As filed with the Securities and Exchange Commission on October 2,
2019
File No. 812-15019
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDED AND RESTATED APPLICATION FOR AN ORDER PURSUANT TO SECTIONS
17(d) AND 57(i) OF THE INVESTMENT COMPANY ACT OF 1940 AND RULE
17d-1 THEREUNDER PERMITTING CERTAIN JOINT TRANSACTIONS OTHERWISE
PROHIBITED BY SECTIONS 17(d) AND 57(a)(4) OF THE INVESTMENT COMPANY
ACT OF 1940 AND RULE 17d-1 THEREUNDER
GREAT ELM CAPITAL CORP., GREAT ELM CAPITAL MANAGEMENT, INC., GREAT
ELM OPPORTUNITIES FUND I, LP
All Communications, Notices and Orders to:
Adam M. Kleinman
Secretary
Great Elm Capital Corp.
800 South Street, Suite 230
Waltham, Massachusetts 02453
Telephone Number: (617) 375-3000
Copies to:
Michael
Hoffman
Skadden,
Arps, Slate, Meagher & Flom LLP
Four
Times Square
New York,
NY 10036
Telephone
Number: (212) 735-3000
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Kenneth
E. Burdon
Skadden,
Arps, Slate, Meagher & Flom LLP
500
Boylston Street
Boston,
MA 02116
Telephone
Number: (617) 573-4800
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October 2, 2019
I. |
SUMMARY OF APPLICATION
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The following entities hereby request an order (the “Order”) from the
Securities and Exchange Commission (the “Commission”)
pursuant to Sections 17(d) and 57(i) and Rule 17d-11
under the Investment Company Act of 1940, as amended (the
“Act”),2
authorizing certain joint transactions that otherwise may be
prohibited by either or both of Sections 17(d) and 57(a)(4) of the
Act as modified by the exemptive rules adopted by the Commission
under the Act:
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Great Elm
Capital Corp. (“GECC”), a
closed-end investment company that has elected to be treated as a
business development company (“BDC”) pursuant to
Section 54 of the Act,3
on behalf of itself and its successors,4
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Great Elm
Opportunities Fund I, LP (“Existing Affiliated
Fund”), which is a separate and distinct legal entity and
would be an investment company but for Section 3(c)(7) of the Act,
and
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Great Elm
Capital Management, Inc., GECC’s and the Existing Affiliated Fund's
investment adviser (“Great Elm
Adviser”), on behalf of itself and its successors (GECC, the
Existing Affiliated Fund and Great Elm Adviser are referred to
collectively herein as the “Applicants”).
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The relief requested in this application (the “Application”) would
permit a Regulated Fund and one or more other Regulated
Funds5
and/or one or more Affiliated Funds6
to (a) co-invest with each other in investment opportunities in
which Great Elm Adviser negotiates terms in addition to price
(“Private
Placement Investments”) and (b) make additional investments
in such issuers, including through the exercise of warrants,
conversion privileges, and other rights to purchase securities of
the issuers (“Follow-On
Investments”) through a proposed co-investment program (the
“Co-Investment
Program”) where such participation would otherwise be
prohibited under
1 |
Unless
otherwise indicated, all rule references herein are to rules under
the Act.
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2 |
Unless
otherwise indicated, all section references herein are to the
Act.
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3 |
Section
2(a)(48) of the Act defines a BDC to be any closed-end investment
company that operates for the purpose of making investments in
securities described in Sections 55(a)(1) through 55(a)(3) of the
Act and makes available significant managerial assistance with
respect to the issuers of such securities.
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4 |
For the
purposes of the requested Order, a “successor” includes
an entity or entities that result from a reorganization into
another jurisdiction or a change in the type of business
organization.
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5 |
The term
“Regulated
Fund” refers to GECC and any Future Regulated Fund. The term
“Future
Regulated Fund” means any closed-end management investment
company that (a) is registered under the Act or has elected to be
regulated as a BDC under the Act, (b) whose investment adviser is
an Adviser, and (c) intends to participate in the Co-Investment
Program. The term “Adviser” means (a)
Great Elm Adviser and (b) any future investment adviser that (i)
controls, is controlled by or is under common control with Great
Elm Adviser and (ii) (a) is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended (the
“Advisers
Act”) or (b) is a relying adviser of an investment adviser
that is registered under the Advisers Act and that controls, is
controlled by, or is under common control with, Great Elm
Adviser.
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6 |
The term
“Affiliated
Fund” means (a) the Existing Affiliated Fund and (b) any
Future Affiliated Fund. The term “Future Affiliated
Fund” means any entity (a) whose investment adviser is an
Adviser, (b) that would be an investment company but for Section
3(c)(1), 3(c)(5)(C) or 3(c)(7) of the Act, and (c) that intends to
participate in the Co-Investment Program.
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Section 17(d) or Section 57(a)(4) and the rules under the Act. The
term “Co-Investment
Transaction” means any transaction in which a Regulated Fund
(or its Wholly-Owned Investment Sub)7
participates together with one or more other Regulated Funds and/or
one or more Affiliated Funds in reliance on the requested
Order.8
“Potential
Co-Investment Transaction” means any investment opportunity
in which a Regulated Fund (or its Wholly-Owned Investment Sub)
could not participate together with one or more other Regulated
Funds and/or one or more Affiliated Funds without obtaining and
relying on the requested Order.
Any of the Regulated Funds may, from time to time, form one or more
Wholly-Owned Investment Subs. A Wholly-Owned Investment Sub would
be prohibited from investing in a Co-Investment Transaction with
any other Regulated Fund or Affiliated Fund because it would be a
company controlled by its parent Regulated Fund for purposes of
Section 57(a)(4) and Rule 17d-1. Applicants request that each
Wholly-Owned Investment Sub be permitted to participate in
Co-Investment Transactions in lieu of its parent Regulated Fund and
that the Wholly-Owned Investment Sub’s participation in any such
transaction be treated, for purposes of the requested Order, as
though the Regulated Fund were participating directly. Applicants
represent that this treatment is justified because a Wholly-Owned
Investment Sub would have no purpose other than serving as a
holding vehicle for the Regulated Fund’s investments and,
therefore, no conflicts of interest could arise between the
Regulated Fund and the Wholly-Owned Investment Sub. The Regulated
Fund’s Board would make all relevant determinations under the
conditions with regard to a Wholly-Owned Investment Sub’s
participation in a Co-Investment Transaction, and the Regulated
Fund’s Board would be informed of, and take into consideration, any
proposed use of a Wholly-Owned Investment Sub in the Regulated
Fund’s place. If the Regulated Fund proposes to participate in the
same Co-Investment Transaction with any of its Wholly-Owned
Investment Subs, the Board will also be informed of, and take into
consideration, the relative participation of the Regulated Fund and
the Wholly-Owned Investment Sub.
All existing entities that currently intend to rely upon the
requested Order have been named as Applicants. Any other existing
or future entity that subsequently relies on the requested Order
will comply with the terms and conditions of the Application.
Applicants do not seek relief for
7 |
The term
“Wholly-Owned
Investment Sub” means an entity (a) whose sole business
purpose is to hold one or more investments on behalf of a Regulated
Fund (and, in the case of an SBIC Subsidiary (as defined below),
maintain a license under the SBA Act (as defined below) and issue
debentures guaranteed by the SBA (as defined below)); (b) that is
wholly-owned by the Regulated Fund (with the Regulated Fund at all
times holding, beneficially and of record, 100% of the voting and
economic interests), (c) with respect to which the Regulated Fund’s
Board of Directors has the sole authority to make all
determinations with respect to the entity’s participation under the
conditions to this Application; and (d) that would be an investment
company but for Section 3(c)(1) or 3(c)(7) of the Act. All
subsidiaries of the Regulated Fund participating in Co-Investment
Transactions will be Wholly-Owned Investment Subs. The term
“SBIC
Subsidiary” means a Wholly-Owned Investment Sub that is
licensed by the Small Business Administration (the “SBA”) to operate
under the Small Business Investment Act of 1958, as amended, (the
“SBA
Act”) as a small business investment company (an
“SBIC”).
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8 |
No
Non-Interested Director (as defined below) of a Regulated Fund will
have a direct or indirect financial interest in any Co-Investment
Transaction (other than indirectly through share ownership in one
of the Regulated Funds), including any interest in any company
whose securities would be acquired in a Co-Investment
Transaction.
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transactions that would be permitted under other regulatory or
interpretive guidance, including, for example, transactions
effected consistent with Commission staff no-action
positions.9
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A. |
Great Elm Capital Corp.
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GECC is a specialty finance company that is a closed-end,
non-diversified management investment company incorporated in
Maryland. GECC was organized in April 2016 and commenced operations
on November 3, 2016 when Full Circle Capital Corporation, a
Maryland corporation, merged with and into GECC. Beginning with
GECC’s tax year starting October 1, 2016, GECC elected to be
treated, and intends to continue to qualify annually, as a
regulated investment company (“RIC”) under
Sub-Chapter M of the Internal Revenue Code of 1986, as amended (the
“Code”). GECC has
elected to be regulated as a BDC under Section 54(a) of the Act.
GECC gave notice of its intent to be regulated as a BDC by filing a
Form N-54A with the Commission on September 27, 2016. GECC is
an “emerging growth company” within the meaning of the Jumpstart
Our Business Startups (JOBS) Act. As of June 30, 2019, GECC had
total assets of approximately $334.6 million.
GECC’s investment objective is to seek to generate both current
income and capital appreciation, while seeking to protect against
risk of capital loss, by investing predominantly in the debt
securities of middle market companies, which GECC defines as
companies with enterprise values between $100.0 million and $2.0
billion.
GECC seeks to generate current interest and capital appreciation by
primarily focusing on investing in secured and senior unsecured
debt instruments in middle-market companies that offer sufficient
downside protection but with the opportunity to unlock substantial
return potential (interest income plus capital appreciation and
fees, if any) that appropriately recognizes potential investment
risks.
GECC targets investments that it perceives to be undervalued due to
over-leveraging or which operate in industries experiencing
cyclical declines and may trade at discounts to their original
issue prices. GECC sources these transactions in the secondary
markets and occasionally directly with issuers. GECC seeks to
protect against the risk of loss by investing in borrowers with
tangible and intangible assets, where Great Elm Adviser believes
asset values are expected to, or do, exceed GECC’s investment and
any debt that is senior to, or ranks in parity with, its
investment. Great Elm Adviser’s investment process includes a focus
on an investment’s contractual documents, as it seeks to identify
rights that enhance an investment’s risk protection and avoid
contracts that compromise potential returns or recoveries. Although
GECC intends to focus on senior debt instruments of middle-market
companies, it may make investments throughout a company’s capital
structure, including subordinated debt, mezzanine debt, and equity
or equity-linked securities.
9 |
See,
e.g., Massachusetts Mutual Life Insurance Co. (pub. Avail. June
7, 2000), Massachusetts Mutual Life Insurance Co. (pub. Avail. July
28, 2000) and SMC Capital, Inc. (pub. Avail. Sept. 5, 1995).
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GECC’s business and affairs are managed under the direction of a
Board,10
a majority of whom are Non-Interested Directors.11
GECC’s Board has delegated daily management and investment
authority to Great Elm Adviser pursuant to an investment management
agreement (the “Investment Management
Agreement”). Great Elm Adviser also serves as GECC’s
administrator pursuant to an administration agreement.
Great Elm Adviser may be deemed to control GECC by virtue of its
position as GECC’s investment adviser. Great Elm Opportunities GP,
Inc. (“GEGP”) may be
deemed to control the Existing Affiliated Fund by virtue of its
position as the general partner of the Existing Affiliated Fund.
Great Elm Capital Group, Inc. (“Holdings”) may be
deemed to control Great Elm Adviser and GEGP by virtue of its
direct or indirect ownership of greater than 25% of the voting
equity of Great Elm Adviser and GEGP. GECC, the Existing Affiliated
Fund and Great Elm Adviser thus may all be deemed to be under the
direct or indirect common control of Holdings.
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B. |
Great Elm Capital Management, Inc.
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Great Elm Adviser, a Delaware corporation that is registered under
the Advisers Act, serves as the investment adviser to GECC pursuant
to the Investment Management Agreement. Subject to the overall
supervision of GECC’s Board, Great Elm Adviser manages the
day-to-day operations of, and provides investment advisory and
management services to, GECC. Under the terms of the Investment
Management Agreement, Great Elm Adviser determines the composition
of GECC’s portfolio, the nature and timing of the changes to GECC’s
portfolio, and the manner of implementing such changes; identifies,
evaluates and negotiates the structure of the investments GECC
makes (including performing due diligence on GECC’s prospective
portfolio companies); closes, monitors, and, when and where
applicable, restructures the investments GECC makes; and determines
the investments and other assets that GECC purchases, retains or
sells.
Pursuant to the administration agreement, Great Elm Adviser also
furnishes GECC with, or otherwise arranges for the provision of,
office facilities, equipment, clerical, bookkeeping and
record-keeping services at such office facilities. Under the
administration agreement, Great Elm Adviser also performs, or
oversees the performance of, GECC’s required administrative
services, which include, among other things, being responsible for
the financial records that GECC is required to maintain and
preparing reports to GECC’s stockholders and reports filed with the
Commission. In addition, Great Elm Adviser oversees GECC in
determining and publishing GECC’s net asset value, oversees the
preparation and filing of GECC’s tax returns and the printing and
dissemination of reports to GECC’s stockholders, and generally
oversees the payment of GECC’s expenses and the performance of
administrative and professional services rendered to GECC by
others.
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C. |
Great Elm Opportunities Fund I, LP
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The Existing Affiliated Fund was organized as a limited partnership
under Delaware law on October 13, 2017 and would be an investment
company but for the exclusion from the definition
10 |
The term
“Board”
means, with respect to any Regulated Fund, the board of directors
of that Regulated Fund.
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11 |
The term
“Non-Interested
Directors” means, with respect to any Board, the directors
who are not “interested persons” within the meaning of Section
2(a)(19).
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of investment company provided by Section 3(c)(7) of the
1940 Act. The Existing Affiliated Fund’s investment
objective is to seek total returns by investing throughout the
capital structures of leveraged issuers. The Existing Affiliated
Fund accepted its first subscriptions from limited partners in the
third quarter of 2018 and is managed by Great Elm Adviser. From
time to time, certain positons that are suitable for the Existing
Affiliated Fund may also fit the investment objectives of
GECC.
The Applicants respectfully request an Order of the Commission
under Sections 17(d) and 57(i) under the Act, and Rule 17d-1 under
the Act to permit, subject to the terms and conditions set forth
below in this Application (the “Conditions”), one
or more Regulated Funds to be able to participate in Co-Investment
Transactions with one or more other Regulated Funds and/or one or
more Affiliated Funds.
The Regulated Funds and Affiliated Funds seek relief to enter into
Co-Investment Transactions because such Co-Investment Transactions
would otherwise be prohibited by either or both of Sections 17(d)
and 57(a)(4) of the Act and Rule 17d-1 under the Act. This
Application seeks relief in order to (i) enable the Regulated Funds
and the Affiliated Funds to avoid, among other things, the
practical commercial and/or economic difficulties of trying to
structure, negotiate and persuade counterparties to enter into
transactions while awaiting the granting of the relief requested in
individual applications with respect to each Co-Investment
Transaction that arises in the future and (ii) enable the Regulated
Funds and the Affiliated Funds to avoid the significant legal and
other expenses that would be incurred in preparing such individual
applications.
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A. |
Section 17(d) and Section 57(a)(4)
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Section 17(d) of the Act generally prohibits an affiliated person
(as defined in Section 2(a)(3) of the Act), or an affiliated person
of such affiliated person, of a registered investment company
acting as principal, from effecting any transaction in which the
registered investment company is a joint or a joint and several
participant, in contravention of such rules as the Commission may
prescribe for the purpose of limiting or preventing participation
by the registered investment company on a basis different from or
less advantageous than that of such other participant.
Similarly, with regard to BDCs, Section 57(a)(4) prohibits certain
persons specified in Section 57(b) of the Act from participating in
a joint transaction with a BDC, or a company controlled by a BDC in
contravention of rules as prescribed by the Commission. In
particular, Section 57(a)(4) applies to:
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Any
director, officer, employee, or member of an advisory board of a
BDC; or any person (other than the BDC itself) who is an affiliated
person of the forgoing pursuant to Section 2(a)(3)(C) of the Act;
or
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Any
investment adviser or promoter of, general partner in, principal
underwriter for, or person directly or indirectly either
controlling, controlled by, or under common control with, a BDC
(except the BDC itself and any person who, if it were not directly
or indirectly controlled by the BDC, would not be directly or
indirectly
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under the control of a person who controls the BDC);12
or any person who is an affiliated person of any of the forgoing
within the meaning of Section 2(a)(3)(C) or (D) of the Act.
Section 2(a)(3)(C) of the Act defines an “affiliated person” of
another person to include any person directly or indirectly
controlling, controlled by, or under common control with, such
other person. Section 2(a)(3)(D) of the Act defines “any officer,
director, partner, copartner, or employee” of an affiliated person
as an affiliated person. Section 2(a)(9) of the Act defines
“control” as the power to exercise a controlling influence over the
management or policies of a company, unless such power is solely
the result of an official position with that company. Under Section
2(a)(9) of the Act a person who beneficially owns, either directly
or through one or more controlled companies, more than 25% of the
voting securities of a company is presumed to control such company.
The Commission and its staff have indicated on a number of
occasions their belief that an investment adviser that provides
discretionary investment management services to a fund and that
sponsored, selected the initial directors, and provides
administrative or other non-advisory services to the fund, controls
such fund, absent compelling evidence to the contrary.13
An Adviser is or will be the investment adviser to each Regulated
Fund and Affiliated Fund. The Regulated Funds and Affiliated Funds
may be deemed to be under common control, and thus affiliated
persons of each other under Section 2(a)(3)(C) of the Act. As a
result, these relationships might cause each Regulated Fund and
each Affiliated Fund participating in Co-Investment Transactions to
be subject to Sections 17(d) or 57(a)(4), and thus subject to the
provisions of Rule 17d-1.
Rule 17d-1 generally prohibits an affiliated person (as defined in
Section 2(a)(3)), or an affiliated person of such affiliated
person, of a registered investment company acting as principal,
from effecting any transaction in which the registered investment
company, or a company controlled by such registered company, is a
joint or a joint and several participant, in contravention of such
rules as the Commission may prescribe for the purpose of limiting
or preventing participation by the registered investment company on
a basis different from or less advantageous than that of such first
or second tier affiliate. Rule 17d-1 also generally prohibits
participation by a registered investment company and an affiliated
person (as defined in Section 2(a)(3) of the Act) or
12 |
Also excluded
from this category by Rule 57b-1 is any person who would otherwise
be included (a) solely because that person is directly or
indirectly controlled by a business development company, or (b)
solely because that person is, within the meaning of Section
2(a)(3)(C) or (D), an affiliated person of a person described in
(a) above.
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13 |
See,
e.g., SEC Rel. No. IC-4697 (Sept. 8, 1966) (“For purposes of
Section 2(a)(3)(C), affiliation based upon control would depend on
the facts of the given situation, including such factors as
extensive interlocks of officers, directors or key personnel,
common investment advisers or underwriters, etc.”); Lazard
Freres Asset Management, SEC No-Action Letter (pub. avail. Jan.
10, 1997) (“While, in some circumstances, the nature of an advisory
relationship may give an adviser control over its client’s
management or policies, whether an investment company and another
entity are under common control is a factual question…“);
In re Investment
Company Mergers, SEC Rel. No. IC-25259 (Nov. 8, 2001);
In re Steadman
Security Corp., 46 S.E.C. 896, 920 n.81 (1977) (“[T]he
investment adviser almost always controls the fund. Only in the
very rare case where the adviser’s role is simply that of advising
others who may or may not elect to be guided by his advice…can the
adviser realistically be deemed not in control.”).
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principal underwriter for that investment company, or an affiliated
person of such affiliated person or principal underwriter, in any
“joint enterprise or other joint arrangement or profit-sharing
plan,” as defined in the rule, without prior approval by the
Commission by order upon application.
Rule 17d-1 was promulgated by the Commission pursuant to Section
17(d) and made applicable to persons subject to Sections 57(a) and
(d) by Section 57(i) to the extent specified therein. Section 57(i)
provides that, until the Commission prescribes rules under Sections
57(a) and (d), the Commission’s rules under Section 17(d)
applicable to registered closed-end investment companies will be
deemed to apply to persons subject to the prohibitions of Section
57(a) or (d). Because the Commission has not adopted any rules
under Section 57(a) or (d), Rule 17d-1 applies to persons subject
to the prohibitions of Section 57(a) or (d).
Applicants seek relief pursuant to Rule 17d-1, which permits the
Commission to authorize joint transactions upon application. In
passing upon applications filed pursuant to Rule 17d-1, the
Commission is directed by Rule 17d-1(b) to consider whether the
participation of a registered investment company or controlled
company thereof in the joint enterprise or joint arrangement under
scrutiny is consistent with provisions, policies and purposes of
the Act and the extent to which such participation is on a basis
different from or less advantageous than that of other
participants.
The Commission has stated that Section 17(d), upon which Rule 17d-1
is based, and upon which Section 57(a)(4) was modeled, was designed
to protect investment companies from self-dealing and overreaching
by insiders. The Commission has also taken notice that there may be
transactions subject to these prohibitions that do not present the
dangers of overreaching. See Protecting Investors: A
Half-Century of Investment Company Regulation, 1504
Fed.Sec.L.Rep., Extra Edition (May 29, 1992) at 448, et seq. The Court of Appeals for the
Second Circuit has enunciated a like rationale for the purpose
behind Section 17(d): “The objective of [Section] 17(d) … is to
prevent … injuring the interest of stockholders of registered
investment companies by causing the company to participate on a
basis different from or less advantageous than that of such other
participants.” Securities and Exchange Commission v. Talley
Industries, Inc., 399 F.2d 396, 405 (2d Cir. 1968), cert.
denied, 393 U.S. 1015 (1969). Furthermore, Congress
acknowledged that the protective system established by the
enactment of Section 57 is “similar to that applicable to
registered investment companies under Section 17 of the Act, and
rules thereunder, but is modified to address concerns relating to
unique characteristics presented by business development
companies.” H.Rep. No. 96-1341, 96th Con., 2d Sess. 45 (1980)
reprinted in 1980 U.S.C.C.A.N. 4827.
Applicants believe that the terms and Conditions of this
Application would ensure that the conflicts of interest that
Section 17(d) and Section 57(a)(4) were designed to prevent would
be addressed and the standards for an order under Rule 17d-1 are
met.
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C. |
Protection Provided by the Proposed Conditions
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Applicants believe that the proposed Conditions, as discussed more
fully in Section III.D of this Application, will ensure the
protection of shareholders of the Regulated Funds and compliance
with the purposes and policies of the Act with respect to the
Co-Investment Transactions. In
particular, the Conditions, as outlined below, would ensure that
each Regulated Fund would only invest in investments that are
appropriate to the interests of shareholders and the investment
needs and abilities of that Regulated Fund. In addition, each
Regulated Fund would be able to invest on equal footing with each
other Regulated Fund and/or one or more Affiliated Funds, including
identical terms, conditions, price, class of securities purchased,
settlement date, and registration rights. Each Regulated Fund would
have the ability to engage in Follow-On Investments in a fair
manner consistent with the protections of the other Conditions.
Each Regulated Fund would have the ability to participate on a
proportionate basis, at the same price and on the same terms and
conditions in any sale of a security purchased in a Co-Investment
Transaction. Fees and expenses of Co-Investment Transactions would
be borne by Great Elm Adviser, or shared pro rata among the
Regulated Funds and Affiliated Funds who participate in the
Co-Investment Transactions. The Conditions would also prevent a
Regulated Fund from investing in reliance on the requested Order in
any issuer in which another Regulated Fund, Affiliated Fund, or any
affiliated person thereof, is an existing investor, which
eliminates the possibility of a Regulated Fund being forced to
invest in a manner that would benefit an affiliated person’s
existing investment. Also, sufficient records of the transactions
would be maintained to permit the examination staff of the
Commission to monitor compliance with the terms of the requested
order.
The Conditions impose a variety of duties on Great Elm Adviser with
respect to Co-Investment Transactions and Potential Co-Investment
Transactions by the Regulated Funds. These duties include
determinations regarding investment appropriateness, the
appropriate level of investment, and the provision of information
to the Board of any Regulated Fund. In addition, when considering
Potential Co-Investment Transactions for any Regulated Fund, Great
Elm Adviser will consider only the Objectives and
Strategies,14
Board-Established Criteria,15
investment policies, investment positions, capital available for
investment, and other pertinent factors applicable to that
Regulated Fund. The participation of a Regulated Fund in a
Potential Co-Investment Transaction may only be approved by a
Required Majority, as defined in Section
14 |
The term
“Objectives
and Strategies” means a Regulated Fund’s investment
objectives and strategies as described in the Regulated Fund’s
registration statement, other filings the Regulated Fund has made
with the Commission under the Securities Act of 1933 or the
Securities Exchange Act of 1934, and the Regulated Fund’s reports
to shareholders.
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15 |
The term
“Board-Established
Criteria” means criteria that the Board of the applicable
Regulated Fund may establish from time to time to describe the
characteristics of Potential Co-Investment Transactions which would
be within the Regulated Fund’s then-current Objectives and
Strategies that the applicable Adviser should consider as
appropriate for the Regulated Fund. If no Board-Established
Criteria are in effect for a Regulated Fund, then such Adviser will
consider all Potential Co-Investment Transactions that fall within
the then-current Objectives and Strategies for that Regulated Fund.
Board-Established Criteria will be objective and testable, meaning
that they will be based on observable information, such as
industry/sector of the issuer, minimum EBITDA of the issuer, asset
class of the investment opportunity or required commitment size,
and not on characteristics that involve discretionary assessment.
Great Elm Adviser may from time to time recommend criteria for the
applicable Board’s consideration, but Board-Established Criteria
will only become effective if approved by a majority of the
Non-Interested Directors. The Non-Interested Directors of a
Regulated Fund may at any time rescind, suspend or qualify its
approval of any Board-Established Criteria, though Applicants
anticipate that, under normal circumstances, the Board would not
modify these criteria more often than quarterly.
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57(o) (a “Required
Majority”), of the directors of the Board eligible to vote
on that Co-Investment Transaction under Section 57(o) (the
“Eligible
Directors”).16
Applicants believe that the use of Board-Established Criteria for
each of the Regulated Funds is appropriate based on the potential
size and scope of Great Elm Adviser’s advisory business, in
particular since Great Elm Adviser intends to continue to evaluate
and consider sponsoring new advisory clients that may be eligible
to participate in the Co-Investment Program, and may pursue
transactions to increase the size and base of investable capital
for GECC and the Existing Affiliated Fund. Great Elm Adviser
presently considers, and potentially more so in the future expects
that it will consider, a large number of investment opportunities,
many of which would not be appropriate for one or more Regulated
Funds. By using the Board-Established Criteria for a Regulated
Fund, Great Elm Adviser will be able to limit the Potential
Co-Investment Opportunities it considers for the Regulated Fund to
objective, verifiable, and testable criteria established by the
Regulated Fund’s Board. In addition to the other protections
offered by the Conditions to the Application, using
Board-Established Criteria in the allocation of Potential
Co-Investment Transactions will further reduce the risk of
subjectivity in Great Elm Adviser’s determination of whether an
investment opportunity is appropriate for a Regulated Fund. In
connection with the Board’s annual review of the continued
appropriateness of any Board-Established Criteria under Condition
9, the Regulated Fund's Adviser will provide information regarding
any Co-Investment Transaction (including, but not limited to
Follow-On Investments) effected by the Regulated Fund that did not
fit within the then-current Board-Established Criteria.
The amount of each Regulated Fund’s capital available for
investment will be determined based on the amount of liquid assets
not held for permanent investment, including cash, amounts that can
currently be drawn down from lines of credit, marketable securities
held for short-term purposes and existing commitments and reserves
(if any), the targeted leverage level, targeted asset mix, and
other investment policies and restrictions set from time to time by
the Board of the applicable Regulated Fund or imposed by applicable
laws, rules, regulations or interpretations. Likewise, an
Affiliated Fund’s capital available for investment will be
determined based on the amount of liquid assets not held for
permanent investment, including cash, amounts that can currently be
drawn down from lines of credit, marketable securities held for
short-term purposes and existing commitments and reserves (if any),
the targeted leverage level, targeted asset mix, and other
investment policies and restrictions set by the Affiliated Fund’s
directors, general partners or adviser or imposed by applicable
laws, rules, regulations or interpretations. In addition, capital
available for investment includes, where applicable, bona fide
uncalled capital commitments that can be called by the settlement
date of the Co-Investment Transaction.
If Great Elm Adviser or its principals, or any person controlling,
controlled by, or under common control with Great Elm Adviser or
its principals, and the Affiliated Funds (collectively, the
“Holders”) own in
the aggregate more than 25 percent of the outstanding voting shares
of a Regulated Fund (the “Shares”), then the
Holders will vote such Shares as required under Condition 14.
16 |
In the case of
a Regulated Fund that is a registered fund, the Board members that
make up the Required Majority will be determined as if the
Regulated Fund were a BDC subject to Section 57(o).
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Applicants believe that this Condition will ensure that the
Non-Interested Directors will act independently in evaluating the
Co-Investment Program, because the ability of Great Elm Adviser or
the principals to influence the Non-Interested Directors by a
suggestion, explicit or implied, that the Non-Interested Directors
can be removed will be limited significantly. The Non-Interested
Directors shall evaluate and approve any such independent third
party, taking into account its qualifications, reputation for
independence, cost to the shareholders, and other factors that they
deem relevant.
In sum, the Applicants believe that the proposed Conditions would
ensure that each Regulated Fund that participated in a
Co-Investment Transaction does not participate on a basis different
from, or less advantageous than, that of such other participants.
As a result, the Applicants believe that the participation of the
Regulated Funds in Co-Investment Transactions done in accordance
with the Conditions would be consistent with the provisions,
policies, and purposes of the Act, and would be done in a manner
that was not different from, or less advantageous than, the other
participants.
With respect to each Wholly-Owned Investment Sub, such a subsidiary
would be prohibited from investing in a Co-Investment Transaction
with any Affiliated Fund or Regulated Fund because it would be a
company controlled by its parent Regulated Fund for purposes of
Section 57(a)(4) of the Act and Rule 17d-1 under the Act.
Applicants request that each Wholly-Owned Investment Sub be
permitted to participate in Co-Investment Transactions in lieu of
its parent Regulated Fund and that the Wholly-Owned Investment
Sub’s participation in any such transaction be treated, for
purposes of the requested Order, as though the parent Regulated
Fund were participating directly. Applicants represent that this
treatment is justified because a Wholly-Owned Investment Sub would
have no purpose other than serving as a holding vehicle for the
Regulated Fund’s investments and, therefore, no conflicts of
interest could arise between the Regulated Fund and the
Wholly-Owned Investment Sub. The Regulated Fund’s Board would make
all relevant determinations under the Conditions with regard to a
Wholly-Owned Investment Sub’s participation in a Co-Investment
Transaction, and the Regulated Fund’s Board would be informed of,
and take into consideration, any proposed use of a Wholly-Owned
Investment Sub in the Regulated Fund’s place. If the Regulated Fund
proposes to participate in the same Co-Investment Transaction with
any of its Wholly-Owned Investment Subs, the Board will also be
informed of, and take into consideration, the relative
participation of the Regulated Fund and the Wholly-Owned Investment
Sub.
Applicants agree that any Order granting the requested relief shall
be subject to the following Conditions:
1. (a) Each
Adviser will establish, maintain and implement policies and
procedures reasonably designed to ensure that it identifies for
each Regulated Fund all Potential Co-Investment Transactions that
(i) the Adviser considers for any other Regulated Fund or
Affiliated Fund and (ii) fall within the Regulated Fund’s
then-current Objectives and Strategies and Board-Established
Criteria.
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(b) |
When an Adviser identifies a Potential Co-Investment Transaction
for a Regulated Fund under Condition 1(a), the Adviser will make an
independent determination of the appropriateness of the investment
for the Regulated Fund in light of the Regulated Fund’s
then-current circumstances.
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2. |
(a) |
If an Adviser deems a Regulated Fund’s participation in any
Potential Co-Investment Transaction to be appropriate for the
Regulated Fund, the Adviser will then determine an appropriate
level of investment for the Regulated Fund. |
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(b) |
If the aggregate amount recommended by an Adviser to be invested by
the applicable Regulated Fund in the Potential Co-Investment
Transaction, together with the amount proposed to be invested by
the other participating Regulated Funds and Affiliated Funds,
collectively, in the same transaction, exceeds the amount of the
investment opportunity, the investment opportunity will be
allocated among them pro rata based on each participant’s capital
available for investment in the asset class being allocated, up to
the amount proposed to be invested by each. Each Adviser will
provide the Eligible Directors of each participating Regulated Fund
with information concerning each participating party’s available
capital to assist the Eligible Directors with their review of the
applicable Regulated Fund’s investments for compliance with these
allocation procedures.
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(c) |
After making the determinations required in Conditions 1(b) and
2(a), each Adviser to a participating Regulated Fund will
distribute written information concerning the Potential
Co-Investment Transaction (including the amount proposed to be
invested by each participating Regulated Fund and each
participating Affiliated Fund) to the Eligible Directors of its
participating Regulated Fund(s) for their consideration. A
Regulated Fund will enter into a Co-Investment Transaction with one
or more other Regulated Funds or Affiliated Funds only if, prior to
the Regulated Fund’s participation in the Potential Co-Investment
Transaction, a Required Majority concludes that:
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(i) |
the terms of the Potential Co-Investment Transaction, including the
consideration to be paid, are reasonable and fair to the Regulated
Fund and its equity holders and do not involve overreaching in
respect of the Regulated Fund or its equity holders on the part of
any person concerned;
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(ii) |
the Potential Co-Investment Transaction is consistent with:
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(A) |
the interests of the Regulated Fund’s equity holders; and
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(B) |
the Regulated Fund’s then-current Objectives and Strategies;
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(iii) |
the investment by any other Regulated Fund(s) or any Affiliated
Fund(s) would not disadvantage the Regulated Fund, and
participation by the Regulated Fund would not be on a basis
different from or less advantageous than that of any other
Regulated Funds or any Affiliated Funds; provided that, if any
other Regulated Fund or any Affiliated Fund, but not the Regulated
Fund itself, gains the right to nominate a director for election to
a portfolio company’s board of directors or the right to have a
board observer or any similar right to participate in the
governance or management of the portfolio company, such event shall
not be interpreted to prohibit the Required Majority from reaching
the conclusions required by this Condition 2(c)(iii), if:
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(A) |
the Eligible Directors will have the right to ratify the selection
of such director or board observer, if any; and
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(B) |
the Adviser agrees to, and does, provide periodic reports to the
Board of the Regulated Fund with respect to the actions of such
director or the information received by such board observer or
obtained through the exercise of any similar right to participate
in the governance or management of the portfolio company; and
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(C) |
any fees or other compensation that any Regulated Fund or any
Affiliated Fund or any affiliated person of any Regulated Fund or
any Affiliated Fund receives in connection with the right of a
Regulated Fund or an Affiliated Fund to nominate a director or
appoint a board observer or otherwise to participate in the
governance or management of the portfolio company will be shared
proportionately among the participating Affiliated Funds (who may
each, in turn, share its portion with its affiliated persons) and
the participating Regulated Funds in accordance with the amount of
each party’s investment; and
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(iv) |
the proposed investment by the Regulated Fund will not benefit any
Adviser, the other Regulated Funds, the Affiliated Funds, or any
affiliated person of any of them (other than the parties to the
Co-Investment Transaction), except (A) to the extent permitted by
Condition 13, (B) to the extent permitted by Sections 17(e) or
57(k) of the Act, as applicable, (C) indirectly, as a result of an
interest in the securities issued by one of the parties to the
Co-Investment Transaction, or (D) in the case of fees or other
compensation described in Condition 2(c)(iii)(C).
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3. |
Each Regulated Fund has the right to decline to participate in any
Potential Co-Investment Transaction or to invest less than the
amount proposed.
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4. |
Each Adviser to a Regulated Fund will present to the Board of each
Regulated Fund, on a quarterly basis, a record of all investments
in Potential Co-Investment Transactions made by any other Regulated
Fund or Affiliated Fund during the preceding quarter that fell
within the Regulated Fund’s then-current Objectives and Strategies
and Board-Established Criteria that were not made available to the
Regulated Fund, and an explanation of why the investment
opportunities were not offered to the Regulated Fund. All
information presented to the Board pursuant to this Condition will
be kept for the life of the Regulated Fund and at least two years
thereafter, and will be subject to examination by the Commission
and its staff.
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5. |
Except for Follow-On Investments made in accordance with Condition
8,17
a Regulated Fund will not invest in reliance on the Order in any
issuer in which another Regulated Fund, Affiliated Fund, or any
affiliated person of another Regulated Fund or Affiliated Fund is
an existing investor. Each Adviser will maintain books and records
that demonstrate compliance with this Condition for each applicable
Regulated Fund.
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6. |
A Regulated Fund will not participate in any Potential
Co-Investment Transaction unless the terms, conditions, price,
class of securities to be purchased, settlement date, and
registration rights will be the same for each participating
Regulated Fund and Affiliated Fund. The grant to another Regulated
Fund or an Affiliated Fund, but not the Regulated Fund, of the
right to nominate a director for election to a portfolio company’s
board of directors, the right to have an observer on the board of
directors or similar rights to participate in the governance or
management of the portfolio company will not be interpreted so as
to violate this Condition 6, if Conditions 2(c)(iii)(A), (B) and
(C) are met.
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17 |
This exception
applies only to Follow-On Investments by a Regulated Fund in
issuers in which that Regulated Fund already holds
investments.
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7. |
(a) |
If any Regulated Fund or Affiliated Fund elects to sell, exchange
or otherwise dispose of an interest in a security that was acquired
in a Co-Investment Transaction, then: |
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(i) |
the Adviser to such Regulated Fund or Affiliated Fund will notify
each Regulated Fund that participated in the Co-Investment
Transaction of the proposed disposition at the earliest practical
time; and
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(ii) |
the Adviser to each Regulated Fund will formulate a recommendation
as to participation by each Regulated Fund in the
disposition.
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(b) |
Each Regulated Fund will have the right to participate in such
disposition on a proportionate basis, at the same price and on the
same terms and conditions as those applicable to the participating
Regulated Funds and Affiliated Funds.
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(c) |
A Regulated Fund may participate in such disposition without
obtaining prior approval of the Required Majority if:
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(i) |
the proposed participation of each Regulated Fund and each
Affiliated Fund in such disposition is proportionate to its
outstanding investments in the issuer immediately preceding the
disposition;
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(ii) |
the Board of the Regulated Fund has approved as being in the best
interests of the Regulated Fund the ability to participate in such
dispositions on a pro rata basis (as described in greater detail in
this Application); and
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(iii) |
the Board of the Regulated Fund is provided on a quarterly basis
with a list of all dispositions made in accordance with this
Condition. In all other cases, the Adviser to each Regulated Fund
will provide its written recommendation as to such Regulated Fund’s
participation to such Regulated Fund’s Eligible Directors, and such
Regulated Fund will participate in such disposition solely to the
extent that a Required Majority determines that it is in such
Regulated Fund’s best interests.
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(d) |
Each Regulated Fund and each Affiliated Fund will bear its own
expenses in connection with any such disposition.
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8. |
(a) |
If a Regulated Fund or an Affiliated Fund desires to make a
Follow-On Investment in a portfolio company whose securities were
acquired in a Co-Investment Transaction: |
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(i) |
the Adviser to each such Regulated Fund or Affiliated Fund will
notify each Regulated Fund that participated in the Co-Investment
Transaction of the proposed transaction at the earliest practical
time; and
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(ii) |
the Adviser to each Regulated Fund will formulate a recommendation
as to the proposed participation, including the amount of the
proposed Follow-On Investment, by each Regulated Fund.
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(b) |
A Regulated Fund may participate in such Follow-On Investment
without obtaining prior approval of the Required Majority if:
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(i) |
the proposed participation of each Regulated Fund and each
Affiliated Fund in such investment is proportionate to its
outstanding investments in the issuer immediately preceding the
Follow-On Investment; and
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(ii) |
the Board of the Regulated Fund has approved as being in the best
interests of the Regulated Fund the ability to participate in
Follow-On Investments on a pro rata basis (as described in greater
detail in this Application). In all other cases, the Adviser will
provide its written recommendation as to the Regulated Fund’s
participation to the Eligible Directors, and the Regulated Fund
will participate in such Follow-On Investment solely to the extent
that a Required Majority determines that it is in the Regulated
Fund’s best interests.
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(c) |
If, with respect to any Follow-On Investment:
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(i) |
the amount of a Follow-On Investment is not based on the Regulated
Funds’ and the Affiliated Funds’ outstanding investments
immediately preceding the Follow-On Investment; and
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(ii) |
the aggregate amount recommended by an Adviser to be invested by
each Regulated Fund in the Follow-On Investment, together with the
amount proposed to be invested by the participating Affiliated
Funds in the same transaction, exceeds the amount of the
opportunity; then the amount invested by each such party will be
allocated among them pro rata based on each party’s capital
available for investment in the asset class being allocated, up to
the amount proposed to be invested by each.
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(d) |
The acquisition of Follow-On Investments as permitted by this
Condition will be considered a Co-Investment Transaction for
all
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purposes and subject to the other Conditions set forth in this
Application.
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9. |
The Non-Interested Directors of each Regulated Fund will be
provided quarterly for review all information concerning Potential
Co-Investment Transactions that fell within the Regulated Fund’s
then-current Objectives and Strategies and Board-Established
Criteria, including investments in Potential Co-Investment
Transactions made by other Regulated Funds and Affiliated Funds,
that the Regulated Fund considered but declined to participate in,
and concerning Co-Investment Transactions in which the Regulated
Fund participated, so that the Non-Interested Directors may
determine whether all Potential Co-Investment Transactions and
Co-Investment Transactions during the preceding quarter, including
those Potential Co-Investment Transactions which the Regulated Fund
considered but declined to participate in, comply with the
Conditions of the Order. In addition, the Non-Interested Directors
will consider at least annually (a) the continued appropriateness
for the Regulated Fund of participating in new and existing
Co-Investment Transactions and (b) the continued appropriateness of
any Board-Established Criteria.
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10. |
Each Regulated Fund will maintain the records required by Section
57(f)(3) of the Act as if each of the Regulated Funds were a BDC
and each of the investments permitted under these Conditions were
approved by the Required Majority under Section 57(f).
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11. |
No Non-Interested Director of a Regulated Fund will also be a
director, general partner, managing member or principal, or
otherwise be an “affiliated person” (as defined in the Act), of any
Affiliated Fund.
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12. |
The expenses, if any, associated with acquiring, holding or
disposing of any securities acquired in a Co-Investment Transaction
(including, without limitation, the expenses of the distribution of
any such securities registered for sale under the 1933 Act) will,
to the extent not payable by the Advisers under their resepective
investment advisory agreements with the Regulated Funds and the
Affiliated Funds, be shared by the Affiliated Funds and the
Regulated Funds in proportion to the relative amounts of the
securities held or to be acquired or disposed of, as the case may
be.
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13. |
Any transaction fee18
(including break-up or commitment fees but excluding brokerage or
underwriting compensation permitted by Section 17(e) or 57(k) of
the Act, as applicable) received in connection with a Co-Investment
Transaction will be distributed to the participating Regulated
Funds and Affiliated Funds on a pro rata basis based on the amounts
they invested or committed, as the case may be, in such
Co-Investment
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18 |
Applicants are
not requesting and the staff of the Commission is not providing any
relief for transaction fees received in connection with any
Co-Investment Transaction.
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Transaction. If any transaction fee is to be held by an Adviser
pending consummation of the transaction, the fee will be deposited
into an account maintained by an Adviser at a bank or banks having
the qualifications prescribed in Section 26(a)(1) of the Act, and
the account will earn a competitive rate of interest that will also
be divided pro rata among the participating Regulated Funds and
Affiliated Funds based on the amounts they invest in such
Co-Investment Transaction. None of the Advisers, the Affiliated
Funds, the other Regulated Funds or any affiliated person of the
Regulated Funds or Affiliated Funds will receive additional
compensation or remuneration of any kind as a result of or in
connection with a Co-Investment Transaction (other than (a) in the
case of the Regulated Funds and Affiliated Funds, the pro rata
transaction fees described above and fees or other compensation
described in Condition 2(c)(iii)(C), (b) brokerage or underwriting
compensation permitted by Section 17(e) or 57(k) of the Act or (c)
in the case of the Advisers, investment advisory fees paid in
accordance with the investment advisory agreements between the
applicable Regulated Funds or the Affiliated Funds and its
Adviser).
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14. |
If the Holders own in the aggregate more than 25 percent of the
Shares of a Regulated Fund, then the Holders will vote such Shares
as directed by an independent third party when voting on (1) the
election of directors; (2) the removal of one or more directors; or
(3) all other matters under either the Act or applicable State law
affecting the Board’s composition, size or manner of
election.
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15. |
Each Regulated Fund’s chief compliance officer, as defined in rule
38a-1(a)(4), will prepare an annual report for its Board each year
that evaluates (and documents the basis of that evaluation) the
Regulated Fund’s compliance with the terms and Conditions of the
application and the procedures established to achieve such
compliance.
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IV. |
STATEMENT IN SUPPORT OF RELIEF REQUESTED
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In accordance with Rule 17d-1 (made applicable to transactions
subject to Section 57(a) by Section 57(i)), the Commission may
grant the requested relief as to any particular joint transaction
if it finds that the participation of the Regulated Funds in the
joint transaction is consistent with the provisions, policies and
purposes of the Act and is not on a basis different from or less
advantageous than that of other participants. Applicants submit
that allowing the Co-Investment Transactions described in this
Application is justified on the basis of (i) the potential benefits
to the Regulated Funds and the shareholders thereof and (ii) the
protections found in the terms and Conditions.
As required by Rule 17d-1(b), the Conditions ensure that the terms
on which Co-Investment Transactions may be made will be consistent
with the participation of the Regulated Funds being on a basis that
it is neither different from nor less advantageous than other
participants, thus protecting the equity holders of any participant
from being disadvantaged. The Conditions ensure that all
Co-Investment Transactions are reasonable and fair to the Regulated
Funds and their
shareholders and do not involve overreaching by any person
concerned, including Great Elm Adviser.
In the absence of the relief sought hereby, in many circumstances
the Regulated Funds would be limited in their ability to
participate in attractive and appropriate investment opportunities.
Section 17(d), Section 57(a)(4) and Rule 17d-1 of the Act should
not prevent BDCs and registered closed-end investment companies
from making investments that are in the best interests of their
shareholders.
In cases where Great Elm Adviser identifies investment
opportunities requiring larger capital commitments, it must seek
the participation of other entities with similar investment styles.
The ability to participate in Co-Investment Transactions that
involve committing larger amounts of financing would enable each
Regulated Fund to participate with one or more of the Affiliated
Funds and the other Regulated Funds in larger financing
commitments, which would, in turn, be expected to obtain discounted
prices and increase income, expand investment opportunities and
provide better access to due diligence information for the
Regulated Funds. Indeed, each Regulated Fund’s inability to
co-invest with one or more of the Affiliated Funds and the other
Regulated Funds could potentially result in the loss of beneficial
investment opportunities for such Regulated Fund and, in turn,
adversely affect such Regulated Fund’s shareholders. For example, a
Regulated Fund may lose investment opportunities if Great Elm
Adviser cannot provide “one-stop” financing to a potential
portfolio company. Portfolio companies may reject an offer of
funding arranged by Great Elm Adviser due to a Regulated Fund’s
inability to commit the full amount of financing required by the
portfolio company in a timely manner (i.e., without the delay that
typically would be associated with obtaining single-transaction
exemptive relief from the Commission). Great Elm Adviser expects
that any portfolio company that is an appropriate investment for a
Regulated Fund should also be an appropriate investment for one or
more other Regulated Funds and/or one or more Affiliated Funds,
with certain exceptions based on available capital or
diversification. The Regulated Funds, however, will not be
obligated to invest, or co-invest, when investment opportunities
are referred to them.
It is anticipated that a Regulated Fund’s participation in
Co-Investment Transactions with one or more other Regulated Funds
and/or one or more Affiliated Funds should increase the number of
favorable investment opportunities for the Regulated Fund. Great
Elm Adviser expects that co-investments by the Regulated Funds and
the Affiliated Funds, or among the Regulated Funds themselves, will
provide the Regulated Funds (through participation in a larger
number and greater variety of transactions) with the ability to
achieve greater diversification and, together with the Affiliated
Funds, the opportunity to obtain greater attention and better deal
flow from investment bankers and others who act as sources of
investments. Moreover, Great Elm Adviser believes that, without the
Order, the Regulated Funds and the Affiliated Funds will have less
bargaining power and will be limited in their ability to exercise
influence on, or control over, the portfolio companies in which
they invest.
A Regulated Fund’s ability to co-invest with one or more other
Regulated Funds and/or one or more Affiliated Funds would allow it
to participate in transactions of a larger size. A BDC that makes
investments of the type contemplated by GECC typically limits its
participation in any
one transaction to a specific dollar amount, which may be
determined by legal or internally imposed limits on exposure in a
single investment. GECC and any other Regulated Fund that is a BDC
must also comply with certain investment limitations imposed by
Section 55(a) of the Act.19
In addition, the Code imposes diversification and other
requirements on companies, such as the Regulated Funds, which seek
certain favorable tax treatment as a RIC under Subchapter M of the
Code.20
It also would be advantageous for a Regulated Fund to have the
additional capital from the Affiliated Funds and the other
Regulated Funds available to meet the funding requirements of
attractive investments in portfolio companies. In view of the
foregoing, in cases where Great Elm Adviser identifies investment
opportunities for a Regulated Fund requiring larger capital
commitments, it must seek the participation of other entities with
similar investment styles. The availability of the Affiliated Funds
and/or the other Regulated Funds as investing partners may
alleviate the necessity for a Regulated Fund to co-invest with
unaffiliated entities in certain circumstances.
Furthermore, a Regulated Fund may have to forego some investment
opportunities if it cannot provide all of the financing required by
a potential portfolio company. Portfolio companies may reject an
offer of funding arranged by Great Elm Adviser as a result of a
Regulated Fund’s inability to commit the entire amount of financing
required by the portfolio company in a timely manner (i.e., without
the delay that typically would be associated with obtaining
single-transaction exemptive relief from the Commission or
arranging a syndicated financing with unaffiliated entities). By
reducing the number of instances in which a Regulated Fund’s
investment limits require Great Elm Adviser to arrange a syndicated
financing with unaffiliated entities, the Regulated Fund will
likely be required to forego fewer attractive investment
opportunities. With the assets of the Affiliated Funds along with
the assets of the other Regulated Funds available for
co-investment, there should be an increase in the number of
favorable investment opportunities accessible to each Regulated
Fund.
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B. |
Protective Representations and Conditions
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The terms and Conditions set forth in this application ensure that
the proposed Co-Investment Transactions are consistent with the
protection of each Regulated Fund’s shareholders and with the
purposes intended by the policies and provisions of the Act.
Specifically, the Conditions incorporate the following critical
protections: (i) in each Co-Investment Transaction, all Regulated
Funds and Affiliated Funds participating in the Co-Investment
Transactions will invest at the same time for the same price and
with the same terms, conditions, class, registration rights and any
other rights, so that none of them receives terms more favorable
than any other; (ii) a Required Majority of each Regulated Fund
must approve various investment decisions with
19 |
Section 55(a)
of the Act prohibits a BDC from acquiring any asset, other than
those described in Section 55(a)(1)-(7) (“Eligible Assets”),
unless at the time of acquisition the ratio of Eligible Assets (net
of certain assets specified in the Section) to total assets (net of
certain assets specified in the Section) equals 70% or greater at
the time of the acquisition of the asset (the “Section 55(a)
Ratio”). Thus, if a BDC’s Section 55(a) Ratio is below 70%,
it is prohibited from purchasing non-Eligible Assets.
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20 |
See Section
851(b)(3) of the Code.
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respect to such Regulated Fund in accordance with the Conditions;
and (iii) the Regulated Funds are required to retain and maintain
certain records.
Other than pro rata dispositions and Follow-On Investments as
provided in Conditions 7 and 8, and after making the determinations
required in Conditions 1 and 2(a), for each Regulated Fund, Great
Elm Adviser will present each Potential Co-Investment Transaction
and the proposed allocation to the Eligible Directors, and the
Required Majority will approve each Co-Investment Transaction prior
to any investment by the participating Regulated Fund. With respect
to the pro rata dispositions and Follow-On Investments provided in
Conditions 7 and 8, a Regulated Fund may participate in a pro rata
disposition or Follow-On Investment without obtaining prior
approval of the Required Majority if, among other things: (i) the
proposed participation of each Regulated Fund and each Affiliated
Fund in such disposition is proportionate to its outstanding
investments in the issuer immediately preceding the disposition or
Follow-On Investment, as the case may be; and (ii) the Board of the
Regulated Fund has approved that Regulated Fund’s participation in
pro rata dispositions and Follow-On Investments as being in the
best interests of the Regulated Fund. If the Board does not so
approve, any such disposition or Follow-On Investment will be
submitted to the Regulated Fund’s Eligible Directors. The Board of
any Regulated Fund may at any time rescind, suspend or qualify its
approval of pro rata dispositions and Follow-On Investments with
the result that all dispositions and/or Follow-On Investments must
be submitted to the Eligible Directors.
Applicants believe that participation by the Regulated Funds in pro
rata dispositions and Follow-On Investments, as provided in
Conditions 7 and 8, is consistent with the provisions, policies and
purposes of the Act and will not be made on a basis different from
or less advantageous than that of other participants. A formulaic
approach, such as pro rata dispositions and Follow-On Investments,
eliminates the discretionary ability to make allocation
determinations, and in turn eliminates the possibility for
overreaching and promotes fairness. Applicants note that the
Commission has adopted a similar pro rata approach in the context
of Rule 23c-2, which relates to the redemption by a closed-end
investment company of less than all of a class of its securities,
indicating the general fairness and lack of overreaching that such
approach provides.
The foregoing analysis applies equally where a Wholly-Owned
Investment Sub is involved in a Co-Investment Transaction as each
Wholly-Owned Investment Sub will be treated as one company with its
parent for purposes of this Application.
The Commission has issued numerous exemptive orders permitting
certain investment companies subject to regulation under the Act
and their affiliated persons to co-invest in Private Placement
Investments.21
Although certain precedents involved somewhat different
formulae,
21 |
See,
e.g., John Hancock GA Mortgage Trust, et al. (File No.
812-14917) Release Nos. IC-33518 (June 25, 2019) (order) and
IC-33493 (May 28, 2019) (notice); BlackRock Capital Investment
Corporation, et al. (File No. 812-14955) Release Nos. IC-33515
(June 20, 2019) (order) and IC-33480 (May 21, 2019) (notice);
Nuveen Churchill BDC LLC, et al. (File No. 812-14850)
Release Nos. IC-33503 (June 7, 2019) (order) and IC-33475 (May 15,
2019) (notice); CM Finance Inc, et al. (File No. 812-14850)
Release Nos. IC-33401 (March 19, 2019) (order) and IC-33377
(February 19, 2019) (notice); Pharos Capital BDC, Inc., et
al. (File No. 812-14891) Release Nos. IC-33394 (March 11, 2019)
(order) and IC-33372 (February 8, 2019) (notice); Stellus
Capital Investment Corporation, et al. (File No. 812-14855)
Release Nos. IC-33316 (December 4, 2018) (order) and IC-33289
(November 6, 2018); Blackstone Real Estate Income Fund, et
al. (File No. 812-14931) Release Nos. IC-33294 (November 13,
2018) and IC-33271 (October 16, 2018); Audax Credit BDC Inc., et
al. (File No. 812-14862) Release Nos. IC-33290 (November 7,
2018) and IC-33270 (October 12, 2018); BC Partners Lending
Corporation, et al. (File No. 812-14860) Release Nos. IC-33279
(October 23, 2018) and IC-33256 (September 26, 2018); and THL
Credit, Inc., et al. (File No. 812-14807) Release Nos. IC-33239
(September 19, 2018) (order) and IC-33213 (notice).
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the Commission has accepted, as a basis for relief from the
prohibitions on joint transactions, use of allocation and approval
procedures to protect the interests of investors in the BDCs and
registered closed-end investment companies. Applicants submit that
the allocation procedures set forth in the Conditions for relief
are consistent with the range of investor protections found in the
orders cited. Applicants note, in particular, that the
co-investment protocol to be followed by Applicants here is
substantially similar to the protocol followed by Goldman Sachs
BDC, Inc. and its affiliates, for which an order was granted on
January 4, 2017.22
Please address all communications concerning this Application and
the Notice and Order to:
Adam M. Kleinman, Esq.
Secretary
Great Elm Capital Corp.
800 South Street, Suite 230
Waltham, Massachusetts 02453
Telephone Number: (617) 375-3000
Please address any questions, and a copy of any communications,
concerning this Application, the Notice and Order to:
Michael Hoffman
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, NY 10036
Telephone Number: (212) 735-3000
and
Kenneth E. Burdon
Skadden, Arps, Slate, Meagher & Flom LLP
500 Boylston Street
Boston, MA 02116
Telephone Number: (617) 573-4800
22 |
See Goldman, note 21 supra. 18
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Pursuant to Rule 0-2(c) under the Act, Applicants hereby state that
each of GECC and Great Elm Adviser, by resolution duly adopted by
each respective Board (attached hereto as Appendices A and B), and
the Existing Affiliated Fund, by virtue of action by GEGP, its
general partner that was duly authorized to act on its behalf by
resolution duly adopted by GEGP’s Board (attached hereto as
Appendix C), is authorized to cause to be prepared and to execute
and file with the Commission this Application and any amendment
thereto under Sections 17(d), 57(a)(4) and 57(i) of the Act and
Rule 17d-1 under the Act, for an order permitting certain joint
transactions that may otherwise be prohibited under Sections 17(d),
57(a)(4) and 57(i) of the Act and Rule 17d-1 under the Act. The
Existing Affiliated Fund’s limited partnership agreement grants
GEGP plenary authority to manage the Existing Affiliated Fund’s
business and affairs, and GEGP, as the Existing Affiliated Fund’s
general partner and pursuant to authority granted to it by
resolution of its Board, as previously stated, is authorized to
execute and file this Application and any amendment thereto on
behalf of the Existing Affiliated Fund. Each person executing the
application on behalf of the Applicants says that he has duly
executed the Application for and on behalf of the Applicants; that
he is authorized to execute the Application pursuant to the terms
of an operating agreement, management agreement or otherwise; and
that all actions by members, directors, trustees or other bodies
necessary to authorize each such deponent to execute and file the
Application have been taken.
All requirements for the execution and filing of this Application
in the name and on behalf of each Applicant by the undersigned have
been complied with and the undersigned is fully authorized to do so
and has duly executed this Application this 2nd day of October,
2019.
[Signature page follows.]
GREAT ELM CAPITAL CORP.
By:
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/s/ Peter
A. Reed
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|
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Name:
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Peter A.
Reed
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|
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Title:
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President
and Chief Executive Officer
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GREAT ELM CAPITAL MANAGEMENT, INC.
By:
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/s/ Peter
A. Reed
|
|
|
Name:
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Peter A.
Reed
|
|
|
Title:
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Chief
Investment Officer
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GREAT ELM OPPORTUNITIES FUND I, LP
By: Great
Elm Opportunities GP, Inc., its general partner
By:
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/s/ Adam
M. Kleinman
|
|
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Name:
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Adam M.
Kleinman
|
|
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Title:
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President
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VERIFICATION
The undersigned states that he has duly executed the foregoing
Application, dated October 2, 2019, for and on behalf of the
Applicants, as the case may be, that he holds the office with such
entity as indicated below and that all action by the directors,
trustees, shareholders, general partners or members of each entity,
as applicable, necessary to authorize the undersigned to execute
and file such instrument has been taken. The undersigned further
states that he is familiar with such instrument and the contents
thereof and that the facts set forth therein are true to the best
of his knowledge, information and belief.
GREAT ELM CAPITAL CORP.
By:
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/s/ Peter
A. Reed
|
|
|
Name:
|
Peter A.
Reed
|
|
|
Title:
|
President
and Chief Executive Officer
|
|
GREAT ELM CAPITAL MANAGEMENT, INC.
By:
|
/s/ Peter
A. Reed
|
|
|
Name:
|
Peter A.
Reed
|
|
|
Title:
|
Chief
Investment Officer
|
|
GREAT ELM OPPORTUNITIES FUND I, LP
By: Great
Elm Opportunities GP, Inc., its general partner
By:
|
/s/ Adam
M. Kleinman
|
|
|
Name:
|
Adam M.
Kleinman
|
|
|
Title:
|
President
|
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