officers, employees and directors. They also believe that such compensation helps to align further our officers’, employees’ and directors’ interests with those of our stockholders. Thus, we believe the company’s interests are advanced by stock-based compensation. As a result, the Compensation Committee recommended and the Board of Directors approved, subject to stockholder approval, the American Capital, Ltd. 2016 Equity Incentive Plan (the “Plan”) covering grants to employees and independent directors. The Plan provides for the issuance not only of stock options, but also other equity-based awards, including restricted stock, restricted stock units, unrestricted stock awards and other awards based on our Common Stock that may be made by us.

Summary of Material Provisions of the 2016 Equity Incentive Plan

The Plan provides for the issuance of equity-based awards based on our common stock that may be granted by us to our directors and employees. The Plan covers (a) an aggregate maximum number of             shares of our Common Stock, or 8% of the             shares of our Common Stock outstanding as of                     , 2016, pursuant to equity-based awards to be granted to employees, and (b) an aggregate maximum number of             shares of our Common Stock, or 0.5% of the             shares of our Common Stock outstanding as of                     , 2016, pursuant to equity-based awards to be granted to non-employee directors. It is our policy with all of our equity incentive plans to grant awards to all non-employee directors and many of our employees. As of             , we had approximately              employees and eight non-employee directors. The equity-based awards issued under the plan will only be for shares of American Capital Common Stock, not for shares of ACAP common stock.

Unless otherwise determined by our Board of Directors, the Plan will be administered by the Executive Committee of the Board for awards to non-employee directors and by the Compensation Committee for all other awards. The applicable Committee will have the authority to make awards to employees and independent directors and to determine what form the awards will take and, subject to the Plan, the terms and conditions of the awards. Except as provided below with respect to equitable adjustments, the applicable Committee may not take any action that would have the effect of reducing the exercise or purchase price of any award granted under the plan without first obtaining the consent of our stockholders.

The maximum number of shares of our Common Stock that may be covered by awards granted under the Plan in the aggregate for a single employee is             , or     % of the aggregate grantable employee awards, and     % for a single non-employee director is             , or 20% of the aggregate grantable director awards.

If any shares subject to an award granted under the plan are forfeited, cancelled, exchanged or surrendered or if an award terminates or expires without a distribution of shares to the participant, or if shares of our Common Stock are surrendered or withheld by us as payment of either the exercise price of an award and/or withholding taxes in respect of an award, the shares of Common Stock forfeited, canceled, exchanged, surrendered, withheld, terminated or expired will again be available for awards under this equity incentive plan.

In the event that the plan administrator determines that any dividend or other distribution (whether in the form of cash, common stock, or other property), recapitalization, stock split, reverse split, reorganization, merger or other similar corporate transaction or event, affects our Common Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of participants under the Plan, then the plan administrator will make equitable changes or

 

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adjustments to: (i) the number and kind of shares of common stock or other property (including cash) that may thereafter be issued in connection with awards; (ii) the number and kind of shares of common stock or other property (including cash) issued or issuable in respect of outstanding awards; (iii) the exercise price, grant price or purchase price relating to any award and (iv) if set forth in an agreement and permissible under Section 162(m) of the Code, the performance goals, if any, applicable to outstanding awards. In addition, the plan administrator may determine that any equitable adjustment may be accomplished by making a payment to the award holder, in the form of cash or other property (including but not limited to shares of our Common Stock).

Generally, no portion of any award under the Plan will vest prior to the one-year anniversary of the date of grant of the award. However, the Committee may provide that up to 5% of shares of Common Stock covered by awards may become vested prior to the one year anniversary of the date of grant. In addition, awards under the Plan may be granted with vesting, value and/or payment contingent upon the attainment of one or more performance goals.

Awards under the Plan are not transferable other than by laws of descent and distribution and will generally be exercisable during an optionee’s lifetime only by the optionee.

Stock Options

Options granted under the Plan may only be non-qualified stock options, and not “incentive stock options” within the meaning of Section 422 of the Code, and entitle the optionee, upon exercise, to purchase from us shares of our Common Stock at a specified exercise price per share. Stock options granted under the Plan must have a per share exercise price of no less than the fair market value of a share of our Common Stock on the date of the grant. Options granted under the Plan may be exercised for a period of no more than ten years from the date of grant.

Under our current accounting policies in accordance with GAAP, we expense options granted. The expensing of stock options under such policies does not affect our taxable income. Without the approval of the stockholders, except in connection with a stock split, dividend or similar event, the respective committees will not lower the exercise price for any outstanding options or issue any replacement options for options previously granted at a higher exercise price.

Other Equity-Based Awards

The plan administrator will determine the terms and conditions of each grant of restricted stock, restricted stock units or other stock-based award under the Plan. Restricted stock units confer on the participant the right to receive cash, Common Stock or other property, as determined by the plan administrator, having a value equal to the number of shares of our Common Stock that are subject to the award. The holders of awards of restricted stock or restricted stock units may be entitled to receive dividends or, in the case of restricted stock units, dividend equivalents, which in either case may be payable immediately or on a deferred basis at such time as is determined by the plan administrator.

The plan administrator may determine to make grants of our Common Stock that are not subject to any restrictions or a substantial risk of forfeiture or to grant other stock-based awards to eligible participants, the terms and conditions of which will be determined by the plan administrator at the time of grant.

Unless otherwise determined by the plan administrator or set forth in an individual award agreement, outstanding awards under the Plan will be forfeited to the extent not fully vested, upon termination of the individual’s employment or the independent director’s service as a director.

The Plan will automatically expire on the tenth anniversary of the date on which it was adopted. Our Board of Directors may terminate, amend, modify or suspend this equity incentive plan at any time, subject to stockholder approval as required by law or stock exchange rules. The plan administrator may amend the terms of any outstanding award under this equity incentive plan at any time. No amendment or termination of this equity incentive plan, or any outstanding award, may adversely affect any of the rights of an award holder without the holder’s consent.

A copy of the Plan is attached as Exhibit IV to this Proxy Statement.

 

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New Plan Benefits

Awards under the Plan will be granted in the discretion of the Compensation Committee, and no awards have been made at this time. We cannot determine at this time what benefits or amounts, if any, will be received by or allocated to any person or group of persons under the Plan if the Plan is approved by the stockholders, or what amounts would have been received by any person or group of persons for the last fiscal year if the Plan had been in effect.

Summary of Certain Federal Income Tax Consequences

The following discussion is intended to be a summary and is not a comprehensive description of the federal tax laws, regulations and policies affecting awards that may be granted under the Plan. Any descriptions of the provisions of any law, regulation or policy are qualified in their entirety by reference to the particular law, regulation or policy. Any change in applicable law or regulation or in the policies of various taxing authorities may have a significant effect on this summary. The Plan is not a qualified plan under Section 401(a) of the Code.

Stock Options. Non-qualified stock options, such as the options available under the Plan, will not create federal income tax consequences when they are granted. When they are exercised, federal income taxes at ordinary income tax rates must be paid on the amount by which the fair market value of the shares acquired by exercising the option exceeds the exercise price. When an option holder sells shares acquired by exercising a non-qualified stock option, he or she must pay federal income taxes on the amount by which the sale price exceeds the sum of the purchase price plus the amount included in ordinary income at option exercise. The amount will be taxed at capital gains rates, which will vary depending upon the time that has elapsed since the exercise of the option. A cash payment in consideration for the cancellation of an option, if directed by the Compensation Committee on a merger or other reorganization under the Plan’s change in control provisions, is taxed at ordinary income rates.

When a non-qualified stock option is exercised, the Company is generally allowed a federal income tax deduction for the same amount that the option holder includes in his or her ordinary income. A cash payment in consideration for the cancellation of an option, if directed by the Compensation Committee on a merger or other reorganization under the Plan’s change in control provisions, is generally deductible as if it were the exercise of a non-qualified stock option.

Restricted Stock. Awards of restricted stock under the Plan do not result in federal income tax consequences to either the Company or the award recipient when the award is made. Once the award is vested and the shares subject to the award are distributed, the award recipient will generally be required to include in ordinary income, for the taxable year in which the vesting date occurs, an amount equal to the fair market value of the shares on the vesting date. The Company will generally be allowed to claim a deduction for compensation expense in a like amount. If cash dividends are paid on unvested shares held under the Plan, such amounts will also be included in the ordinary income of the recipient upon receipt. The Company will be allowed to claim a deduction for compensation expense for this amount as well. In certain cases, a recipient of a restricted stock award may elect to include the value of the shares subject to a restricted stock award in income for federal income tax purposes when the award is made instead of when it vests. If this election is made, any cash dividends paid on the unvested shares will be taxable to the recipient as dividend income upon receipt, and the Company will not be allowed to claim a deduction for these dividends. When an award recipient later sells shares received under an award of restricted stock, any value received in excess of the amount previously included in income will be taxed at capital gains rates, which will vary depending upon the time that has elapsed since the award was included in income.

Restricted Stock Units. Restricted stock unit awards under the Plan do not result in federal income tax consequences to either the Company or the award recipient when the award is made. Once the award is vested and the shares, cash or other property subject to the award are distributed, the award recipient will generally be required to include in ordinary income, for the taxable year in which the distribution occurs, an amount equal to the fair market value of the shares, cash or other property distributed, on the distribution date. The Company will generally be allowed to claim a deduction for compensation expense in a like amount. If dividend equivalents are paid on units outstanding under the Plan, such amounts will also be included in the ordinary income of the recipient upon receipt. The Company will generally be allowed to claim a deduction for compensation expense for this amount as well. When an award recipient later sells shares received under a restricted stock unit award, any value received in excess of the value at the time of distribution will be taxed at capital gains rates, which will vary depending upon the time that has elapsed since the shares were distributed.

 

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Other Stock-Based Awards. The tax consequences of other stock-based awards will depend on the specific terms of each award.

Deduction Limits. Section 162(m) of the Code limits the Company’s deductions for compensation in excess of $1,000,000 per year for the Chief Executive Officer and the other Named Executive Officers (other than the Chief Financial Officer). Compensation amounts resulting from so-called “qualified performance-based compensation” are not subject to this limit. The Company has designed the Plan to allow a section 162(m)-qualifying committee to grant options, restricted stock, restricted stock units and other stock-based awards that qualify as qualified performance-based compensation that is not subject to the $1,000,000 deduction limit. The “Performance Goals” set forth in the Plan means performance goals established by the Committee which may be based on sales, stock price, return on equity, revenue, revenue per employee, economic return, net operating income, net income, earnings before or after taxes, interest, depreciation and/or amortization, net realized gain on investments, net asset value per share, realizable net asset value per share, dividend characterization, return on assets, cash flow (including, but not limited to, operating cash flow, free cash flow and cash flow return on capital), cash on hand, total amortizations, prepayments and exits, earnings per share, total stockholder return, equity or investment growth, gross margins, operating margins, operating efficiency, gross amount invested, closing of new buyouts and sponsor finance investments, debt reduction, compliance with loan covenants, market share, regulatory compliance (including compliance goals relating to the Sarbanes-Oxley Act of 2002), satisfactory internal or external audits, improvement of financial ratings, budget and expense management, productivity ratios, economic value added or other value added measurement, achievement of balance sheet objectives, employee retention, implementation or completion of one or more projects or transactions, intradepartmental or intra-office performance, or any other objective goals established by the Committee, and may be absolute in their terms or measured against or in relationship to other companies comparably, similarly or otherwise situated. Such performance goals may be particular to an eligible individual or the department, branch, affiliate or other division in which he or she works, or may be based on the performance of the Company, one or more affiliates, or the Company and one or more affiliates, and may cover such period as may be specified by the Committee. The Company expects that the Compensation Committee will take these deduction limits into account in establishing the size and the terms and conditions of awards. However, the Compensation Committee may decide to grant awards all or a portion of which will not be deductible.

Federal Tax Rules for Non-Qualified Deferred Compensation Plans. Section 409A of the Code imposes federal tax penalties on certain non-qualified deferred compensation arrangements. Section 409A generally does not apply to stock options granted at fair market value that do not have deferral features, or stock settled restricted stock awards reported as compensation paid at the time of vesting, such as the stock options and restricted stock awards contemplated by the Plan. The Company has designed the Plan to allow the Compensation Committee to make awards that comply with, or are exempt from, section 409A.

Excess Parachute Payments. Sections 280G and 4999 of the Code provide that, where payments to certain employees that are contingent on a change in control exceed specified limits, the employee generally is liable for a 20% excise tax on, and the corporation or other entity making the payment generally is not entitled to any deduction for, a specified portion of those payments. The Compensation Committee may grant awards under the Plan for which vesting is accelerated in connection with a change in control. Any such accelerated vesting would be relevant in determining whether the excise tax and deduction disallowance rules would be triggered.

The preceding statements are intended to summarize the general principles of current federal income tax law applicable to awards that may be made under the Plan. State and local tax consequences may also be significant.

Vote Required

The affirmative vote by the holders of a majority of the votes cast by the holders of our Common Stock present or represented and entitled to vote at the Special Meeting is necessary for approval of this proposal. Abstentions will have no effect on the outcome of the proposal.

Conclusion and Recommendation

The Board of Directors believes that it is in our best interests and in the best interests of the stockholders to adopt the 2016 Equity Incentive Plan to help attract, motivate and retain outstanding employees and directors and to align further their interests with those of the stockholders. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE 2016 EQUITY COMPENSATION PLAN.

 

54    AMERICAN CAPITAL, LTD. – Proxy Statement


Table of Contents

PROPOSAL 6: TO AUTHORIZE THE COMPANY, UNDER LIMITED CIRCUMSTANCES, TO SELL

SHARES OF COMMON STOCK BELOW THE NET ASSET VALUE PER SHARE

 

 

PROPOSAL 6:

TO AUTHORIZE THE COMPANY, UNDER LIMITED CIRCUMSTANCES,

TO SELL SHARES OF COMMON STOCK

BELOW THE NET ASSET VALUE PER SHARE

Introduction

As a BDC, we are prohibited under the 1940 Act from selling shares of our Common Stock at a price below our current NAV per share, subject to certain exceptions. One of these exceptions allows such sales if authorized through approval by the holders of a majority of our outstanding voting securities and by the holders of a majority of our outstanding voting securities who are not affiliated persons of us. In addition, our Board of Directors must make certain determinations prior to any such sale. As described further in this proposal, we are seeking approval to issue a limited number of shares of our Common Stock at a value below our NAV per share solely as partial payment in connection with a tender offer for outstanding stock options that we have previously issued to our employees as compensation that we plan to undertake prior to the completion of the Spin-Off.

If approved, the authorization would be effective for the period starting on the date of the Special Meeting and expiring on the earlier of (i) the first anniversary of such date and (ii) the distribution date for the Spin-Off, and the number of shares would be limited to a maximum of             shares of Common Stock, which is     % of the number of shares outstanding as of the Special Meeting record date, subject to adjustment under specified circumstances and which is the amount estimated to be necessary to implement the tender of options as described below.

Background

As discussed above, our Board of Directors has determined that it is in the best interests of American Capital and our stockholders to undertake the Spin-Off and to declare and pay a special dividend to our stockholders of all of the shares of common stock of ACAP. It is expected that the value of the special dividend will represent a significant portion of the pre-Spin-Off value of American Capital. However, under the terms of our stock option plans, holders of our stock options do not receive a dividend or any adjustments to the terms of their options, or other compensation for the value of the special dividend. It can be reasonably expected that as of the effective date of the Spin-Off, the value of American Capital shares will decline by approximately the value of the ACAP shares, although the combined value of the American Capital and ACAP shares can be expected to approximate the value of the American Capital shares immediately prior to the Spin-Off. However, because option holders do not receive any value associated with the special dividend or an adjustment to the number of shares or exercise price, the value of each option, as represented by the difference between the option’s exercise price and the price of American Capital common stock, will decline by approximately the value of the special dividend and will therefore result in the option becoming less valuable and may result in the option becoming worthless.

It should be noted that the impact of a spin-off transaction on outstanding stock options is a common issue and that companies deal with it in various ways. These actions include providing options in each of the resulting companies or making adjustments in the stock price and number of options issued by the option holder’s continuing employer to compensate for the otherwise lost value. Various legal and economic constraints prevent us from undertaking these actions. For instance, we are prohibited under the 1940 Act from issuing options in ACAP stock to American Capital employees.

Thus, so as to realize the value of their options before the value is reduced by the special dividend, option holders will likely find it necessary to exercise all of their in-the-money options prior to the Spin-Off. It is important to recognize that in exercising options, employee option holders must pay the exercise price of the option and also generally incur an income tax liability based on the amount by which the value of the underlying stock exceeds the exercise price for the option. For example, if a stock option has an exercise price of $10 per share and the stock is trading at $20 per share with the option holder in a 50% tax bracket, the holder will owe $10 for the exercise price plus $5 in taxes for every exercised option. Therefore, $15 of the market trading price will need to be expended by the option holder to exercise an option, and the option holder will only net $5 in after-tax proceeds. Because of the significant amount of cash typically necessary to exercise options, most option holders choose to sell many of the shares at the time of the option exercise. At many companies, option holders have the

 

AMERICAN CAPITAL, LTD. – Proxy Statement    55


Table of Contents

PROPOSAL 6: TO AUTHORIZE THE COMPANY, UNDER LIMITED CIRCUMSTANCES, TO SELL

SHARES OF COMMON STOCK BELOW THE NET ASSET VALUE PER SHARE

 

 

ability to undertake the exercise transaction with the company, with the company issuing to the option holder a net number of shares after deducting the value associated with the exercise price and tax liability in return for the option which the company extinguishes. This is commonly called a “net issue exercise.” However, the 1940 Act prohibits a BDC from undertaking net issue exercise transactions and, thus, our employee option holders typically sell shares of common stock on the market when they exercise options.

As of             , there were outstanding employee options for approximately             million shares of our Common Stock. Many American Capital employee options have been exercised recently with employees selling shares to pay the exercise price and tax liabilities and it is expected that option holders will continue to do so until the Spin-Off occurs. The sale of such shares by our employees to pay their option exercise price and taxes may exert downward pressure on our stock price. After considerable deliberation, our Board of Directors has concluded that it may be in stockholders’ interest to reduce the number of shares that need to be sold into the market from option exercises by conducting a tender offer for outstanding employee options. The price for the tendered options is expected to be the then current market price for the Common Stock at the time of the tender from which the exercise price of tendered options would be deducted. The tendering option holder would receive the resulting net amount in cash sufficient to pay the income tax due from the option exercise with the balance of the value delivered in the form of shares of American Capital Common Stock. Generally, this would have the same effect as a net issue exercise described above. However, considering the current and recent trading price of our Common Stock, American Capital may have to issue shares in the tender offer at a price below NAV per share. Because of the 1940 Act restrictions on issuing shares below NAV per share, stockholder authority to do so in connection with the tender offer is being sought by this proposal.

The following table lists the high and low sales prices for our Common Stock, and the closing sales price as a percentage of NAV per share. On                     , 2015, the last reported closing sales price of our Common Stock was $     per share. Given this extended history of our shares trading at a discount to NAV per share, we believe that there is a possibility that they will continue to do so at the time of a tender offer.

 

        Sales Price      High
Sales Price
to NAV (2)
    Low
Sales Price
to NAV (2)
 
      NAV (1)      High      Low       
Year ended December 31, 2015           

First Quarter

   $ 20.12       $ 15.34       $ 13.93         76     69

Second Quarter

   $ 20.35       $ 15.36       $ 13.54         75     67

Third Quarter

   $ *       $ *       $ *         *     *

Fourth Quarter

   $ *       $ *       $ *         *     *
Year ended December 31, 2014           

First Quarter

   $ 19.29       $ 16.37       $ 14.01         85     73

Second Quarter

   $ 20.12       $ 16.03       $ 14.24         80     71

Third Quarter

   $ 20.54       $ 15.77       $ 14.16         77     69

Fourth Quarter

   $ 20.50       $ 16.10       $ 13.59         79     66
Year ended December 31, 2013           

First Quarter

   $ 19.04       $ 15.24       $ 12.19         80     64

Second Quarter

   $ 19.28       $ 15.20       $ 11.82         79     61

Third Quarter

   $ 19.54       $ 13.94       $ 12.42         71     64

Fourth Quarter

   $ 18.97       $ 15.67       $ 13.38         83     71

 

(1) NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices. The NAVs per share shown are based on outstanding shares at the end of each period.

 

(2) Calculated as the respective high or low sales price divided by NAV per share.

 

* Not determinable at the time of filing.

 

56    AMERICAN CAPITAL, LTD. – Proxy Statement


Table of Contents

PROPOSAL 6: TO AUTHORIZE THE COMPANY, UNDER LIMITED CIRCUMSTANCES, TO SELL

SHARES OF COMMON STOCK BELOW THE NET ASSET VALUE PER SHARE

 

 

Conditions to Sales Below Net Asset Value Per Share

If the requisite stockholders approve this proposal, we may only sell or issue up to             shares of our Common Stock, which is     % of the number of shares of Common Stock outstanding as of the Special Meeting record date, subject to adjustment for the occurrence of events such as stock splits, stock dividends, distributions and recapitalizations, as well as any stock option exercises, at a price below NAV per share until the earlier of (i) the first anniversary of the date of the stockholder approval and (ii) the distribution date for the Spin-Off, if the following conditions are met:

 

   

The issuance would occur solely as partial payment in connection with a tender offer for outstanding stock options that we have previously issued to our employees as compensation;

 

   

The number of shares authorized to be issued would be limited to the number of shares needed to implement the equivalent of a net issue exercise for the options tendered by option holders in the tender offer; and

 

   

a “required majority” of our directors have determined that any such sale would be in the best interests of us and our stockholders; and

 

   

a “required majority” of our directors, in consultation with the underwriter or underwriters of the offering if it is to be underwritten, has determined in good faith, and as of a time immediately prior to the first solicitation by or on behalf of us of firm commitments to purchase such Common Stock or immediately prior to the issuance of such Common Stock, that the price at which such Common Stock is to be sold is not less than a price which closely approximates the market value of those shares of Common Stock, less any distributing commission or discount. (It is not expected that an underwriter will be involved in the tender offer and, thus, it is unlikely that this condition will apply.)

A “required majority” of directors means both a majority of our directors who have no financial interest in the transaction and a majority of our directors who are not interested persons of us. For these purposes, directors will not be deemed to have a financial interest solely by their ownership of our Common Stock.

Employee Lock-Up Agreements

In addition to benefitting our stockholders by reducing the number of shares likely to be sold on the open market in connection with option exercises, a tender offer may benefit participating option holders by providing some certainty as to the stock price on which their option exercises will be based. This is because the Board is expected to base the fixed tender price on the average of the Corporation’s stock price over a to be determined period. Employees selling shares on the open market will do so subject to varying market conditions at the time of sale and will have no assurance as to the actual sale price or whether there will be sufficient market demand to complete any share sales. This benefit should assist us in the retention and motivation of employees, many of whom have served us for long periods and who we believe are key to our future success, and thus also benefit our stockholders. In consideration of this benefit to our participating employees, employees who receive shares of American Capital Common Stock under the tender offer will agree that, for a period of 180 days after the concluding date of the tender offer, they will not, without the prior written consent of the Board of Directors, dispose of or hedge any shares of such Common Stock or any securities convertible into or exchangeable for such Common Stock, subject to certain exceptions. The Company may, in its sole discretion, release any of the securities subject to these lock-up agreements at any time, and in certain circumstances, without notice.

Effect of Issuing Shares Below Net Asset Value Per Share

Any sale of Common Stock at a price below NAV per share results in an immediate dilution to our existing stockholders on a per share basis. This dilution would include reduction in the NAV per share as a result of the issuance of shares at a price below the NAV per share and a decrease in a stockholder’s per share interest in the earnings and assets of the Company and per share voting interest in the Company. However, all of our outstanding stock options give their holders the right to purchase shares of our Common Stock at prices below the current NAV per share. Thus, the issuance of shares below NAV per share in the tender offer would not likely result in any dilution above the level that will already occur as a result of the exercise of all outstanding in-the-money employee stock options. Moreover, we believe that the tender offer would reduce such pending

 

AMERICAN CAPITAL, LTD. – Proxy Statement    57


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PROPOSAL 6: TO AUTHORIZE THE COMPANY, UNDER LIMITED CIRCUMSTANCES, TO SELL

SHARES OF COMMON STOCK BELOW THE NET ASSET VALUE PER SHARE

 

 

dilution assuming the current market price per share, as it would allow us to issue fewer shares relative to the case in which the options are exercised outright and as such would be less dilutive.

Set forth below is a comparison of the potential dilutive effect of the issuance of shares of our Common Stock below NAV per share in connection with the exercise of all of our outstanding in-the-money employee stock options and a potential tender offer for such options, based on the following assumptions: that 20,000,000 options are exercised or tendered1, that American Capital offers a tender price equal to the current market price per share of American Capital common stock as of                     , 20    , to be paid in part in American Capital common stock and in cash, in an amount sufficient only to cover the tax obligations. It does not include any effects or influence on market share price due to changes in investment performance over time, dividend policy, increased trading volume or other qualitative aspects of the shares of our Common Stock. Based on the example below, the issuance of shares below NAV per share in connection with a tender offer would result in $0.27 less dilution in our NAV per share than in connection with the exercise of employee stock options.

Hypothetical Comparison of Dilution from Option Exercises versus a Tender Offer

 

Scenarios   

20MM Options
Exercised
(No Tender)

    

20MM Options

Tendered in
Tender Offer
(No Options
Exercised)

    Difference  
Options Assumed to be Exercised      20,000,000                (20,000,000
Options Assumed to be Tendered      0         20,000,000         20,000,000   
Average Strike Price Per Share of Exercised or Tendered Options    $ 8.13       $ 8.13       $ 0.00   
Exercise or Tender Price Per Share for Options    $ 14.50       $ 14.50       $ 0.00   
Change in NAV*    $ 162,699,927       ($ 50,920,029 )     ($ 213,619,956
Shares Issued      20,000,000         5,267,589         (14,732,411
Total Potential Dilution from Q2 2015 NAV per Share    ($ 0.85    ($ 0.58 )     $ 0.27   

 

* Assumes American Capital offers a tender price equal to the then current market price per share of American Capital Common Stock, to be paid part in American Capital Common Stock and part in cash in an amount sufficient only to cover the tax obligations. As of June 30, 2015, the NAV per share for American Capital was $20.35 and the number of shares outstanding was 268,063,069.

Vote Required

The approval of this proposal requires the affirmative vote of (1) a majority of our outstanding voting securities as of the record date; and (2) a majority of our outstanding voting securities that are not held by affiliated persons of us, which includes directors, officers, employees and 5% stockholders, as of the record date. For purposes of this proposal, a “majority” of the outstanding voting securities, as defined in the 1940 Act, means the vote of (i) 67% or more of the shares of our Common Stock present at the Special Meeting, if the holders of 50% or more of our outstanding shares of Common Stock are present or represented by proxy or (ii) more than 50% of the outstanding shares of our Common Stock, whichever is the less. Abstentions will not count as affirmative votes and will therefore count against the proposal.

Conclusion and Recommendation

Our Board of Directors believes that having the flexibility to issue our Common Stock below NAV per share so as to allow for a tender offer for outstanding employee stock options is in the best interests of our stockholders and the Company. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO AUTHORIZE THE COMPANY, UNDER LIMITED CIRCUMSTANCES, TO SELL SHARES OF OUR COMMON STOCK BELOW THE NET ASSET VALUE PER SHARE.

 

1  As of                     , 20    ,                      in-the-money options were outstanding. Accordingly, for this hypothetical example we have assumed 20,000,000 options will be exercised or tendered.

 

58    AMERICAN CAPITAL, LTD. – Proxy Statement


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PROPOSAL 7: TO AUTHORIZE THE CHAIRMAN OF THE SPECIAL MEETING TO

ADJOURN THE SPECIAL MEETING IF NECESSARY OR APPROPRIATE

 

 

PROPOSAL 7:

TO AUTHORIZE THE CHAIRMAN OF THE SPECIAL MEETING

TO ADJOURN THE SPECIAL MEETING IF NECESSARY OR APPROPRIATE

General

If this proposal is adopted, the Special Meeting may be adjourned to another time and place, if necessary or appropriate, in the sole discretion of the Chairman of the Special Meeting, to obtain a quorum or to permit, among other things, further solicitation of proxies if necessary to obtain additional votes in favor of the other proposals.

Vote Required

The affirmative vote by the holders of a majority of the votes cast by the holders of our Common Stock present or represented and entitled to vote at the Special Meeting is necessary for approval of this proposal. Abstentions will have no effect on the outcome of the proposal.

Conclusion and Recommendation

Accordingly, we are asking stockholders to authorize the holder of any proxy solicited by the Board to vote in favor of the proposal that the Chairman of the Board adjourn the Special Meeting, if necessary and appropriate, in the sole discretion of the chairman of the Special Meeting, to obtain a quorum or to solicit additional proxies if there are not sufficient votes to approve the proposals at the time of the Special Meeting. We currently intend to adjourn the Special Meeting if there are insufficient votes at the time of the Special Meeting to approve the proposals. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADJOURNMENT PROPOSAL.

 

AMERICAN CAPITAL, LTD. – Proxy Statement    59


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DIRECTOR COMPENSATION

 

 

DIRECTOR COMPENSATION

The elements of compensation for our non-employee directors include retainers, stock options and, if applicable, compensation for serving on the boards of directors of our portfolio companies. Non-employee directors are paid a retainer for service on the Board of Directors at the rate of $200,000 per year, payable quarterly in advance, and each member of the Audit, Compliance and Valuation Committee and the Compensation, Corporate Governance and Nominating Committee receives an additional retainer at the rate of $40,000 per year and each member of the Executive Committee receives an additional retainer at the rate of $15,000 per year. The lead director and members chairing the Audit, Compliance and Valuation Committee and the Compensation, Corporate Governance and Nominating Committee receive an additional retainer at the rate of $40,000, $20,000 and $20,000 per year, respectively.

Non-employee directors received a fee from us for each American Capital portfolio company or fund board of directors on which they served, in lieu of any payment by the portfolio company or fund. For such companies that are not public, that fee is set at the rate of $40,000 per year. For such companies that are public, that fee is based on the fee payable by the company to its other directors. Directors are also reimbursed for travel, lodging and other out-of-pocket expenses incurred in connection with the Board of Directors and committee meetings. Directors who are our employees do not receive additional compensation for service as a member of the Board of Directors.

The following table sets forth the compensation received by each non-employee director during 2014(1):

 

Name   

Fees Earned

or Paid in

Cash (2)

($)

    

Stock

Awards

($)

    

Option

Awards (3)

($)

    

Non-Equity

Incentive Plan

Compensation

($)

    

Change in

Pension Value

and

Nonqualified

Deferred

Compensation

Earnings

($)

    

All Other

Compensation

($)

    

Total

($)

 
Mary C. Baskin      286,000                                                 286,000   
Neil M. Hahl      358,500                                                 358,500   
Philip R. Harper      331,500                                                 331,500   
Stan Lundine      268,000                                                 268,000   
Susan Nestegard      243,000                                                 243,000   
Kenneth D. Peterson, Jr.      221,000