Share
Ownership of Our Directors and Executive Officers
As
of the Record Date, our directors and executive officers beneficially owned and were entitled to vote, in the aggregate, 611,542
shares of Common Stock, representing approximately 9.67% of the combined voting power of the shares of Common Stock
outstanding on the Record Date.
Voting
and Proxies
Any
Shareholder of record entitled to vote at the special meeting may submit a proxy by returning a signed proxy card by mail in the
accompanying prepaid reply envelope or by granting a proxy electronically over the Internet or by telephone, or may vote in person
by appearing at the special meeting. If you are a beneficial owner and you hold your shares of Common Stock in “street name”
through a bank, broker or other nominee, you should instruct your bank, broker or other nominee as to how you wish to vote your
shares of Common Stock using the instructions provided by your bank, broker or other nominee. Under applicable stock exchange
rules, banks, brokers or other nominees have the discretion to vote on routine matters. The proposals to be considered at the
special meeting are non-routine matters, and banks, brokers and other nominees cannot vote on these proposals without your instructions.
Therefore, it is important that you cast your vote or instruct your bank, broker or nominee as to how you wish to vote your
shares of Common Stock.
If
you are a Shareholder of record, you may change your vote or revoke your proxy at any time before it is voted at the special meeting
by (i) signing another proxy card with a later date and returning it prior to the special meeting, (ii) submitting a new proxy
electronically over the Internet or by telephone after the date of the earlier submitted proxy, (iii) delivering a written notice
of revocation to the Company or (iv) attending the special meeting and voting in person by ballot.
If
you hold your shares of Common Stock in “street name,” you should contact your bank, broker or other nominee for instructions
regarding how to change your vote. You may also vote in person at the special meeting if you obtain a “legal proxy”
from your bank, broker or other nominee.
QUESTIONS
AND ANSWERS
The
following questions and answers address some commonly asked questions regarding the Stock Purchase Transaction, the Externalization
Transaction and the special meeting. These questions and answers may not address all of the questions that are important to you.
We encourage you to read carefully the more detailed information contained elsewhere in this proxy statement and the appendices
to this proxy statement.
Q:
|
Why
did you send me this proxy statement?
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A:
|
We
sent you this proxy statement and the enclosed proxy card because the Board would like you to vote at the special meeting
either in person, or by proxy on the enclosed card. You can also vote on the internet at www.AALVote.com/RAND or by phone
by calling 1-866-804-9616.
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Q:
|
When
and where will the special meeting take place?
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A:
|
The
special meeting will take place at The Buffalo Club, the Millard Fillmore Room, 388 Delaware Avenue, Buffalo, New York,
14202 (Business Attire Required), on May 16, 2019, at 1:00 p.m., local time. See “The Special Meeting”
beginning on page 30 for more information.
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Q:
|
Why
is the Company holding a special meeting?
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A:
|
We
are holding a special meeting to ask our Shareholders to approve several proposals that are required in order to complete
the Transactions. We believe these Transactions are important in the transformation of the Company to drive future growth
and to increase Shareholder value. As described in greater detail under “The Stock Purchase Transaction ‒ Background
of the Transactions” beginning on page 37, the Board, including the Strategic Committee (as defined herein),
has been considering potential alternatives to enhance Shareholder value for a significant period of time, and believes that
the Transactions represent a transformative opportunity for future growth for the Company. In addition, following the completion
of the Transactions, the Company intends to declare and pay the Special Dividend to Shareholders and adopt a new dividend
policy that includes regular cash dividends to Shareholders.
|
In
order to complete the Transactions, we need Shareholder approval of the Certificate of Incorporation Amendment Proposal to increase
the number of shares of Common Stock authorized for issuance under the Certificate of Incorporation and the Sale Below NAV Proposal
and the Nasdaq Proposal to sell approximately 8.3 million shares of Common Stock at a price of $3.00 per share of Common Stock
to East in the Stock Purchase Transaction. Because the price per share of Common Stock in the Stock Purchase Transaction is below
the Company’s current net asset value (“
NAV
”) per share of Common Stock, this sale requires your approval
under the Sale Below NAV Proposal.
We
also need your approval to enter into the Investment Management Agreement and hire the Adviser as the investment adviser for the
Company under the Investment Management Agreement Proposal in connection with the Externalization Transaction. We believe that
the external management structure under the Investment Management Agreement whereby the Adviser is hired as the investment adviser
for the Company, provides a better structure to grow our investment portfolio and is expected to reduce our expense-to-asset ratio
as we grow.
Keep
in mind that, despite it being our intention to declare and pay the Special Dividend to Shareholders after the completion of the
Transactions, we cannot assure you that the Special Dividend, or any other dividend or distribution, will be paid to Shareholders
after the completion of the Transactions or at all, or that the Company will ever adopt a new dividend policy that includes regular
cash dividends to Shareholders.
Q:
|
Who
is entitled to vote?
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A:
|
Holders
of Common Stock as of the close of business on the Record Date are entitled to notice of, and to vote at, the special meeting
and any postponements or adjournments of the special meeting. See “The Special Meeting” beginning on page 30 for
more information.
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Q:
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What
is the quorum required for the special meeting?
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A:
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Under
the BCL and our by-laws, the presence, in person or by proxy, of the holders of a majority of the outstanding shares of Common
Stock entitled to vote at the special meeting is necessary to constitute a quorum of Shareholders. A quorum is required for
us to take action at the special meeting. The shares of Common Stock that are present at the special meeting or represented
by a proxy will be counted for quorum purposes. Proxies submitted with abstentions and broker non-votes will be counted in
determining whether or not a quorum is present. See “The Special Meeting” beginning on page 30 for more information.
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Q:
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Who
is East Asset Management?
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A:
|
East
is an entity owned by Terry and Kim Pegula that was formed in 2010 and is dedicated to investing in private and public market
securities. East has formed multiple investment vehicles that provide capital to a variety of industries including energy,
media, real estate, hospitality, sports and entertainment. East has developed a network for sourcing investment opportunities,
including opportunities in the private credit and current yield space, leveraging both its in-house and affiliated investment
talent and capabilities. The Pegulas are also owners of Pegula Sports & Entertainment – the management company streamlining
key business areas across all Pegula family-owned sports and entertainment properties including the Buffalo Bills, Buffalo
Sabres, Buffalo Bandits, Rochester Americans, Harborcenter, Black River Entertainment, ADPRO Sports, PicSix Creative agency
and numerous hospitality properties.
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Q:
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Why
should I support these proposals?
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A:
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We
believe the strategic investment by East into the Company in the Stock Purchase Transaction is both a testament to the success
of our organization and a transforming opportunity for future growth. The portfolio assets to be contributed by East as part
of the consideration in the Stock Purchase Transaction provide us greater scale with more income-producing securities that
are expected to increase our net investment income, while the cash consideration to be paid by East in the Stock Purchase
Transaction enhances our liquidity and is expected to enable further expansion of our investment portfolio. Furthermore, the
price per share of Common Stock to be sold to East under the Stock Purchase Transaction of $3.00 per share represents a 33%
premium per share over the closing price of Common Stock on January 24, 2019 (the trading day immediately prior to the announcement
of the Transactions). We also expect the Externalization Transaction to reduce our expense-to-asset ratio as we grow, thereby
improving our earnings power. Following the completion of the Transactions, subject to Board approval, we intend to pay the
Special Dividend to Shareholders and adopt a new dividend policy that includes regular cash dividends to Shareholders.
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Q:
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Does
the Externalization Transaction have the effect of just benefiting the Company’s existing management?
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A:
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No,
the Company’s existing management team will only become employees of the Adviser, similar to their current roles and
positions as employees and officers of the Company. The Company’s existing management team will not have an equity ownership
stake in the Adviser, rather the Adviser will initially be owned only by East and Brian Collins. In addition, the Company’s
existing management team, to the extent that they remain Shareholders as of the record date for the payment of the intended
Special Dividend, if any, following the Closing date, will receive the same Special Dividend amount per share of Common Stock
as all other Shareholders.
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Q:
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Is
the Company’s NAV being diluted given East is acquiring shares in the Stock Purchase Transaction at a price below NAV
per share?
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A:
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While
the investment by East in the Stock Purchase Transaction at a purchase price per share below the Company’s current NAV
per share has the effect of diluting the Company’s NAV per share, the $3.00 per share purchase price in the Stock Purchase
Transaction represents a significant premium of 33% over the closing price of the Common Stock on January 24, 2019, the day
prior to the announcement of the Stock Purchase Transaction. The Company’s current strategy that involves returning
value to Shareholders through public share price appreciation is not believed to be in favor among many investors, which the
Company believes has resulted in the Common Stock consistently trading at public share prices below the Company’s then-current
NAV per share. With the investment from East, the Board believes that the Company, which will continue to trade on the Nasdaq,
can potentially provide Shareholders with improved total returns. Total return would be in the form of appreciation of the
Common Stock from potential improved valuation, greater scale and the opportunity for growth, as well as through an intended
ongoing dividend.
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Q:
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How
can I be confident that the Contributed Investment Assets Fair Value to be used in the Stock Purchase Transaction for purposes
of valuing the Contributed Investments Assets represents the fair value for those assets?
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A:
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The
Company’s management has applied the same discipline, and used the same debt and equity valuation methodologies, to
evaluate and determine the fair value of the Contributed Investment Assets as it uses to value the debt and equity investments
that currently are part of the Company’s portfolio.
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Q:
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Pursuant
to the rules and regulations of the SBA, Rand SBIC is required to obtain approval of
the Stock Purchase Transaction from the SBA in order for Rand SBIC to retain its SBA
license and for Rand SBIC’s SBA debentures to remain outstanding after Closing.
What will be the effect if Rand SBIC is not able to obtain such approval from the SBA?
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A:
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To the extent Rand SBIC
does not receive the approval from the SBA, Rand SBIC may be required to repay its outstanding SBA debentures and relinquish
the related SBA license, or its SBA debentures may not be able to remain outstanding after the Closing.
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Q:
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Why
are the Shareholders being asked to vote on the Sale Below NAV Proposal?
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A:
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As
part of the Stock Purchase Transaction, the Company is selling shares of Common Stock at a price of $3.00 per share to East.
This sale price per share of Common Stock is less than the Company’s current NAV per share of Common Stock. We require
your approval because under Section 63(2) of the 1940 Act, a BDC is only allowed to sell shares of Common Stock for less than
the Company’s current NAV per share of Common Stock without violating Section 23(b) of the 1940 Act if such sale is
approved by affirmative vote of holders of at least a “majority of the outstanding voting securities,” as defined
in the 1940 Act, of (i) the outstanding shares of Common Stock and (ii) the outstanding shares of Common Stock held by persons
that are not affiliated persons, as defined in the 1940 Act, of the Company. The Board has approved the Sale Below NAV Proposal
and has recommended the Shareholders vote “
For
” the Sale
Below NAV Proposal.
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Q:
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Why
are the Shareholders being asked to vote on the Nasdaq Proposal?
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A:
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Our
shares of Common Stock are listed for trading on Nasdaq, which requires us to abide by the listing rules established by Nasdaq.
Under Rule 5635 of the Nasdaq Listing Rules, specifically Nasdaq Listing Rules 5635(a) and 5635(b), Shareholder approval is
required because the issuance to East of shares of Common Stock in the Stock Purchase Transaction in exchange for cash consideration
and investment assets results in (i) the issuance of shares of Common Stock (a) having voting power equal to or in excess
of 20% of the voting power of the Common Stock outstanding prior to the issuance of the Common Stock to East in the Stock
Purchase Transaction and (b) in excess of 20% of the number of shares of Common Stock outstanding prior to the issuance of
the Common Stock to East in the Stock Purchase Transaction, and (ii) a change of control (as defined by the Nasdaq Listing
Rules) of the Company. The Board has approved the Nasdaq Proposal and has recommended the Shareholders vote “
For
”
the Nasdaq Proposal.
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Q:
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What
is the Externalization Transaction?
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A:
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The
Company is currently internally managed by its executive officers under the supervision
of its Board, and, as such, the Company incurs the operating costs associated with employing
officers and employees. The Externalization Transaction will provide for the management
of the Company’s investment portfolio by an external investment adviser that
has expertise in financial due diligence and evaluation of potential investments
and access to a network of family offices that the Board believes will enhance
the Company’s access to investment opportunities and investment decision process.
In addition, the Adviser and the Company will benefit from the continuity and experience
provided by having Allen F. “Pete” Grum serve as President and Chief Executive
Officer of the Adviser and Daniel P. Penberthy serve as Executive Vice President and
Chief Financial Officer of the Adviser. If the Transactions are completed and the
Adviser becomes the Company’s external investment adviser, the Company will be
responsible for paying the Adviser the investment advisory fees set forth in the Investment
Management Agreement for the Adviser’s management of the Company’s investment
portfolio. The Company anticipates that having the Adviser serve as investment adviser
and administrator to the Company, under the Investment Management Agreement and the Administration
Agreement, respectively, will reduce the Company’s expense-to-asset ratio. For
more information, see “Proposal 3 – Approval of the Investment Management
Agreement Proposal – Proposed Externalization of the Company’s Management”
beginning on page 83.
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Q:
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Why
are the Shareholders being asked to vote on the Investment Management Agreement?
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A:
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Shareholders
are being asked to approve the Company’s entry into the Investment Management Agreement under which the Adviser will
become the investment adviser of the Company because such approval is required by the 1940 Act. The 1940 Act makes it unlawful
for any person or entity to serve as an investment adviser to a BDC, except under a written contract that has been approved
by a majority vote of a BDC’s shareholders and the Board. The Board has approved the Investment Management Agreement
and has recommended the Shareholders vote “
For
” the Investment
Management Agreement Proposal.
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Q:
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Who
will be the Company’s investment adviser if the Investment Management Agreement is approved?
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A:
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If
the Investment Management Agreement is approved by the Shareholders, Rand Capital Management LLC, a newly formed Delaware
limited liability company, will become the Company’s investment adviser. Upon the Closing of the Transactions, the Company’s
current executive officers and employees will terminate their employment with the Company and become employees of the Adviser.
Allen F. “Pete” Grum will be retained as President and Chief Executive Officer of the Adviser, and Daniel P. Penberthy
will be retained as Executive Vice President and Chief Financial Officer of the Adviser. Messrs. Grum and Penberthy will also
serve as members of the Adviser’s Investment Committee. For more information about the Adviser, see “Proposal
3 – Approval of the Investment Management Agreement Proposal – About the Adviser” beginning on page 84.
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Q:
|
Why
are the Shareholders being asked to vote on the Certificate of Incorporation Amendment Proposal?
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A:
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Shareholders
of the Company are being asked to approve the Certificate of Incorporation Amendment
Proposal, under which the Certificate of Incorporation will be amended to increase the
number of authorized shares of Common Stock from 10 million shares of Common Stock to
100 million shares of Common Stock, in order to allow the Company to have sufficient
authorized, but unissued, shares of Common Stock. The additional authorized shares of
Common Stock are needed in order to complete the Stock Purchase Transaction, distribute
shares of Common Stock to Shareholders in the stock portion of the intended Special Dividend,
and for use in general corporate purposes after the completion of the Transactions. Specifically,
in connection with the Stock Purchase Transaction, the Company will issue 8,333,333.33
shares of Common Stock to East. Given that the Company, as of the Record Date, has 6,321,988
shares of Common Stock issued and outstanding and only 3,678,012 additional
shares of Common Stock authorized and available for issuance under its Certificate of
Incorporation, and the fact that the Company does not anticipate repurchasing or redeeming
any shares of Common Stock that are issued and outstanding prior to the Closing, an amendment
to increase the number of authorized shares of Common Stock is required to allow for
the issuance contemplated by the Stock Purchase Agreement. The Board has approved the
Certificate of Incorporation Amendment Proposal and has recommended the Shareholders
vote “
For
” the Certificate
of Incorporation Amendment Proposal.
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Q:
|
Why
are the Shareholders being asked to vote on the Adjournment Proposal?
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A:
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While
the presiding officer of the special meeting may adjourn the special meeting in his or her discretion under the terms of our
by-laws, Shareholders are also being asked to approve the Adjournment Proposal in order to allow the Company to solicit additional
proxies if there are insufficient votes at the time of the special meeting to approve (i) the Sale Below NAV Proposal, (ii)
the Nasdaq Proposal, (iii) the Investment Management Agreement Proposal and (iv) the Certificate of Incorporation Amendment
Proposal.
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Q:
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If
the proposals are approved, will the Shareholders receive any special dividend or distribution from the Company in connection
with the completion of the Transactions?
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A:
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Shareholders
will not receive a distribution from the Company in connection with the completion of the Transactions. However, after the
completion of the Transactions, the Company intends to declare and pay the Special Dividend to Shareholders in an amount equal
to the Company’s “accumulated earnings and profits” for tax purposes since the Company’s inception.
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Following
payment of the intended Special Dividend and contingent upon meeting certain tax-related conditions, the Company also expects
to elect to be taxed for U.S. tax purposes as a RIC, and in connection therewith, subject to Board approval, expects to adopt
a new dividend policy that includes regular cash dividends to Shareholders. Keep in mind that despite it being our intention
to declare and pay the Special Dividend to Shareholders after the completion of the Transaction, we cannot assure you that
the Special Dividend, or any other dividend or distribution, will be paid to Shareholders after the completion of the Transactions
or at all, or that the Company will ever adopt a new dividend policy that includes regular cash dividends to Shareholders.
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Q:
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Will
there be future on-going, regular dividends?
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A:
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After
payment of the intended Special Dividend and contingent upon meeting certain tax-related conditions, the Company expects to
elect to be taxed for U.S. tax purposes as a RIC, and in connection therewith, subject to Board approval, expects to adopt
a new dividend policy that includes regular cash dividends to Shareholders.
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However,
despite it being our current intention to declare and pay the Special Dividend
to Shareholders after the completion of the transactions, because any such dividend payment
will require action of the Board in the future based on relevant factors and considerations
affecting the Company at that time, we cannot assure you that the Special Dividend,
or any other dividend or distribution, will be paid to Shareholders after the completion
of the transactions or at all, or that the Company will ever adopt a new dividend
policy that includes regular cash dividends to Shareholders.
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Q:
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What
is the future strategy of the Company?
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A:
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After
the Closing, we expect to communicate further about our plans to grow our investment portfolio and Shareholder value. We expect
that the Adviser will shift the Company’s investment strategy towards investing in more interest-yielding debt securities.
We believe that quality, middle market companies are currently underserved by traditional financial institutions and there
is abundant opportunity to put capital to work in this space. This investment strategy is also supportive of our intent, subject
to Board approval, to establish an on-going dividend policy that includes regular cash dividends to Shareholders after we
meet the necessary requirements to elect to be taxed for U.S. tax purposes as a RIC.
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Q:
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Will
the ownership of the Company by its current Shareholders change if the proposals are approved and the Transactions are consummated?
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A:
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After
the Closing, East will own approximately 57% of the Company’s issued and outstanding shares of Common Stock. Given that
8,333,333.33 shares of Common Stock will be issued to East in the Stock Purchase Transaction at a price per share below the
Company’s per share NAV, you will suffer substantial dilution upon completion of the Stock Purchase Transaction. See
“Risk Factors ‒ Completion of the Stock Purchase Transaction will result in substantial dilution to existing holders
of Common Stock” and “Proposal 1 – Approval of the Sale Below NAV Proposal – Key Shareholder Considerations
- Dilutive Effect of the Issuance of Shares Below NAV” for additional information.
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Q:
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Will
the Company continue to be a publicly-traded BDC after closing of the Transactions?
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A:
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Yes,
after the Closing of the Transactions, the Company will continue to be a BDC and its shares of Common Stock will continue
to be listed on Nasdaq.
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Q:
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Will
the Company’s name change?
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A:
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No.
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Q:
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What
are the Base Management Fees payable by the Company under the Investment Management Agreement?
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A:
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The
Base Management Fee will be 1.50% per annum of the Company’s total gross assets (other than cash or cash equivalents
but including assets purchased with borrowed funds), determined according to procedures duly adopted by the Board.
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Q:
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What
are the Incentive Fees payable by the Company under the Investment Management Agreement?
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A:
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The
Incentive Fee payable under the Investment Management Agreement will consist of two parts: (1) the Income Based Fee and (2)
the Capital Gains Fee. The Income Based Fee will be paid in each calendar quarter as follows: (i) no Income Based Fee in any
quarter in which the Pre-Incentive Fee Net Investment Income for such quarter does not exceed the hurdle rate of 1.75% (7.00%
annualized); (ii) 100% of the Pre-Incentive Fee Net Investment Income for any calendar quarter with respect to that portion
of the Pre-Incentive Fee Net Investment Income for such calendar quarter, if any, that exceeds the hurdle rate of 1.75% (7.00%
annualized) but is less than 2.1875% (8.75% annualized) and (iii) 20% of the amount of the Pre-Incentive Fee Net Investment
Income for any calendar quarter with respect to that portion of the Pre-Incentive Fee Net Investment Income for such calendar
quarter, if any, that exceeds 2.1875% (8.75% annualized).
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Beginning
two years and three months after execution of the Investment Management Agreement, the Income Based Fee will also be subject
to a look-back requirement that builds up to a trailing twelve-quarter period whereby the Company will pay the Adviser no
more than 20% of the aggregate Pre-Incentive Fee Net Investment Income earned during such period less any net capital losses
incurred during such period. The Income Based Fee is also subject to such additional terms and conditions as are described
in “Proposal 3 – Approval of the Investment Management Agreement Proposal” beginning on page 81.
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The
Capital Gains Fee will be 20% of the cumulative net realized capital gains, which will be determined and payable in arrears
as of the end of each calendar year (or upon termination of the Investment Management Agreement), commencing with the calendar
year ending on December 31, 2019.
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Q:
|
How
will the Company’s operating costs associated with the management of its investment portfolio differ on a go-forward
basis under the Investment Management Agreement?
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A:
|
Because
the Company is currently internally managed by its executive officers under the supervision of its Board, the Company incurs
the operating costs associated with employing officers and employees. If the Transactions are completed and the Adviser becomes
the Company’s external investment adviser, the Company will be responsible for paying the Adviser the investment advisory
fees set forth in the Investment Management Agreement for the Adviser’s management of the Company’s investment
portfolio. The Company anticipates that having the Adviser serve as investment adviser and administrator to the Company, under
the Investment Management Agreement and the Administration Agreement, respectively, will reduce the Company’s expense-to-asset
ratio.
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Q:
|
What
rights will East have with respect to the nomination of persons for election as directors to the Board?
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A:
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In
connection with the Closing, the Company and East will enter into the Shareholder Agreement,
under which East has the right to designate two or three persons, depending upon the
size of the Board, for nomination for election to the Board. East will have the right
to designate (i) up to two persons if the size of the Board is composed of fewer than
seven directors or (ii) up to three persons if the size of the Board is composed of seven
or more directors. The terms of the Shareholder Agreement also provide that East’s
right to designate a person for nomination for election to the Board under the Shareholder
Agreement is to be the exclusive means by which East may designate or nominate persons
for election to the Board and that East will not avail itself of any other means or rights
to seek to designate or nominate a person to the Board. Upon Closing, it is expected
that the Board will consist of five members, of which East will have the
right to designate two persons for nomination for election to the Board.
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Q:
|
What
vote is required to approve the Sale Below NAV Proposal?
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|
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A:
|
Approval
of the Sale Below NAV Proposal requires the affirmative vote of holders of a “majority of the outstanding voting securities”
as defined in the 1940 Act, of (i) the outstanding shares of Common Stock and (ii) the outstanding shares of Common Stock
held by persons that are not affiliated persons, as defined in the 1940 Act, of the Company. Under the 1940 Act, the vote
of holders of a “majority of the outstanding voting securities” means the vote of the holders of the lesser of
(a) 67% or more of the voting securities present or represented by proxy at the special meeting if the holders of more than
50% of the voting securities are present or represented by proxy or (b) more than 50% of the outstanding voting securities.
An “affiliated person” is defined under the 1940 Act to include officers, directors and employees of the Company
and holders of 5% or more of the outstanding Common Stock.
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Q:
|
What
vote is required to approve the Nasdaq Proposal?
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|
|
A:
|
Approval
of the Nasdaq Proposal requires the affirmative vote of the holders of a majority of the votes cast on this proposal at the
special meeting.
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Q:
|
What
vote is required to approve the Investment Management Agreement Proposal?
|
|
|
A:
|
Approval
of the Investment Management Agreement Proposal requires the affirmative vote of holders of at least a “majority of
the outstanding voting securities” as defined in the 1940 Act. Under the 1940 Act, the vote of holders of a “majority
of the outstanding voting securities” means the vote of the holders of the lesser of (a) 67% or more of the voting securities
present or represented by proxy at the special meeting if the holders of more than 50% of the voting securities are present
or represented by proxy or (b) more than 50% of the outstanding voting securities.
|
Q:
|
What
vote is required to approve the Certificate of Incorporation Amendment Proposal?
|
|
|
A:
|
Approval
of the Certificate of Amendment Proposal requires the affirmative vote of the holders of a majority of the outstanding shares
of Common Stock.
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|
|
Q:
|
What
vote is required to approve the Adjournment Proposal?
|
|
|
A:
|
Approval
of the Adjournment Proposal requires the affirmative vote of the holders of a majority of shares of Common Stock present in
person or represented by proxy and entitled to vote on the matter.
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|
|
Q:
|
Are
(i) the Sale Below NAV Proposal, (ii) the Nasdaq Proposal, (iii) the Investment Management Agreement Proposal, and (iv) the
Certificate of Incorporation Amendment Proposal contingent upon each other?
|
|
|
A:
|
Yes,
Shareholder approval of Sale Below NAV Proposal, the Nasdaq Proposal, the Investment Management Agreement Proposal, and the
Certificate of Incorporation Amendment Proposal are each necessary in order to effectuate the Transactions. As a result, if
any one of these proposals is not approved by the Shareholders, the other proposals will not be implemented, and the Transactions
will not be consummated.
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|
Q:
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What
are the effects of abstaining or broker non-votes on each of the Proposals?
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A:
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A
broker non-vote occurs when a bank, broker or other nominee holding shares for a beneficial owner votes on some matters on
the proxy card, but not on others, because the bank, broker or other nominee does not have instructions from the beneficial
owner or discretionary authority (or declines to exercise discretionary authority) with respect to those other matters. We
do not, however, expect many, if any, broker non-votes at the special meeting because there are no routine proposals to be
voted on at the special meeting. For this reason, it is imperative that Shareholders vote or provide instructions to their
bank, broker or other nominee as to how to vote.
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Abstentions
and broker non-votes will have the same effect as a vote “AGAINST” (i) the Sale Below NAV Proposal, (ii) the Investment
Management Agreement Proposal, and (iii) the Certificate of Incorporation Amendment Proposal. Abstentions will have the same
effect as a vote “AGAINST” the Adjournment Proposal and broker non-votes will have no effect on the vote for the
Adjournment Proposal. Abstentions and broker non-votes will have no effect on the Nasdaq Proposal.
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Proxies
submitted with abstentions and broker non-votes will, however, be counted in determining whether or not a quorum is present.
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Q:
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What
if I want to change my vote or revoke my proxy?
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A:
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A
registered Shareholder may change his, her or its vote, or revoke his, her or its proxy at any time before it is voted at
the special meeting by:
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●
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signing
another proxy card with a later date and returning it to us prior to the special meeting;
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submitting
a new proxy electronically over the Internet or by telephone as indicated on the proxy card after the date of the earlier
submitted proxy;
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●
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delivering
a written notice of revocation to the Company; or
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attending
the special meeting and voting in person by ballot.
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If
you hold your shares of Common Stock in “street name,” you should contact your bank, broker or other nominee for instructions
regarding how to change your vote. You may also vote in person at the special meeting if you obtain a “legal proxy”
from your bank, broker or other nominee.
Q:
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Are
there any expenses associated with collecting the Shareholder vote?
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A:
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We
will bear all costs of soliciting proxies for the special meeting. We estimate that we will pay Alliance Advisors, LLC, our
proxy solicitor, a fee of approximately $9,000 to solicit proxies, plus we will reimburse Alliance Advisors, LLC for all out-of-pocket
expenses that they incur, though the cost of this proxy solicitation process could be lower or higher than our estimate. We
may also reimburse brokers, nominees, fiduciaries and other custodians their reasonable fees and expenses for sending proxy
materials to beneficial owners and obtaining their instructions.
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Q:
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Where
can I find the voting results?
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A:
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Voting
results will be reported in a press release and Current Report on Form 8-K, which we will file with the SEC within four business
days following the special meeting. All reports that the Company files with the SEC are publicly available when filed. For
more information, please see the section of this proxy statement captioned “Where You Can Find More Information”
on page 99.
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Q:
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If
my shares are held in “street name” by my bank, broker or other nominee, will my bank, broker or other nominee
vote my shares for me?
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A:
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Your
bank, broker or other nominee will only be permitted to vote your shares held in street name if you instruct them how to vote.
You should follow the procedures on the voting instruction card provided by your bank, broker or other nominee regarding the
voting of your shares. The failure to instruct your bank, broker or other nominee how to vote your shares will have the same
effect as voting “AGAINST” each of (i) the Sale Below NAV Proposal, (ii) the Investment Management Agreement Proposal
and (iii) the Certificate of Incorporation Amendment Proposal.
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Q:
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What
does it mean if I receive more than one proxy card?
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A:
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If
your shares are registered differently or in more than one account, you will receive more than one proxy card. Please sign
and return all proxy cards to ensure that all of your shares are voted.
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Q:
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Who
can help answer my other questions?
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A:
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If
you have any questions concerning the special meeting or the accompanying proxy statement, would like additional copies of
the accompanying proxy statement or need help voting your shares of Common Stock, please contact Alliance Advisors, LLC:
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Call
Toll-Free: (844) 853-0931
200
Broadacres Drive, 3
rd
Floor
Bloomfield,
NJ 07003
Q:
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How
does the Board recommend that I vote?
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A:
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The
Board unanimously recommends that you vote
“FOR”
each of (i) the Sale Below NAV Proposal, (ii) the Nasdaq
Proposal, (iii) the Investment Management Agreement Proposal, (iv) Certificate of Incorporation Amendment Proposal and (v)
the Adjournment Proposal.
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Q:
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Do
I have appraisal or dissenter’s rights in connection with the Transactions?
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A:
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Pursuant
to the BCL and the Certificate of Incorporation, there are no appraisal or dissenters’ rights that apply to the execution,
delivery and performance of the Stock Purchase Agreement or the consummation of the Transactions.
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Q:
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Are
there any risks relating to the Stock Purchase Transaction and the other transactions described herein?
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A:
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Yes,
you should carefully read the sections of this proxy statement captioned “Forward-Looking Statements” and “Risk
Factors,” and the sections captioned “Risk Factors” in the Company’s most recent Annual Report on
Form 10-K for the year ended December 31, 2018 and any subsequent quarterly reports on Form 10-Q.
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Q:
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When
are the Transactions expected to close?
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A:
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We
currently expect the Closing to occur during the third quarter of 2019. However, the exact timing of the Closing cannot be
predicted because it subject to the satisfaction or waiver of the closing conditions specified in the Stock Purchase Agreement,
some of which are outside of our direct control.
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Q:
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Where
is the proxy statement available?
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A:
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This
proxy statement, the Notice of Special Meeting of Shareholders and other documents of the Company on file with the SEC are
available at www.randcapital.com or via the SEC’s EDGAR home page at www.sec.gov/edgar.
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FORWARD-LOOKING
STATEMENTS
Some
of the statements in this proxy statement may include “forward-looking statements” within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended (the “
Exchange Act
”). All statements, other than historical
facts, including but not limited to statements regarding the expected timing of the Closing; the ability of the Company to complete
the Transactions considering the various closing conditions set forth in the Stock Purchase Agreement, including receipt of necessary
Shareholder approvals and approval from the SBA; the Company’s intention for it and Rand SBIC to elect to be taxed as RICs
for U.S. federal tax purposes; the intention to declare and pay a Special Dividend after the Closing; the intention to pay a regular
cash dividend after the Closing; the expected benefits of the Transactions such as a lower expense-to-asset ratio for the Company,
increased net investment income, availability of additional resources, expanded access to and sourcing platform for new investments
and streamlining of operations under the external management structure with the Adviser; the business strategy of originating
additional income producing investments; the competitive ability and position of the Company following the Closing; and any assumptions
underlying any of the foregoing, are forward-looking statements. Forward-looking statements concern future circumstances and results
and other statements that are not historical facts and are sometimes identified by the words “may,” “will,”
“should,” “potential,” “intend,” “expect,” “endeavor,” “seek,”
“anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,”
“could,” “project,” “predict,” “continue,” “target” or other similar
words or expressions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove to
be incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. The inclusion
of such statements should not be regarded as a representation that such plans, estimates or expectations will be achieved. Important
factors that could cause actual results to differ materially from such plans, estimates or expectations include, among others,
(1) that one or more closing conditions set forth in the Stock Purchase Agreement may not be satisfied or waived, on a timely
basis or otherwise, including that the SBA may not approve the Stock Purchase Transaction or that the required approvals by the
Shareholders may not be obtained; (2) the risk that the Transactions may not be completed in the time frame expected by parties,
or at all; (3) the risk that the Company or Rand SBIC may be unable to fulfill the conditions required in order to elect to be
treated as RICs for U.S. federal tax purposes; (4) uncertainty of the expected financial performance of the Company following
completion of the Transactions; (5) failure to realize the anticipated benefits of the Transactions, including as a result of
delay in completing the Transactions; (6) the risk that the Board is unable or unwilling to declare and pay the Special Dividend
or declare and pay regular dividends on a going forward basis; (7) the occurrence of any event that could give rise to termination
of the Stock Purchase Agreement; (8) the risk that shareholder litigation in connection with the Transactions may affect the timing
or occurrence of the Transactions or result in significant costs of defense, indemnification and liability; (9) evolving legal,
regulatory and tax regimes; and (10) changes in general economic and/or industry specific conditions.
The
foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary
statements that are included in this proxy statement and elsewhere, including the risk factors included herein and in the “Risk
Factors” sections of the Company’s most recent Annual Report on Form 10-K and most recent later filed Quarterly
Report on Form 10-Q. The forward-looking statements in this proxy statement represent the Company’s views as of the date
of this proxy statement. The Company anticipates that subsequent events and developments will cause its views to change. However,
while the Company may elect to update these forward-looking statements at some point in the future, it has no current intention
of doing so, except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements
as representing the Company’s views as of any date subsequent to the date of this proxy statement.
RISK
FACTORS
In
addition to the other information contained in this proxy statement and the risk factors cited in the “Risk Factors”
sections of the Company’s most recent Annual Report on Form 10-K and most recent Quarterly Report on Form 10-Q, you should
also consider the following risk factors when deciding whether to vote to approve the proposals described in this proxy statement.
We
may not declare or pay the Special Dividend or begin to declare and pay regular cash dividends.
As
described in this proxy statement, after the Closing, we intend to declare and pay the Special Dividend to Shareholders in an
amount equal to the Company’s “accumulated earnings and profits” for tax purposes since the Company’s
inception. In addition, in connection with our intended RIC Election, we expect to adopt a new dividend policy that includes regular
cash dividends to Shareholders. While we intend to declare and pay the Special Dividend and intend to adopt a new dividend policy
that includes regular cash dividends to Shareholders, we cannot assure you that we will declare and pay any dividends, including
the Special Dividend. All dividends, including the Special Dividend, will be paid at the discretion of our Board and will depend
on our earnings, our financial condition and, with respect to the payment of regular cash dividends, maintenance of our status
as a RIC and such other factors as our Board may deem relevant from time to time. In addition, with respect to Rand SBIC, any
dividend or distribution from Rand SBIC to the Company will need to be in compliance with the rules and regulations of the SBA
and, if Rand SBIC is unable to comply with the SBA’s rules and regulations, require Rand SBIC to seek and obtain approval
or a waiver from the SBA in order to make any such dividend or distribution. We cannot assure you that Rand SBIC will be able
to obtain any such approval or waiver from the SBA. Furthermore, if the Transactions are not completed, without the Cash Consideration,
we will likely be unable to pay the Special Dividend to Shareholders or distribute our “accumulated earnings and profits”
as to be in the position to make the RIC Election, as we will have insufficient capital resources on hand to declare and pay the
Special Dividend. Our ability to declare and pay regular cash dividends will depend upon whether we achieve investment results
that will allow us to pay a specified level of cash dividends. Our ability to pay dividends might be adversely affected by, among
other things, the Adviser’ inability to successfully or timely execute on its investment strategy and the impact of one
or more of the other risk factors described herein.
East
will exercise significant influence over us in connection with its ownership of Common Stock.
Following the Closing, East is expected to beneficially own approximately 57% of the Company’s outstanding
Common Stock. As a result, East will be able to direct the outcome of any matters submitted for Shareholder action after the Closing
of the Transactions, including approval of significant corporate transactions, such as amendments to our governing documents, business
combinations, consolidations and mergers. East will have substantial influence on us, and could exercise its influence in a manner
that conflicts with the interests of other Shareholders. The presence of a significant Shareholder may also have the effect of
making it more difficult for a third party to acquire us or for the Board to discourage a third party from seeking to acquire us
following the Closing of the Transactions.
In
addition, pursuant to the terms of the Shareholder Agreement, East will have the right to designate two or three persons, depending
upon the size of the Board, for nomination for election to the Board. East will have the right to designate (i) up to two persons
if the size of the Board is composed of fewer than seven directors or (ii) up to three persons if the size of the Board is composed
of seven or more directors. The designation right provided to East under the terms of the Shareholder Agreement will provide East
with a significant presence on the Board and direct influence on matters presented to the Board, although all directors, whether
or not nominated by East, owe fiduciary duties to all Shareholders.
Completion
of the Stock Purchase Transaction will result in substantial dilution to existing holders of Common Stock.
Pursuant
to the Stock Purchase Transaction, we will issue 8,333,333.33 shares of Common Stock to East at a price per share below NAV, which
will result in their ownership of approximately 57% of the Company’s outstanding Common Stock upon completion of the Transactions.
Completion of the Transactions will result in significant dilution in the percentage ownership interest and voting power of existing
holders of Common Stock. This substantial dilution may negatively impact the trading price for shares of our Common Stock. For
more information, see the section of this proxy statement captioned “Proposal 1 – Approval of the Sale Below NAV Proposal.”
The
Adviser has no prior experience managing or acting as an investment adviser for a BDC.
The
Adviser is a newly formed entity that has no prior experience managing or acting as an investment adviser for a BDC. Although
the Company’s existing officers and employees will become employed by the Adviser after the Closing, all investment decisions
to be made by the Adviser will be made by its Investment Committee, which consists of five persons, of which the Company’s
current executive officers will be two of the five persons on the Investment Committee. The investment philosophy and techniques
to be used by the Adviser, and in particular its Investment Committee, to manage the Company may differ from the investment philosophy
and techniques previously employed by the Adviser’s investment team in identifying and managing other investments and that
of the Company’s current management. The Adviser intends to focus on investing in more interest-yielding debt securities.
In addition, the Adviser intends to try to source potential investments using its relationships and the business networks and
family office networks of the members of the Investment Committee, which we expect to provide the Company with additional investment
opportunities that are appropriate for the Company’s investment strategy. However, we can offer no assurance that the
Adviser will be successful with respect to its investment decisions in acting as our investment adviser or that the
Adviser or the Investment Committee will be successful in their attempts to source and originate additional potential transactions
that are appropriate for the Company’s investment strategy available through the use of existing business networks,
and our investment returns could be substantially lower than the returns we have achieved in the past.
The
Contributed Investment Assets may be determined in the future to have a value that is less than the Contributed Investment Asset
Fair Value attributed to such assets at Closing.
In
connection with the Closing, the Company and East will agree upon a Contributed Investment Asset Fair Value for each of the Contributed
Investment Asset to be contributed by East to the Company as consideration in the Stock Purchase Transaction. Given the Contributed
Investment Assets consist of loans and other securities of privately held companies, determining the fair value of these Contributed
Investment Assets is subjective and inherently uncertain. As a result, the parties could agree to attribute a Contributed Investment
Asset Fair Value to any such Contributed Investment Asset that is later determined to be in excess of its actual fair market value.
Furthermore, the Company’s due diligence investigation of the Contributed Investment Assets may not reveal risks inherent
in any Contributed Investment Asset or the underlying portfolio companies. As a result, the business, results of operations or
financial condition of any such portfolio company may decline after the Closing, resulting in Contributed Investment Assets having
a fair value that is less than the Contributed Investment Assets Fair Value attributed to such assets at Closing.
After
the Closing of the Transactions, we will be dependent upon the Adviser for our future success.
After
the Closing, we will not have any employees. The Company’s operations will remain in Buffalo, New York. Allen F. “Pete”
Grum will be retained as the Adviser’s President and Chief Executive Officer and remain the President and Chief Executive
Officer of the Company. Daniel P. Penberthy will be retained as the Adviser’s Executive Vice President and Chief Financial
Officer and remain the Executive Vice President and Chief Financial Officer of the Company. We will depend on the diligence, skill,
investment expertise and network of business contacts of the Adviser’s investment professionals and the Investment Committee
to source appropriate investments for us. We will depend on members of the Adviser’s investment team and the Investment
Committee to appropriately analyze our investments and on members of the Adviser’s Investment Committee to make investment
decisions for us. The Adviser’s investment team will evaluate, negotiate, structure, close and monitor our investments.
Our future success will depend on the continued availability of the members of the Adviser’s investment team and the Investment
Committee and the other investment professionals available to the Adviser. Although the current employees of the Company are expected
to enter into employment letter agreements with the Adviser, the Company will not have employment agreements with these individuals
or other key personnel of the Adviser, including members of the Investment Committee, and we cannot provide any assurance that
unforeseen business, medical, personal or other circumstances would not lead any such individual to terminate his or her relationship
with the Adviser. The loss of a material number of senior investment professionals to which the Adviser has access or members
of the Investment Committee, could have a material adverse effect on our ability to achieve our investment objective as well as
on our financial condition and results of operations. In addition, we cannot assure you that the Adviser will remain our investment
adviser or that we will continue to have access to the Adviser’s investment professionals or the Investment Committee or
its information and deal flow.
Our
executive officers and employees may have interests in the Transactions other than, or in addition to, the interests of our Shareholders
generally.
Our
executive officers and employees may have interests in the Transactions that are different from, or are in addition to, the interests
of our Shareholders generally. Upon the Closing of the Transactions, the Company’s current executive officers and employees
will terminate their employment with the Company and become employees of the Adviser; however, Allen F. “Pete” Grum
will remain as President and Chief Executive Officer of the Company and Daniel P. Penberthy will remain as Executive Vice President
and Chief Financial Officer of the Company. Mr. Grum will be retained as President and Chief Executive Officer of the Adviser,
and Mr. Penberthy will be retained as Executive Vice President and Chief Financial Officer of the Adviser. Messrs. Grum and Penberthy
will also serve as members of the Adviser’s Investment Committee. See “The Stock Purchase Transaction – Interests
of Certain Persons Related to the Company” for more information.
There
are potential conflicts of interest, including the management of other investment funds and accounts by the principals and certain
members of the Investment Committee of the Adviser, which could impact our investment returns.
The
principals and certain members of the Investment Committee of the Adviser manage other funds and accounts for other entities affiliated
with members of the Adviser’s Investment Committee. Accordingly, they have obligations to those investors, the fulfillment
of which may not be in the best interests of, or may be adverse to the interests of, us or our Shareholders. Although the principals,
members of the Investment Committee and other professional staff of the Adviser are expected to devote as much time to our management
as appropriate to enable the Adviser to perform its duties in accordance with the Investment Management Agreement, the members
of the Investment Committee and investment professionals of the Adviser may have conflicts in allocating their time and services
among the Adviser, on the one hand, and the other investment vehicles managed by affiliated entities of the Adviser, on the other
hand.
The
Adviser, including members of its Investment Committee, may face conflicts in allocating investment opportunities between us and
other investment vehicles affiliated with members of the Investment Committee that have overlapping investment objectives with
ours. Although the Adviser, including members of the Investment Committee, will endeavor to allocate investment opportunities
in a fair and equitable manner in accordance with its allocation policies and procedures, it is possible that, in the future,
we may not be given the opportunity to participate in investments made by investment funds managed by the Adviser or members of
the Investment Committee if such investment is prohibited by law.
Our
ability to enter into transactions with affiliates of the Adviser will be restricted.
After
the Closing of the Transactions, we and certain of our controlled affiliates will be prohibited under the 1940 Act from knowingly
participating in certain transactions with our upstream affiliates, or the Adviser and its affiliates, without the prior approval
of the “required majority” of our directors as defined in Section 57(o) of the 1940 Act and, in some cases, the SEC.
Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our upstream affiliate for purposes
of the 1940 Act, and we are generally prohibited from buying or selling any security (other than our securities) from or to such
affiliate, absent the prior approval of the “required majority” of our directors as defined in Section 57(o) of the
1940 Act. The 1940 Act also prohibits “joint” transactions with an upstream affiliate, or the Adviser or its affiliates,
which could include investments in the same portfolio company (whether at the same or different times), without prior approval
of the “required majority” of our directors as defined in Section 57(o) of the 1940 Act. In addition, we and certain
of our controlled affiliates will be prohibited from buying or selling any security from or to, or entering into joint transactions
with, the Adviser and its affiliates, or any person, including East, who owns more than 25% of our voting securities or is otherwise
deemed to control, be controlled by, or be under common control with us, absent the prior approval of the SEC through an exemptive
order (other than in certain limited situations pursuant to current regulatory guidance). The analysis of whether a particular
transaction constitutes a joint transaction requires a review of the relevant facts and circumstances then existing.
As
a BDC, we are required to comply with certain regulatory requirements. For example, we will generally not be permitted to make
loans to companies controlled by the Adviser or other funds managed by the Adviser. We will also not be permitted to make any
co-investments with the Adviser or its affiliates (including any fund managed by the Adviser or an investment adviser controlling,
controlled by or under common control with the Adviser) without exemptive relief from the SEC, subject to certain exceptions.
The
proposed fee structure under the Investment Management Agreement may induce the Adviser to pursue speculative investments and
incur leverage, which may not be in the best interests of the Shareholders.
After
the Closing, the Base Management Fee will be payable even if the value of your investment declines. The Base Management Fee will
be calculated based on the total assets (other than cash or cash equivalents but including assets purchased with borrowed funds),
as determined according to procedures duly adopted by the Board. Accordingly, the Base Management Fee will be payable regardless
of whether the value of the Company’s total assets or your investment has decreased during the then-current quarter and
creates an incentive for the Adviser to incur leverage, which may not be consistent with our Shareholders’ interests.
The
Incentive Fee payable to the Adviser will be calculated based on a percentage of our return on invested capital. After the Closing,
the Incentive Fee payable to the Adviser may create an incentive for the Adviser to make investments on our behalf that are risky
or more speculative than would be the case in the absence of such a compensation arrangement. Unlike the Base Management Fee,
the Income Based Fee is payable only if the hurdle rate is achieved. Because the portfolio earns investment income on gross assets
while the hurdle rate is based on net assets, and because the use of leverage increases gross assets without any corresponding
increase in net asset, the Adviser may be incentivized to incur leverage to grow the portfolio, which will tend to enhance returns
where our portfolio has positive returns and increase the chances that such hurdle rate is achieved. Conversely, the use of leverage
may increase losses where our portfolio has negative returns, which would impair the value of the Common Stock.
In
addition, the Adviser receives the Incentive Fees based, in part, upon net capital gains realized on our investments under the
Capital Gains Fee. Unlike the Income Based Fee, there is no hurdle rate applicable to the Capital Gains Fee. As a result, the
Adviser may have a tendency to invest more capital in investments that are likely to result in capital gains as compared to income
producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the
case, which could result in higher investment losses, particularly during economic downturns.
The
Adviser’s liability will be limited under the Investment Management Agreement and the Administration Agreement, and we will
be required to indemnify the Adviser against certain liabilities, which may lead the Adviser to act in a riskier manner on our
behalf than it would when acting for its own account.
Under
the Investment Management Agreement and the Administration Agreement, the Adviser will not assume any responsibility to us other
than to render the services described in the Investment Management Agreement and Administration Agreement, as applicable, and
it will not be responsible for any action of our Board in declining to follow the Adviser’s advice or recommendations. Pursuant
to the Investment Management Agreement and the Administration Agreement, the Adviser, its members and their respective officers,
managers, partners, agents, employees, controlling persons, members and any other person affiliated with any of them will not
be liable to us for their acts under the Investment Management Agreement and Administration Agreement, as applicable, absent willful
misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. We have agreed to indemnify,
defend and protect the Adviser its members and their respective officers, managers, partners, agents, employees, controlling persons,
members and any other person affiliated with any of them with respect to all damages, liabilities, costs and expenses arising
out of or otherwise based upon the performance of any of the Adviser’s duties or obligations under the Investment Management
Agreement or Administration Agreement, as applicable, or otherwise as investment adviser or administrator, as applicable, for
us, and not arising out of willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their
duties under the Investment Management Agreement or the Administration Agreement. These protections may lead the Adviser to act
in a riskier manner when acting on our behalf than it would when acting for its own account.
We
borrow money, which could magnify the potential for gain or loss on amounts invested in us and increase the risk of investing
in us.
We
borrow money as part of our business plan through Rand SBIC and may borrow money in the future. Borrowings, also known as leverage,
magnify the potential for gain or loss on invested equity capital and may, consequently, increase the risk of investing in us.
We expect to continue to use leverage to finance our investments, through senior securities issued by banks and other lenders.
Lenders of these senior securities have fixed dollar claims on our assets that are superior to claims of our Shareholders and
we would expect such lenders to seek recovery against our assets in the event of default. If the value of our assets decreases,
leveraging would cause our net asset value to decline more sharply than it otherwise would have had we not been leveraged. Similarly,
any decrease in our income would cause our net income to decline more sharply than it would have had we not borrowed monies. Such
a decline could adversely affect our ability to make dividend payments, if any, in the future. In addition, because our investments
may be illiquid, we may be unable to dispose of them or to do so at a favorable price in the event we need to do so if we are
unable to refinance any indebtedness upon maturity and, as a result, we may suffer losses. Leverage is generally considered a
speculative investment technique and increases the risks associated with investing in our Common Stock.
Our
ability to service any debt that we incur depends largely on our financial performance and is subject to prevailing economic conditions
and competitive pressures. Moreover, if the Transactions are completed, the Adviser’s Base Management Fee will be payable
to the Adviser based on total assets, including those assets acquired through the use of leverage; this may cause the Adviser
to have a financial incentive to incur leverage, which may not be consistent with our interests and the interests of our Shareholders.
In addition, holders of our Common Stock will, indirectly, bear the burden of any increase in our expenses as a result of leverage,
including any increase in the Base Management Fee payable to the Adviser.
If
the Transactions are completed, we may experience fluctuations in our annual and quarterly results due to the nature of our business.
If
the Transactions are completed, the Adviser, in its capacity as the investment adviser to the Company after the Closing, expects
over time to transition the Company’s portfolio to include more interest-yielding debt securities. We could experience fluctuations
in our annual and quarterly operating results due to a number of factors, some of which are beyond our control, including the
Adviser’s ability or inability to make investments in companies that meet our investment criteria, the interest rate payable
on the debt securities acquired and the default rate on such securities, the level of our expenses, variations in and the timing
of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in the markets in
which we operate and general economic conditions. As a result of these factors, results for any period should not be relied upon
as being indicative of performance in any future periods.
The
failure to complete the Transactions may result in a decrease in the market value of the Common Stock.
After
the Transactions were announced, the market price for our Common Stock rose sharply. The Transactions are each subject to a number
of contingencies, including approval by our Shareholders and the closing conditions set forth in the Stock Purchase Agreement.
As a result, we cannot assure you that the Transactions will be completed. If the Transactions are not completed for any reason,
the market price of the Common Stock may decline, including to a price per share that is below the price per share on the date
that the Transactions were announced.
If
the Transactions are not consummated, there may not be any other offers from potential acquirers or parties interested in a potential
strategic transaction.
If
the Transactions are not consummated, we may seek another strategic transaction. Although we have had such discussions with various
parties in the past, these parties may no longer have an interest in a strategic transaction with the Company, or be willing to
offer a reasonable purchase price or other consideration in connection therewith. See the section entitled “The Stock Purchase
Transaction – Background of the Transactions.”
If
we do not complete the Transactions, we will continue to face challenges and uncertainties in our ability to achieve business
success.
Historically,
the Company has focused on a strategy that involved seeking to achieve long-term capital appreciation on the Company’s
equity investments, while maintaining a current cash flow from the Company’s debt investments and pass-through equity instruments
to fund expenses. Under this strategy, the Company has not declared dividends to Shareholders, but instead has sought to return
value to Shareholders through public share price appreciation on the Common Stock based upon realizing gains in the Company’s
equity investment portfolio. The Company has observed that its strategy has become disfavored among investors, which
the Company believes has resulted in an increasingly larger spread between the public share price for the Common Stock
and the Company’s NAV per share. If the Stock Purchase Transaction is not completed, the Company will not affect the
Externalization Transaction with the Adviser, and we will continue conducting our business as an internally managed BDC and may
consider and evaluate other strategic alternatives. These other strategic alternatives may include (i) pursuing another strategic
transaction that would allow the Company to be able to elect RIC status for U.S. tax purposes, (ii) engaging another external
investment adviser to manage our investment strategy, (iii) selling the Company or its portfolio to a third party acquirer, or
(iv) allowing the Company’s portfolio to run-off and distribute the proceeds to Shareholders. If the Transactions are
not completed, we may not be able to engage another external investment adviser to manage our investment strategy and will remain,
for the time being, as an internally managed BDC that is likely to continue the same legacy strategy. Without the Cash
Consideration, we will likely be unable to pay the intended Special Dividend to Shareholders or distribute our “accumulated
earnings and profits” as to be in the position to make the RIC Election. Therefore, if we are unable to complete the Transactions,
we may need to continue to operate our business in a manner that is substantially similar to the manner in which it is currently
operated, and would continue to face the same business challenges and uncertainties associated with our current business strategy,
and possibly even on a more acute basis. In addition, if we determine to allow the portfolio to run-off and distribute
the proceeds to Shareholders, because our investments may be illiquid, we may be unable to dispose of them or to do so at a favorable
price in the event we need to do so.
Under
certain circumstances, a Termination Fee may be payable by the Company upon termination of the Stock Purchase Agreement.
The
Stock Purchase Agreement provides for the payment by the Company of a Termination Fee (as defined herein) of up to $750,000 if
the Stock Purchase Agreement is terminated under certain circumstances. Given the Company’s financial condition and amount
of cash and cash equivalents on hand, payment of the Termination Fee in an amount up to $750,000 would likely have a material
adverse effect on the Company’s financial condition and on its ability to make any significant new investments or follow-on
investments in the near future.
The
Stock Purchase Agreement limits the Company’s ability to pursue alternatives to the Transactions
.
The
Stock Purchase Agreement contains provisions that limit the Company’s ability to actively solicit, discuss or negotiate
competing third-party proposals for strategic transactions. These provisions, which are typical for transactions of this type,
and include the Termination Fee payable under certain circumstances, might discourage a potential competing acquirer that might
have an interest in acquiring all or a significant part of the Company from considering or proposing that acquisition even if
it were prepared to pay consideration with a higher price than that to be paid by East in the Stock Purchase Transaction or might
result in a potential competing acquirer proposing to pay a lower price to acquire the Company than it might otherwise have proposed
to pay without the Company’s requirement to pay the Termination Fee in order to terminate the Stock Purchase Agreement to
accept a superior proposal.
The
Stock Purchase Transaction is subject to closing conditions, including receipt of Shareholder approvals, that, if not satisfied
or appropriately waived, will result in the Transactions not being completed, which may result in material adverse consequences
to the Company’s business and operations.
The
Stock Purchase Transaction is subject to closing conditions, including certain approvals of Shareholders and approval of the Stock
Purchase Transaction by the SBA, which, if not satisfied, will prevent the Transactions from being completed. The closing condition
that the Shareholders approve the Stock Purchase Transaction, the Investment Management Agreement and certain other proposals
described herein may not be waived under applicable law and must be satisfied for the Transactions to be completed. If the Shareholders
do not approve (i) the Sale Below NAV Proposal, (ii) the Nasdaq Proposal, (iii) the Investment Management Agreement Proposal and
(iv) the Certificate of Incorporation Amendment Proposal, the resulting failure to complete the Transactions could have a material
adverse impact on the Company’s business and operations. In addition to the required approvals from the Shareholders, the
Stock Purchase Transaction is subject to a number of other conditions, some of which are beyond the Company’s direct control.
See “The Stock Purchase Agreement – Conditions to the Stock Purchase Transaction” for additional information
regarding the conditions to Closing set forth in the Stock Purchase Agreement. The Company cannot predict when the conditions
set forth in the Stock Purchase Agreement will be satisfied or if they will be satisfied at all.
Pursuant
to the rules and regulations of the SBA, Rand SBIC is required to obtain approval of the Stock Purchase Transaction
from the SBA in order for Rand SBIC to retain its SBA license and for Rand SBIC’s SBA debentures to remain outstanding
after Closing.
Given
East’s proposed purchase of shares of our Common Stock in the Stock Purchase Transaction resulting in their ownership of
approximately 57% of the Company’s outstanding Common Stock upon completion of the Transactions, the Company believes that,
under the rules and regulations of the SBA, approval from the SBA is required in order for Rand SBIC to retain its SBA license
and for its SBA debentures to remain outstanding after the Closing. Rand SBIC is currently in the process of seeking to obtain
this approval from the SBA, but we cannot assure you that Rand SBIC will be able to obtain this approval from the SBA or advise
you on what conditions, if any, the SBA might require the Company or Rand SBIC to satisfy in order to grant its approval. To
the extent Rand SBIC does not receive the approval from the SBA, Rand SBIC may be required to repay its outstanding SBA debentures
and relinquish its related SBA license, or its SBA debentures may not be able to remain outstanding after the Closing.
Furthermore,
under the terms of the Stock Purchase Agreement, the Closing is conditioned upon (i) approval of the Stock Purchase Transaction
by the SBA, (ii) receipt of confirmation from the SBA that approval of the Stock Purchase Transaction from the SBA is not required
or (iii) the Company’s delivery of evidence of the payoff of, or escrowing of funds in an amount sufficient to pay off,
the Company’s SBA debentures in accordance with SBA regulations. The Company cannot predict when this condition to the Closing
will be satisfied or if it can be satisfied at all, particularly if approval from the SBA is unable to be obtained and the Company
is required to repay Rand SBIC’s outstanding SBA debentures in order to satisfy this condition to Closing.
The
Company will be subject to operational uncertainties and contractual restrictions while the Transactions are pending.
Uncertainty
about the effect of the Transactions may have an adverse effect on the Company while the Transactions are pending. These uncertainties
may impair the Company’s ability to retain and motivate key personnel until the Transactions are consummated and could cause
those that deal with the Company to seek to change their existing relationships with the Company. Furthermore, future potential
portfolio companies may be unwilling to accept the Company’s investments or loans given the uncertainty that will exist
while the Transactions are pending. In addition, the Stock Purchase Agreement imposes limitations on the Company with respect
to actions that it can take while the Transactions are pending, which may result in the Company not pursuing or being unable to
pursue certain business opportunities that may arise prior to the completion of the Transactions.
If
the Transactions do not close, the Company will not benefit from the expenses incurred in furtherance of the Transactions.
The
Transactions may not be completed. If the Transactions are not completed, the Company will have incurred substantial expenses
for which no ultimate benefit will have been received. The Company has incurred out-of-pocket expenses in connection with the
Transactions for investment banking, legal and accounting fees and financial printing and other related charges, much of which
will be incurred even if the Transactions are not completed. In addition, in the event the Stock Purchase Agreement is terminated
under certain circumstances, the Company may be required to pay a Termination Fee.
The
Company may waive one or more conditions to the Stock Purchase Transaction without resoliciting Shareholder approval.
Certain
conditions to the Company’s obligations to complete the Stock Purchase Transaction as set forth in the Stock Purchase Agreement
may be waived, in whole or in part, to the extent legally allowed, either unilaterally or by agreement of the Company and East.
In the event that any such waiver does not require re-solicitation of Shareholders, the Company and East will have the discretion
to complete the Stock Purchase Transaction without seeking further Shareholder approval. The condition in the Stock Purchase Agreement
that requires the Company to obtain approval of the Shareholders for the proposals set forth in this proxy statement, however,
cannot be waived. See “The Stock Purchase Agreement – Conditions to the Stock Purchase Transaction” for more
information.
THE
SPECIAL MEETING
This
proxy statement summarizes the information regarding the matters to be voted on at the special meeting. However, you do not need
to attend the special meeting to vote your shares of Common Stock. You may simply complete, sign, and return the enclosed proxy
card, or submit your vote by calling toll free at the telephone number indicated on the enclosed proxy card, or vote your shares
through the Internet, as indicated on the proxy card. You may also grant a proxy (i.e., authorize someone to vote your shares).
If you properly sign and date the accompanying proxy card or otherwise provide voting instructions, either via the Internet or
telephone, as indicated on the proxy card and the Company receives the proxy card or such instruction in time for the special
meeting, the persons named as proxies will vote the shares registered directly in your name in the manner that you specified.
As
of the Record Date, there were 6,321,988 shares of Common Stock outstanding and entitled to vote at the special meeting.
If you are a holder of Common Stock, you are entitled to one vote at the special meeting for each share of Common Stock that you
held as of the close of business on the Record Date. The Company began mailing this proxy statement on or about April 18,
2019 to all Shareholders entitled to vote their shares of Common Stock at the special meeting.
Time
and Location
We
will hold the special meeting on May 16, 2019 at 1:00 p.m., local time, at The Buffalo Club, the Millard Fillmore
Room, 388 Delaware Avenue, Buffalo, New York 14202 (Business Attire Required).
Attending
the Special Meeting
You
are entitled to attend the special meeting only if you were a Shareholder as of the close of business on the Record Date, or if
you hold a valid proxy for the special meeting. You must present valid photo identification, such as a driver’s license
or passport, for admittance. If you are not a Shareholder of record of the Company but hold shares as a beneficial owner in street
name, in order to attend the special meeting, you must also provide proof of beneficial ownership, such as your most recent account
statement prior to the Record Date, a copy of the voting instruction form provided by your broker, bank, or other nominee, or
other similar evidence of ownership of shares of Common Stock. If you do not provide photo identification or comply with the other
procedures outlined above, you will not be admitted to the special meeting.
Proposals
to approve each of (i) the Sale Below NAV Proposal, (ii) the Nasdaq Proposal, (iii) the Investment Management Agreement Proposal,
(iv) the Certificate of Incorporation Amendment Proposal and (v) the Adjournment Proposal.
At
the special meeting, you will be asked to vote on each of (i) the Sale Below NAV Proposal, (ii) the Nasdaq Proposal, (iii) the
Investment Management Agreement Proposal, (iv) the Certificate of Incorporation Amendment Proposal and (v) the Adjournment
Proposal.
Recommendation
of the Board
The
Board unanimously recommends that you vote “FOR” each of (i) the Sale Below NAV Proposal, (ii) the Nasdaq Proposal,
(iii) the Investment Management Agreement Proposal, (iv) the Certificate of Incorporation Amendment Proposal and (v) the
Adjournment Proposal.
Shareholders
Entitled to Vote
You
are entitled to vote if you were a holder of record of Common Stock as of the close of business on the Record Date.
All
holders of Common Stock as of the Record Date, voting together, will be entitled to vote for the approval of each of (i) the Nasdaq
Proposal, (ii) the Investment Management Agreement Proposal, (iii) the Certificate of Incorporation Amendment Proposal and (iv) the
Adjournment Proposal, in each case, at the special meeting.
In
addition, all holders of Common Stock as of the Record Date, voting together, will be entitled to vote for the approval of the
Sale Below NAV Proposal, but approval must obtained from both (i) the outstanding shares of Common Stock and (ii) the outstanding
shares of Common Stock held by persons that are not affiliated persons, as defined in the 1940 Act, of the Company. See the section
entitled “The Special Meeting – Approval Standards” for more information.
Quorum
To
conduct business at the special meeting, a quorum of Shareholders must be present at the special meeting. Under the BCL and our
by-laws, the presence, in person or by proxy, of the holders of a majority of the outstanding shares of Common Stock entitled
to vote at the special meeting is necessary to constitute a quorum of the Shareholders to take action at the special meeting.
The shares of Common Stock that are present at the special meeting or represented by a proxy will be counted for quorum purposes.
Abstentions will be treated as shares present for quorum purposes. Shares for which brokers have not received voting instructions
from the beneficial owner of the shares and do not have discretionary authority to vote on certain proposals (which are considered
“broker non-votes” with respect to such proposals) will be treated as shares present for quorum purposes.
If
a quorum is not present, the vote of a majority of the Shareholders present in person or by proxy and entitled to vote or the
presiding officer of the special meeting shall have the power to adjourn the special meeting from time to time, for a period
not to exceed 30 days at any one time, until a quorum shall be present and the business of the meeting accomplished, without notice
other than announcement at the special meeting.
Shareholders
Holding Shares Through Brokers, Banks or Other Nominees
If
you hold shares of Common Stock through a broker, bank or other nominee, you must follow the voting instructions you receive from
your broker, bank or other nominee. If you hold shares of Common Stock through a broker, bank or other nominee and want to vote
in person at the special meeting, you must obtain a legal proxy from the record holder of your shares and present it at the special
meeting.
Please instruct your broker, bank or other nominee so your vote can be counted.
Granting
Authority to Vote to Brokers, Banks or Other Nominees
Brokers,
banks and other nominees have discretionary authority to vote on “routine” matters, but not on “non-routine”
matters. All proposals being considered at this special meeting are non-routine. If you hold your shares of Common Stock in street
name (or “nominee name”) and do not provide your broker, bank or other nominee who holds such shares of record with
specific instructions regarding how to vote on the proposals, your broker may not be permitted to vote your shares on any of the
proposals. Please instruct your broker, bank or other nominee so your vote can be counted.
Voting
by Proxy
If
you are a record holder of shares of Common Stock, you may authorize a proxy to vote on your behalf by following the instructions
provided on the enclosed proxy card. Authorizing your proxy will not limit your right to vote in-person at the special meeting.
A properly completed and submitted proxy will be voted in accordance with your instructions, unless you subsequently revoke your
instructions. If you authorize a proxy without indicating your voting instructions, the proxyholder will vote your shares
“FOR”
each of (i) the Sale Below NAV Proposal, (ii) the Nasdaq Proposal, (iii) the Investment Management Agreement Proposal, (iv)
the Certificate of Incorporation Amendment Proposal and (v) the Adjournment Proposal. Internet and telephone voting procedures
are designed to authenticate the Shareholder’s identity and to allow such Shareholders to vote their shares and confirm
that their instructions have been properly recorded. Your Internet or telephone vote authorizes the named proxies to vote your
shares in the same manner as if you had marked, signed and returned a proxy card.
Receiving
Multiple Proxy Cards
Many
Shareholders hold their shares in more than one account and may receive separate proxy cards or voting instruction forms for each
of those accounts. To ensure that all of your shares are represented at the special meeting, we recommend that you vote by following
the instructions on each proxy card or voting instruction form you receive.
Revocation
of Proxy
If
you are a Shareholder of record, you can revoke your proxy at any time before it is exercised by (i) delivering a written revocation
notice prior to the special meeting to Rand Capital Corporation, 2200 Rand Building Buffalo, New York 14203, (ii) submitting a
later-dated proxy that we receive no later than the conclusion of voting at the special meeting, (iii) voting in person at the
special meeting or (iv) submitting a new proxy electronically over the Internet or by telephone as indicated on the proxy card
after the date of the earlier submitted proxy. If you hold shares of Common Stock through a broker, bank or other nominee, you
must follow the instructions you receive from them in order to revoke your voting instructions. Attending the special meeting
does not revoke your proxy unless you also vote in person at the special meeting.
Approval
Standards
Sale
Below NAV Proposal
: Approval of the Sale Below NAV Proposal requires the affirmative vote of holders of a “majority
of the outstanding voting securities” as defined in the 1940 Act, of (i) the outstanding shares of Common Stock and (ii)
the outstanding shares of Common Stock held by persons that are not affiliated persons, as defined in the 1940 Act, of the Company.
Under the 1940 Act, the vote of holders of a “majority of the outstanding voting securities” means the vote of the
holders of the lesser of (a) 67% or more of the voting securities present or represented by proxy at the special meeting if the
holders of more than 50% of the voting securities are present or represented by proxy or (b) more than 50% of the outstanding
voting securities. An “affiliated person” is defined under the 1940 Act to include officers, directors and employees
of the Company and holders of 5% or more of the outstanding Common Stock. Abstentions and broker non-votes, which occur when you
do not provide voting instructions to your bank, broker or other nominee when your shares are held in “street name,”
will have the same effect as a vote “AGAINST” this proposal.
Nasdaq
Proposal
: Approval of the Nasdaq Proposal requires the affirmative vote of the holders of a majority of the votes cast on
this proposal at the special meeting. Abstentions and broker non-votes will have no effect on the Nasdaq Proposal.
Investment
Management Agreement Proposal
: Approval of the Investment Management Agreement Proposal requires the affirmative vote of holders
of at least a “majority of the outstanding voting securities” as defined in the 1940 Act. Under the 1940 Act, the
vote of holders of a “majority of the outstanding voting securities” means the vote of the holders of the lesser of
(a) 67% or more of the voting securities present or represented by proxy at the special meeting if the holders of more than 50%
of the voting securities are present or represented by proxy or (b) more than 50% of the outstanding voting securities. Abstentions
and broker non-votes will have the same effect as a vote “AGAINST” this proposal.
Certificate
of Incorporation Amendment Proposal
: Approval of the Certificate of Amendment Proposal requires the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock. Abstentions and broker non-votes will have the same effect as
a vote “AGAINST” this proposal.
Adjournment
Proposal
: Approval of the Adjournment Proposal requires the affirmative vote of the holders of a majority of shares of Common
Stock present in person or represented by proxy and entitled to vote on the matter. Abstentions will have the same effect as a
vote “AGAINST” the Adjournment Proposal and broker non-votes will have no effect on the vote for the Adjournment Proposal.
Methods
of Proxy Solicitation and Related Expenses
We
have engaged the services of Alliance Advisors, LLC to assist in the solicitation of proxies. Alliance Advisors, LLC will not
attempt to influence how you vote your shares, but only ask that you take the time to authorize your proxy. You may also be asked
if you would like to vote over the telephone and to have your vote transmitted to the proxy tabulation firm.
In
addition to the solicitation of proxies by the use of mail, proxies may be solicited in person and by telephone, electronic transmission
or facsimile transmission by directors or officers of the Company without special compensation therefor.
We
will bear all costs of soliciting proxies for the special meeting. We estimate that we will pay Alliance Advisors, LLC, our proxy
solicitor, a fee of approximately $9,000 to solicit proxies, plus we will reimburse Alliance Advisors, LLC for all out-of-pocket
expenses that they incur, though the cost of this proxy solicitation process could be lower or higher than our estimate. We may
also reimburse brokers, nominees, fiduciaries and other custodians their reasonable fees and expenses for sending proxy materials
to beneficial owners and obtaining their instructions.
Other
Matters to Be Voted on at the Special Meeting
Pursuant
to the BCL and our by-laws, no matters may properly be brought before the special meeting except as specified in the Notice of
the Special Meeting.
Whether
or not you expect to attend the special meeting, please complete, date, sign and promptly return the accompanying proxy card so
that you may be represented at the special meeting.
Who
to Contact if You Have Questions
If
you have any questions concerning the special meeting or the accompanying proxy statement, would like additional copies of the
accompanying proxy statement or need help voting your shares of Common Stock, please contact Alliance Advisors, LLC:
Call
Toll-Free: (844) 853-0931
200
Broadacres Drive, 3
rd
Floor
Bloomfield,
NJ 07003
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Unless
otherwise indicated, the following table sets forth beneficial ownership of our shares on April 12, 2019, by (a) persons
known by us to be beneficial owners of more than 5% of the outstanding shares of Common Stock, (b) the directors and the named
executive officers of the Company, and (c) all directors and executive officers as a group. For purposes of the table, the address
for each of our Directors and named executive officers is c/o 2200 Rand Building, Buffalo, NY 14203. Unless otherwise stated,
each person named in the table has sole voting and investment power with respect to the shares indicated as beneficially owned
by that person.
Beneficial Owner
|
|
Amount and Nature of Beneficial Ownership
(1)
|
|
|
Percent of Class
(3)
|
|
More than 5% Owners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
User-Friendly Phone Book, LLC
|
|
|
1,455,993
|
|
|
|
23.0
|
%
|
10200 Grogan’s Mill Road, Suite 440
|
|
|
|
|
|
|
|
|
The Woodlands, TX 77380
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and named executive officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allen F. Grum
|
|
|
173,642
|
|
|
|
2.7
|
%
|
Erland E. Kailbourne
|
|
|
40,000
|
|
|
|
*
|
|
Ross B. Kenzie
|
|
|
113,000
|
|
|
|
1.8
|
%
|
Jayne K. Rand
|
|
|
115,433
|
|
|
|
1.8
|
%
|
Robert M. Zak
|
|
|
85,000
|
|
|
|
1.3
|
%
|
Daniel P. Penberthy
|
|
|
84,467
|
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
* Less than 1%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Directors and executive officers
as a group (six persons)
|
|
|
611,542
|
|
|
|
9.7
|
%
|
(1)
|
The
beneficial ownership information presented is based upon information furnished by each person or contained in filings made
with the SEC.
|
|
|
(2)
|
User-Friendly
Phone Book, LLC filed an amended Schedule 13D with the SEC on June 22, 2018 reporting that it has shared voting power and
shared investment power of the indicated 1,455,993 shares of Common Stock with User-Friendly Holding, LLC, a Delaware limited
liability company. According to this amended Schedule 13D, User-Friendly Phone Book, LLC is a wholly owned subsidiary of User-Friendly
Holding, LLC.
|
|
|
(3)
|
Percent
of class calculated based on 6,321,988 shares outstanding at the Record Date.
|
Approximate
Value of Investments in the Company
The
following table indicates the range of value as of April 12, 2019 of the shares of the Company beneficially owned by each
director and executive officer. The Company is not part of a family of investment companies.
Name of Director or Executive Officer
|
|
Dollar Range of Equity Securities Beneficially Owned
|
Directors who are not Interested Persons:
|
|
|
Erland E. Kailbourne
|
|
Over $100,000
|
Robert M. Zak
|
|
Over $100,000
|
Ross B. Kenzie
|
|
Over $100,000
|
Jayne K. Rand
|
|
Over $100,000
|
|
|
|
Directors who are Interested Persons and Executive Officers:
|
|
|
Allen F. Grum
|
|
Over $100,000
|
Daniel P. Penberthy
|
|
Over $100,000
|
THE
STOCK PURCHASE TRANSACTION
This
discussion of the Stock Purchase Agreement and related Stock Purchase Transaction is qualified in its entirety by reference to
the Stock Purchase Agreement, which is attached to this proxy statement as
Appendix A
and incorporated into this proxy
statement by reference. You should carefully read the entire Stock Purchase Agreement as it is the legal document that governs
the Stock Purchase Transaction.
Parties
to the Stock Purchase Agreement
Rand
Capital Corporation
The
Company was incorporated under the laws of New York in February 1969. We completed our initial public offering in 1971 as an internally
managed, closed-end, diversified, management investment company. We have elected to be regulated as a BDC under the 1940 Act.
As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70%
of our total assets in “qualifying assets” and make available managerial assistance to the portfolio companies in
which we invest. The Company established an SBIC, Rand SBIC, in 2002, whereby the Company utilizes funds borrowed from the SBA
to invest in portfolio companies. The Company currently operates as an internally managed investment company whereby its officers
and employees conduct the business of the Company under the general supervision of its Board. Neither the Company nor Rand SBIC
have currently elected to qualify to be taxed as a RIC under Subchapter M of the Code.
The
Company’s principal executive offices are located at 2200 Rand Building, Buffalo, New York 14203 and our telephone number
is 716-853-0802.
East
East
was formed in 2010 as a Delaware limited liability company to invest in private and public market securities, and has formed multiple
investment vehicles that provide capital to a variety of industries including energy, media, real estate, hospitality, sports
and entertainment. East is an entity owned by Terry and Kim Pegula, owners of Pegula Sports & Entertainment.
Adviser
The
Adviser is a newly formed investment adviser that intends to register with the SEC pursuant to the Advisers Act. The Adviser will
initially be owned by East and Brian Collins. The Adviser will establish an Investment Committee, as discussed in the section
entitled “Proposal 3 – Approval of the Investment Management Agreement – About the Investment Process of the
Adviser.”
Effect
on the Company if the Stock Purchase Transaction Is Completed
If
the proposals are approved by the Shareholders, and the other conditions to Closing of the Stock Purchase Transaction are satisfied
or waived, the Company will issue 8,333,333.33 shares of Common Stock to East in consideration for the Purchase Price consisting
of (i) Cash Consideration and (ii) Contributed Investment Assets Fair Value, having an aggregate value of $25.0 million.
In
connection with the Closing of the Stock Purchase Transaction, the Company will:
|
●
|
Amend
its Certificate of Incorporation to increase its number of authorized shares of Common Stock from 10 million shares of Common
Stock to 100 million shares of Common Stock;
|
|
|
|
|
●
|
Terminate
the employment of each employee of the Company, effective immediately prior to the Closing;
|
|
|
|
|
●
|
Terminate
each benefit plan of the Company, effective immediately prior to the Closing;
|
|
|
|
|
●
|
Enter
into the Investment Management Agreement and Administration Agreement with the Adviser and complete the Externalization Transaction;
and
|
|
|
|
|
●
|
Enter
into the Shareholder Agreement with East.
|
Effect
on the Company if the Stock Purchase Transaction Is Not Completed
If
the Stock Purchase Transaction is not completed, the Company will not affect the Externalization Transaction with the
Adviser, and we will continue conducting our business as an internally managed BDC and may consider and evaluate other
strategic alternatives. These other strategic alternatives may include (i) pursuing another strategic transaction that
would allow the Company to be able to elect RIC status for U.S. tax purposes, (ii) engaging another external investment
adviser to manage our investment strategy, (iii) selling the Company or its portfolio to a third party acquirer or (iv)
allowing the Company’s portfolio to run-off and distribute the proceeds to Shareholders.
Purchase
Price
In
connection with the Stock Purchase Transaction, East will pay the Company the Purchase Price, consisting of the following:
|
(i)
|
Cash
Consideration in an amount equal to $25.0 million less the amount of the Contributed Investment Assets Fair Value;
plus
|
|
|
|
|
(ii)
|
The
Contributed Investment Assets Fair Value, which is defined as the fair value of the Contributed Investment Assets being contributed
by East to the Company, plus (without duplication) the aggregate amount of accrued but unpaid interest (including uncapitalized
payment-in-kind interest earned), penalties, fees, charges and other amounts on the Contributed Investment Assets.
|
Under
the Stock Purchase Agreement, the Contributed Investment Assets Fair Value is to be determined as of 5:00 p.m. (New York, New
York time) on the second business day prior to the Closing date, and such amount is to be agreed upon between the Company and
East prior to the Closing of the Stock Purchase Transaction. The sum of the Cash Consideration and the Contributed Investment
Assets Fair Value will be $25.0 million.
Use
of Proceeds
If
the Stock Purchase Transaction is completed, the Company will hold the Contributed Investment Assets as investment assets of the
Company and use a portion of the cash proceeds from the Stock Purchase Transaction to pay costs and expenses incurred in connection
with the Transactions. The remainder of the cash proceeds from the Stock Purchase Transaction will be used by the Company for
general corporate purposes, including, for use in payment of the cash portion of the intended Special Dividend, if declared.
The
following table sets forth the proposed uses of the proceeds from the Stock Purchase Transaction and assumes:
|
●
|
Contributed
Investment Assets have a Contributed Investment Assets Fair Value of $11.6 million;
|
|
|
|
|
●
|
Cash
Consideration of $13.4 million; and
|
|
|
|
|
●
|
the
cash portion of the intended Special Dividend, if declared, is an estimated $4.4 million.
|
|
|
(amounts in thousands)
|
|
Proceeds from Stock Purchase Transaction (1)
|
|
$
|
25,000
|
|
Contributed Investment Assets held by the Company (2)
|
|
|
(11,600
|
)
|
Aggregate cash portion of Special Dividend (3)(4)
|
|
|
(4,400
|
)
|
Transaction expenses (5)
|
|
|
(1,000
|
)
|
Remaining portion of the Cash Consideration
|
|
$
|
8,000
|
|
(1)
|
The
proceeds received by the Company from the Stock Purchase Transaction will consist of the Cash Consideration and Contributed
Investment Assets.
|
(2)
|
The
amount represents the Contributed Investment Assets Fair Value as determined by the parties as of December 31, 2018. The Contributed
Investment Assets Fair Value is subject to adjustment pursuant to the terms of the Stock Purchase Agreement. See “The
Stock Purchase Transaction – Contributed Investment Assets.”
|
|
|
(3)
|
The
intended Special Dividend is expected to be declared and paid in an amount equal to the Company’s “accumulated
earnings and profits” for tax purposes since the Company’s inception and, contingent upon meeting certain tax
related conditions, in connection with the Company’s and Rand SBIC’s expected elections for U.S. tax purposes
to be taxed as RICs. This table assumes that the intended Special Dividend is in the aggregate amount of an estimated $22.0
million (representing the Company’s estimate of its “accumulated earnings and profits” from inception to
December 31, 2018).
|
|
|
(4)
|
The
intended Special Dividend is expected to be comprised of 20% cash and 80% Common Stock. Shareholders are expected to have
the option to elect to receive the Special Dividend in cash or Common Stock, subject to the 20% cap on the cash portion of
the Special Dividend. If too many Shareholders elect to receive their distribution in cash, the amount of cash available for
distribution will be allocated pro rata among the Shareholders electing to receive the distribution in cash and the remaining
portion of their distribution will be paid in shares of Common Stock. There can be no assurance that the Special Dividend,
or any other dividend or distribution, will be paid to Shareholders after the completion of the Transactions.
|
|
|
(5)
|
Includes
an estimate of legal, investment banking and other fees and expenses incurred by the Company in connection with the Transactions.
|
Background
of the Transactions
Historically,
the Company has focused on a strategy that involved seeking to achieve long-term capital appreciation on the Company’s
equity investments, while maintaining a current cash flow from the Company’s debt investments and pass-through equity instruments
to fund expenses. Under this strategy, the Company has not declared dividends to Shareholders, but instead has sought to return
value to Shareholders through public share price appreciation on the Common Stock based upon realizing gains in the Company’s
equity investment portfolio. The Company’s management and the Board have observed that its strategy has become disfavored
among investors, which the Company believes has resulted in an increasingly larger spread between the public share
price for the Common Stock and the Company’s net asset value per share.
Consequently,
during 2015 and early 2016, the Board began to consider potential strategic alternatives to increase the public price of
the Common Stock and to enhance Shareholder value. In 2015, the Board established a strategic committee of the Board (the “
Strategic
Committee
”) to assist in the ongoing evaluation of potential strategic transactions. During the relevant periods of
2018 and 2019 discussed below, the Strategic Committee consisted of Erland E. Kailbourne, Robert M. Zak and Allen F. Grum. During
2015, the Strategic Committee met with representatives of multiple investment banking firms, including KBW, an investment banking
firm that would subsequently be engaged to act as the Company’s financial advisor, as part of its evaluation of potential
strategic options.
As
part of this process, the Board considered and evaluated various potential strategic options, including (i) voluntarily delisting
from Nasdaq and “going dark” by suspending or terminating reporting obligations for the Company under the Exchange
Act; (ii) electing RIC tax status for U.S. tax purposes and beginning regular dividend payments to Shareholders; (iii) allowing
the Company’s portfolio to run-off and distributing the proceeds from the run-off to Shareholders; (iv) selling the Company
to a third party acquirer; and (v) seeking to accelerate growth by increasing available borrowing capacity and boosting participation
in transactions in order to increase the size of the Company’s investment portfolio. At the completion of this evaluation
process and prior to the Company’s 2016 annual meeting of Shareholders, the Board determined to pursue the strategy of seeking
to accelerate growth. The Company’s management reported on the Board’s evaluation process and determination during
a presentation made at the Company’s 2016 annual meeting of Shareholders and in subsequent public communications to investors.
However,
since the Company’s 2016 annual meeting of Shareholders, the Company’s management has consistently stated during the
Company’s earnings calls and in other public comments and communications to investors that the Company was continuing to
evaluate potential alternatives and was willing to consider pursuing potential transactions as they may arise. Also, during 2016
and 2017, the Company’s management continued to meet with representatives of KBW to gain additional perspective on the potential
for strategic transactions and on ways the Company might consider enhancing Shareholder value.
In
late 2017, the Company’s chief executive officer, Allen F. Grum, and chief financial officer, Daniel P. Penberthy (“
Company
Management
”), received an inquiry from a representative of an affiliate of East based in Buffalo, NY requesting to introduce
Company Management to other representatives of East.
On
January 18, 2018, Company Management attended an introductory in-person meeting with representatives of East in which the parties
discussed broadly the possibility of seeking to work together on a possible transaction. At the close of the meeting, Company
Management and representatives of East agreed to arrange for additional follow-up discussions.
On
January 29, 2018, the Company sent a non-disclosure agreement to East (the “
East Non-Disclosure Agreement
”),
which, after a negotiation period, was signed by the parties. The East Non-Disclosure Agreement included a customary “standstill”
provision and related provisions designed to protect the Board’s review process for potential strategic transactions.
On
January 30, 2018, representatives of East held an initial telephonic due diligence discussion with Freed Maxick CPAs, P.C., the
Company’s independent registered public accounting firm, to discuss certain tax-related due diligence questions regarding
the Company.
On
March 1, 2018, Company Management traveled to East’s offices located in Boca Raton, Florida to hold an in-person meeting
to further discuss the potential for a transaction between East and the Company.
On
March 14, 2018, Company Management, the Strategic Committee and representatives of Hodgson Russ LLP (“
Hodgson Russ
”),
the Company’s outside legal counsel, held an in-person meeting in which Company Management provided the Strategic Committee
a description of the initial discussions with East. During the meeting, representatives of Hodgson Russ discussed the Strategic
Committee’s legal responsibilities as part of strategic transaction review process and the standard of conduct governing
the acts of directors.
On
March 22, 2018, at the direction of, and after review by, the Strategic Committee, Company Management sent a letter, via email,
to East requesting additional specific information regarding East and the elements of a potential transaction involving the Company.
On
April 2, 2018, East provided written responses to the Company’s letter dated March 22, 2018. As part of these responses,
East described the specific elements of their proposed transaction, which were (i) East to contribute assets into Rand in exchange
for shares of Common Stock; (ii) the Company to declare a dividend to Shareholders in an amount sufficient to distribute the Company’s
“accumulated earnings and profits” and thereby allowing the Company to be in a position to elect RIC status for U.S.
tax purposes; (iii) the Company to announce a new dividend policy going forward that was consistent with other dividend-paying
BDCs; and (iv) externalization of the Company’s management function to a new management company, the Adviser, to seek to
bring the Company’s expenses and management structure in-line with BDC industry norms.
On
April 5, 2018, the Strategic Committee held a telephonic meeting, with Company Management and representatives of Hodgson Russ
present at the invitation of the Strategic Committee. During the meeting, Company Management outlined the written response received
from East to the Company’s letter dated March 22, 2018. The Strategic Committee discussed and reviewed these responses,
including the proposed transaction structure. At the conclusion of the meeting, the Strategic Committee instructed Company Management
to have an additional meeting with East to further discuss and understand some of the responses provided.
On
April 9, 2018, Company Management held a telephonic meeting with representatives of East in which general transaction structuring
matters were discussed.
On
April 23, 2018, Company Management received an unsolicited inquiry from representatives of Party A to discuss a possible transaction
between the Company and Party A.
On
April 27, 2018, Company Management and representatives of Party A had a general discussion regarding the Company and discussed
the broad terms of a possible strategic transaction between the Company and Party A.
On
May 2, 2018, representatives of East sent an email to Company Management, describing the regulatory approvals that would need
to be obtained to proceed with a proposed transaction, including approval of the Shareholders for purposes of compliance with
the 1940 Act and approval from the SBA. This email was prepared based upon advice received by East from Eversheds Sutherland (US)
LLP (“
Eversheds Sutherland
”), as outside legal counsel to East.
On
May 3, 2018, Company Management held a telephonic meeting with representatives of East to discuss the responses received from
East to the Company’s letter dated March 22, 2018 and the regulatory approvals that would be required to execute on the
proposed transaction.
In
addition, on May 3, 2018, Company Management received a memorandum preliminarily outlining a potential transaction that involved
a reverse merger of an existing portfolio company of Party A into the Company in exchange for shares of Common Stock. The transaction
contemplated that the Company would terminate its status as a BDC and effect a distribution of the Company’s portfolio company
securities to the existing Shareholders.
On
May 21, 2018, the Company executed a non-disclosure agreement with Party A, which included a customary “standstill”
provision and related provisions designed to protect the Board’s review process for potential strategic transactions.
On
June 1, 2018, the Company received a draft letter of intent and exclusivity agreement from East (collectively the “
East
Letter of Intent
”). The East Letter of Intent proposed that East would contribute an unspecified amount of assets and
cash into the Company in exchange for the issuance to East of shares of Common Stock using a predetermined share price formula.
In addition, the East Letter of Intent provided that the Company would declare a dividend in an amount sufficient to distribute
the Company’s “accumulated earnings and profits” in a ratio of 20% in cash and 80% in the Common Stock and,
in connection with announcement of the transaction, announce to the Shareholders an intention to adopt a new dividend policy that
would be consistent with other dividend-paying BDCs. The East Letter of Intent proposed creating a new external management company,
the Adviser, to serve as the Company’s investment adviser. With regard to the Advisor’s fee structure, the East Letter
of Intent provided for a base management fee of 1.50% on total gross assets of the Company and an undefined incentive fee structure
with a 20% incentive fee payable to the Adviser, subject to a 7% hurdle rate and a catch-up feature between 7% and 8.75%. Given
that East projected that the Adviser would operate at a loss in connection with its provision of investment advisory services
to the Company, the East Letter of Intent contemplated that the Company would pay a one-time transition fee to the Adviser in
an unspecified amount during the first year after completion of the transaction. The Adviser would employ the Company’s
existing management and employees and would form an investment committee to approve new investments. The East Letter of Intent
proposed that, after the closing of the transaction, the Board size would be fixed at seven members with East receiving the right
to nominate four members. The East Letter of Intent was non-binding and included an exclusivity provision under which the parties
would agree to negotiate exclusively with one another for three months.
On
June 8, 2018, the Strategic Committee held a meeting during which Company Management presented the terms of the East Letter of
Intent to the Strategic Committee. The Strategic Committee discussed the potential benefits of the transactions outlined in the
East Letter of Intent, including the value that it could create for the Shareholders and the immediate increased scale and liquidity
that the transaction would provide, as well as the execution risks associated therewith, noting specifically the need to obtain
Shareholder approval of the transaction, among other matters. Thereafter, the Strategic Committee discussed other factors to consider
in connection with the East Letter of Intent and instructed Company Management to seek additional clarity on certain elements
of the proposed transaction, including the price at which the Common Stock would be issued to East and the assets that were proposed
to be contributed by East.
On
June 12, 2018, Party B purchased 1,455,993 shares of Common Stock at a price of $3.00 per share and filed a Schedule 13D with
the SEC on June 21, 2018 reporting such purchase.
On
June 19, 2018, Company Management held an in-person meeting with Party A in which Party A presented a letter of intent for a proposed
transaction (“
Party A Letter of Intent
”). The Party A Letter of Intent proposed that the holding company for
Party A’s existing portfolio of companies would complete a reverse merger with and into the Company. As consideration in
the merger, Party A would receive shares of Common Stock using a value of $3.17 per share of Common Stock for purposes of the
issuance to Party A. After the completion of the transaction, Party A would make an offer to purchase shares of Common Stock from
the other existing Shareholders at a price of $2.83 per share. The Party A Letter of Intent provided that the Company’s
existing management would be retained after the completion of the transaction to manage a planned private equity investment division
of the combined company. The Party A Letter of Intent was non-binding and included an exclusivity provision under which the parties
would agree to negotiate exclusively with one another until either party provided 30 days’ notice to terminate the Party
A Letter of Intent.
On
June 22, 2018, East sent a letter to the Company providing additional supplemental information regarding the proposals described
in the East Letter of Intent (the “
East Supplemental Letter
”). With respect to its proposal to acquire shares
of Common Stock, East proposed that the aggregate investment from East would be in the amount of $25.0 million with approximately
50% of the consideration to be paid in the form of cash and approximately 50% of the consideration to come in the form of the
contribution by East of existing loans originated by East to the Company. East further proposed that the purchase price for the
Common Stock to be purchased in the transaction would be based upon an average of the 30-day, 60-day and 90-day moving average
stock price for the Common Stock as of the day prior to the transaction’s announcement. In addition, as originally described
in the East Letter of Intent, East reiterated that it intended for the Company to declare a special dividend to Shareholders in
an amount sufficient to distribute the Company’s “accumulated earnings and profits,” and thereby allow the Company
to be in a position to elect RIC status for U.S. tax purposes. It was East’s expectation that it would participate in this
dividend as a Shareholder and that a portion of the cash consideration received from East in the Stock Purchase Transaction would
be used to fund a portion of the cash portion of this special dividend.
On
June 26, 2018, the Company executed a non-disclosure agreement with Party B.
On
June 28, 2018, the Strategic Committee held a telephonic meeting, with Company Management and representatives of KBW present at
the invitation of the Strategic Committee. During the meeting, Company Management described the contents of the East Supplemental
Letter. The Strategic Committee engaged in extensive discussions about the East Letter of Intent as supplemented by the East Supplemental
Letter, including the benefit to Shareholders of the proposed special dividend and the view that the purchase price for the Common
Stock as proposed by East in the East Supplement Letter undervalued the Common Stock given the control position to be obtained.
On
July 2, 2018, Company Management held an in-person meeting with representatives of Party B. Company Management discussed the Company’s
current strategy and the contents of its investment portfolio.
On
July 5, 2018, Company Management held a telephonic meeting with representatives of East in which transaction structuring matters
were discussed.
On
July 9, 2018, the Strategic Committee held a telephonic meeting, with Company Management and representatives of Hodgson Russ present
at the invitation of the Strategic Committee. The Strategic Committee discussed extensively the East Letter of Intent, the Party
A Letter of Intent and Company Management’s discussions with Party B during the July 2, 2018 meeting.
On
July 11, 2018, representatives of the Adviser sent a letter to the Company (the “
Investment Adviser Supplemental Letter
”),
in which the Adviser clarified the scope of investment advisory services proposed to be provided by the Adviser, reiterated the
fee structure described in the East Letter of Intent and proposed that the Adviser be paid a one-time transition fee by the Company
at the end of first year after the completion of the Transactions in the amount of $500,000 (the “
Transition Fee
”).
On
July 16, 2018, Company Management and representatives of KBW reviewed and discussed the information provided in the Investment
Adviser Supplemental Letter.
On
July 17, 2018, Company Management held a telephonic meeting with representatives of East and the Adviser in which the parties
discussed the Investment Adviser Supplemental Letter, including the request for payment of the Transition Fee.
On
July 18, 2018, Company Management held a telephonic meeting with representatives of Party B in which further information regarding
the Company was exchanged.
On
July 19, 2018, the Strategic Committee held a telephonic meeting with Company Management in which Company Management reviewed
the additional information provided in the Investment Adviser Supplemental Letter and Company Management’s further discussions
with Party B.
On
July 26, 2018, Company Management held a telephonic meeting with representatives of East and the Adviser in which the parties
discussed operational details regarding the external investment adviser structure and the role of the Adviser in the Company’s
operations.
On
July 26, 2018, the Board held a regular in-person board meeting. At this meeting, Company Management and the Strategic Committee
presented an update to the full Board regarding the work of the Strategic Committee and the current status of the process with
East and Party A and the discussion that had occurred with Party B. The full Board had a full discussion regarding the East Letter
of Intent and Party A Letter of Intent, including a discussion of the associated risks related to each of the potential transactions.
At the conclusion of this discussion, the Board directed the Strategic Committee to continue with and finalize its review of the
potential transactions and to report back to the Board with a recommendation.
On
July 31, 2018, the Strategic Committee held separate in-person meetings with representatives of East and the Adviser and representatives
of Party A. At the meeting with representatives of East and the Adviser, the parties discussed the East Letter of Intent, including
the information provided in the East Supplemental Letter and the Investment Adviser Supplemental Letter and associated business
issues. At the meeting with the representatives of Party A, the parties discussed the Party A Letter of Intent and associated
business issues.
On
August 6, 2018, the Strategic Committee held a telephonic meeting, with Company Management, representatives of KBW and representatives
of Hodgson Russ present at the invitation of the Strategic Committee. The Strategic Committee discussed the status of its review
process with respect to the East Letter of Intent and Party A Letter of Intent.
On
August 31, 2018, the Strategic Committee held a telephonic meeting, with Company Management, representatives of KBW and representatives
of Hodgson Russ present at the invitation of the Strategic Committee. Representatives of KBW provided an update to the Strategic
Committee regarding a telephonic discussion that KBW had during mid-August with representatives of Party B, in which Party B had
indicated the possibility of contributing an existing portfolio company of Party B with a proposal value of $16 million to the
Company in exchange for additional shares of Common Stock at an unspecified issuance price (the “
Party B Indication
”).
Representatives of KBW then discussed the East Letter of Intent, the Party A Letter of Intent and the Party B Indication, noting
that each of the transactions would result in a different strategic direction for the Company as they each contained structural
differences and therefore were not directly comparable. The Strategic Committee, with input from representatives of KBW, Company
Management and representatives of Hodgson Russ, held a discussion to consider each of the proposals. At the conclusion of this
discussion, the Strategic Committee determined to recommend to the full Board that the Company focus its negotiations on the proposed
transaction with East and the Adviser and seek to revise the East Letter of Intent to add provision for a “go shop”
period, remove the proposed Transition Fee and increase the price at which the shares of Common Stock were to be issued to East
to $3.00 per share.
On
September 5, 2018, the Board held a special telephonic meeting, with Company Management, representatives of KBW and representatives
of Hodgson Russ present at the invitation of the Board. Representatives of KBW discussed the East Letter of Intent, the Party
A Letter of Intent and the Party B Indication with the full Board. The Strategic Committee then presented its recommendation that
the Company focus its negotiations on the proposed transaction with East and seek to revise the East Letter of Intent to add provision
for a “go shop” period, remove the proposed Transition Fee and increase the price at which the shares of Common Stock
were to be issued to East to $3.00 per share. As part of this presentation to the Board, the Strategic Committee set forth its
reasoning for its recommendation, including that it believed that the proposed transaction with East provided better value to
the Shareholders and had greater certainty of completion as compared with the other alternatives that were considered by the Strategic
Committee. The Board then, with input from representatives of KBW, Company Management and representatives of Hodgson Russ, held
a discussion to consider each proposal and the recommendation of the Strategic Committee. At the conclusion of the meeting, the
Board directed Company Management and KBW to seek to negotiate the changes to the East Letter of Intent.
On
September 7, 2018, at the request of Company Management, representatives of KBW had a discussion with East in which they conveyed
the request to revise the East Letter of Intent to add provision for a “go shop” period, remove the proposed Transition
Fee and increase the price at which the shares of Common Stock were to be issued to East to $3.00 per share. East agreed that
it was only willing to remove the proposed Transition Fee and increase the price at which the shares of Common Stock were to be
issued to East to $3.00 per share.
On
September 18, 2018, representatives of KBW, representatives of East and the Adviser and representatives of Party B had an in-person
meeting in which East presented the proposed terms set forth in the East Letter of Intent to representatives of Party B. The participants
discussed the proposed terms, but no further action was taken.
On
October 5, 2018, the Company received an updated Party A Letter of Intent (the “
Updated Party A Letter of Intent
”)
in which Party A revised its proposal to (i) increase the price per share of Common Stock to be used for purposes of the determining
the number of shares to be issued to Party A as the merger consideration from $3.17 per share to $3.50 per share and (ii) increase
the price at which Party A would offer to purchase shares of Common Stock after completion of the transaction from $2.83 per share
to $3.00 per share.
On
October 8, 2018, East presented an updated draft of the East Letter of Intent (the “
Updated East Letter of Intent
”)
in which it removed the requirement for payment of a Transition Fee and increased the price at which the shares of Common Stock
would be issued to East to $3.00 per share. In addition, East revised the provision regarding the size of the Board to provide
that the size would be five members or seven members as determined after the closing of the transaction with East having the right
to designate two persons for nomination to the Board.
On
October 10, 2018, the Strategic Committee held a telephonic meeting, with Company Management, representatives of KBW and representatives
of Hodgson Russ present at the invitation of the Strategic Committee. Representatives of KBW and Company Management provided an
update on the status of negotiations with East, including the revisions to the prior transaction proposal as set forth in the
Updated East Letter of Intent and reported that East was unwilling to agree to a “go shop” period as part of the transaction.
The Strategic Committee discussed the Updated Party A Letter of Intent, but ultimately determined that the execution risks associated
with the proposed transaction with Party A did not outweigh the enhanced financial terms as set forth in the Updated Party A Letter
of Intent. The Strategic Committee also discussed the fact the Company has made numerous public statements that it was willing
to consider potential transactions, and therefore determined that it was willing to proceed without a “go shop” period
in the transaction agreement. At the completion of the meeting, the Strategic Committee determined to recommend approval of the
Updated East Letter of Intent to the Board at the meeting to be held on October 11, 2018.
On
October 11, 2018, the Board held an in-person meeting, with Company Management, representatives of KBW and representatives of
Hodgson Russ present at the invitation of the Board. Representatives of KBW and Company Management provided an update on the status
of negotiations with East to the full Board, including the revisions to the prior transaction proposal as set forth in the Updated
East Letter of Intent. The members of the Strategic Committee discussed the negotiation process and their recommendation to approve
the Updated East Letter of Intent. After a discussion by the Board, with input from representatives of KBW and representatives
of Hodgson Russ, regarding the terms of the Updated East Letter of Intent, the Board approved the Updated East Letter of Intent
and directed Company Management to finalize negotiation of the terms of the Updated East Letter of Intent, including providing
for a maximum 60-day exclusivity period, and, upon being finalized, execute the Updated East Letter of Intent.
On
October 12, 2018, Company Management sent a revised draft of the Updated East Letter of Intent to East, which, among other changes,
shortened the exclusivity period to 60 days.
On
October 31, 2018, representatives of East sent a further revised draft of the Updated East Letter of Intent to the Company in
which they proposed a 90-day exclusivity period.
On
November 6, 2018, a revised draft of the Updated East Letter of Intent was exchanged in which the parties agreed to set the exclusivity
period to expire on December 31, 2018 with an automatic 30-day extension period if, as of such date, the parties were working
in good faith towards the execution of definitive agreements with respect to the transaction. East and the Company then each executed
the Updated East Letter of Intent.
On
November 9, 2018, Company Management, representatives of Hodgson Russ, representatives of East and representatives of Eversheds
Sutherland held a telephonic meeting to discuss documentation preparation responsibilities based upon the executed Updated East
Letter of Intent, transaction structuring issues and a transaction timeline.
On
November 21, 2018, representatives of the Company presented a questionnaire to be completed by the Adviser pursuant to Section
15(c) of the 1940 Act (the “
15(c) Questionnaire
”) for use by the Board in connection with its evaluation of
the Adviser’s capacity and capabilities to serve as the investment adviser for the Company.
On
November 26, 2018, representatives of Eversheds Sutherland delivered a draft of the Stock Purchase Agreement to the Company and
Hodgson Russ.
On
November 27, 2018, representatives of Eversheds Sutherland delivered an initial due diligence request list to the Company and
Hodgson Russ. Responses to such request were subsequently delivered to Eversheds Sutherland by the Company and Hodgson Russ during
December 2018 and January 2019.
On
November 28, 2018, representatives of Eversheds Sutherland delivered a draft of the Administration Agreement to the Company and
Hodgson Russ.
On
November 29, 2018, representatives of DLA Piper LLP (US) (“
DLA Piper
”), as outside legal counsel to the Adviser,
delivered a draft of the Investment Management Agreement to the Company and Hodgson Russ.
On
November 30, 2018, representatives of Hodgson Russ delivered a revised draft of the Investment Management Agreement to DLA Piper
and the Adviser, which included proposed revised terms on the calculation of the incentive-based fees that would be payable to
the Adviser.
On
December 3, 2018, representatives of Hodgson Russ delivered a revised draft of the Stock Purchase Agreement to Eversheds Sutherland
and East.
On
December 4, 2018, representatives of Hodgson Russ and representatives of DLA Piper held a telephonic conference call to discuss
Hodgson Russ’ proposed revisions to the Investment Management Agreement, including revisions to the calculation of the incentive
fees payable to the Adviser under the Investment Management Agreement.
On
December 5, 2018, representatives of Hodgson Russ delivered a revised draft of the Administration Agreement to Eversheds Sutherland,
East and the Adviser.
On
December 10, 2018, representatives of DLA Piper delivered a revised draft of the Investment Management Agreement to the Company
and Hodgson Russ. In addition, on December 10, 2018, representatives of Eversheds Sutherland delivered a revised draft of the
Administration Agreement and an initial draft of the Shareholder Agreement to the Company and Hodgson Russ.
On
December 12, 2018, Dansa, D’Arata Soucia LLP, as advisors to the Company, delivered summary memorandums describing the terms
and providing other financial information regarding each of the loans and other securities proposed to be contributed by East
to the Company as a portion of the consideration payable by East in the Stock Purchase Transaction. Company Management delivered
each of these summary memorandums to the Board for its review.
On
December 13, 2018, representatives of Hodgson Russ delivered a revised draft of the Investment Advisory Agreement to DLA Piper
and the Adviser and delivered a revised draft of the Administration Agreement and the Shareholder Agreement to Eversheds Sutherland,
East and the Adviser.
On
December 17, 2018, the Board, with Company Management, representatives of KBW and representatives of Hodgson Russ in attendance
at the invitation of the Board, held an in-person meeting to review in detail the then-proposed terms of the Stock Purchase Agreement,
the Investment Management Agreement and the Administration Agreement. During this meeting, representatives of Hodgson Russ discussed
the standard of conduct and the information to be reviewed by the Board, including the 15(c) Questionnaire and accompanying information,
in connection with the Board’s evaluation of the Investment Management Agreement and consideration of the approval of the
Adviser to serve as investment adviser to the Company. Representatives of KBW discussed the financial aspects of the proposed
Stock Purchase Transaction on a preliminary basis. After the completion of this review, representatives of East and the Adviser
were invited into the meeting and made an in-person presentation to the Board regarding their background and the business case
for the Stock Purchase Transaction and the Externalization Transaction.
On
December 21, 2018, representatives of Eversheds Sutherland delivered a draft of a completed 15(c) Questionnaire and a revised
draft of the Administration Agreement to the Company and Hodgson Russ.
On
December 28, 2018, representatives of Hodgson Russ and Company Management held an in-person meeting to review the draft 15(c)
Questionnaire and related materials provided by the Adviser and to discuss open business and legal issues in the Administration
Agreement and the Investment Management Agreement.
On
January 2, 2019, representatives of Eversheds Sutherland delivered a revised draft of the Stock Purchase Agreement and the Shareholder
Agreement to the Company and Hodgson Russ.
On
January 3, 2019, representatives of Hodgson Russ delivered a list of comments and questions on the draft 15(c) Questionnaire to
Eversheds Sutherland.
On
January 7, 2019, representatives of Hodgson Russ and representatives of Eversheds Sutherland held a telephonic meeting to discuss
Hodgson Russ’ previously circulated comments and questions on the draft 15(c) Questionnaire.
On
January 13, 2019, representatives of the Company delivered a list of open business and legal issues with respect to the Stock
Purchase Agreement, the Shareholder Agreement, the Investment Management Agreement and the Administration Agreement to East, the
Adviser and Eversheds Sutherland.
On
January 14, 2019, Company Management, representatives of Hodgson Russ, representatives of East, representatives of the Adviser
and representatives of Eversheds Sutherland held a telephonic meeting to discuss the list of open business and legal issues with
respect to the Stock Purchase Agreement, the Shareholder Agreement, the Investment Management Agreement and the Administration
Agreement.
On
January 16, 2019, representatives of Hodgson Russ delivered revised drafts of the Stock Purchase Agreement, the Shareholder Agreement
and the Administration Agreement to East, the Adviser and Eversheds Sutherland.
On
January 17, 2019, Eversheds Sutherland delivered an updated 15(c) Questionnaire to the Company and Hodgson Russ.
In
the morning of January 18, 2019, the Strategic Committee held a telephonic meeting with Company Management and representatives
of Hodgson Russ to discuss the open business and legal issues with respect to the Stock Purchase Agreement, the Shareholder Agreement,
the Investment Management Agreement and the Administration Agreement.
In
the afternoon of January 18, 2019, representatives of Eversheds Sutherland delivered a list of open business and legal issues
with respect to the Stock Purchase Agreement and the Shareholder Agreement and revised drafts of the Stock Purchase Agreement,
the Shareholder Agreement and the Administration Agreement to the Company and Hodgson Russ.
In
the morning of January 22, 2019, representatives of Hodgson Russ delivered an updated list of open business and legal issues with
respect to the Stock Purchase Agreement and the Shareholder Agreement to East and Eversheds Sutherland. In the afternoon of January
22, 2019, representatives of Eversheds Sutherland delivered responses to each of the items included on the updated list of open
business and legal issues back to the Company and Hodgson Russ.
In
the morning of January 23, 2019, representatives of Hodgson Russ and Company Management held a telephonic meeting in which the
responses to the updated list of open business and legal issues were reviewed. In the afternoon of January 23, 2019, representatives
of Hodgson Russ delivered updated drafts of the Stock Purchase Agreement, the Shareholder Agreement and the Administration Agreement
to Eversheds Sutherland, the Adviser and East, and representatives of DLA Piper delivered an updated draft of the Investment Management
Agreement to Hodgson Russ and the Company. In addition, on January 23, 2019, Eversheds Sutherland delivered a final completed
15(c) Questionnaire to the Company and Hodgson Russ.
In
the morning of January 24, 2019, the Strategic Committee held a telephonic meeting with Company Management and representatives
of Hodgson Russ to discuss the resolution of the open business and legal issues with respect to the Stock Purchase Agreement,
the Shareholder Agreement, the Investment Management Agreement and the Administration Agreement.
In
the afternoon of January 24, 2019, the Board held an in-person meeting, with Company Management, representatives of KBW and Hodgson
Russ in attendance at the invitation of the Board, to consider approval of the Stock Purchase Agreement, the Shareholder Agreement,
the Investment Management Agreement and the Administration Agreement, and to consider whether to approve those agreements and
the transactions contemplated thereby, including the Amendment to the Certificate of Incorporation. At this meeting, KBW reviewed
the financial aspects of the proposed Stock Purchase Transaction and rendered an opinion to the Board to the effect that, as of
such date and subject to the procedures followed, assumptions made, matters considered, and qualifications and limitations on
the review undertaken by KBW as set forth in such opinion, the consideration of $3.00 per share of Common Stock to be received
in the Stock Purchase Transaction was fair, from a financial point of view, to the Company.
Later
during the Board meeting of January 24, 2019, representatives of Hodgson Russ reiterated the applicable standard of conduct, fiduciary
duties and the responsibilities of the Board before providing an overview of the Stock Purchase Agreement, the Shareholder Agreement,
the Investment Management Agreement and the Administration Agreement, including a summary of the key terms and closing conditions
in each, the interaction of the agreements and related matters. Representatives of Hodgson Russ also assisted the Board in reviewing
the final completed 15(c) Questionnaire. After further discussion and deliberation, the Board unanimously determined that the
Stock Purchase Agreement, the Investment Management Agreement, the Shareholder Agreement and the Administration Agreement and
the transactions contemplated thereby and the Amendment to the Certificate of Incorporation were advisable and in the best interests
of the Company and the Shareholders and unanimously voted to approve the Stock Purchase Agreement, the Investment Advisory Agreement,
the Shareholder Agreement and the Administration Agreement and the transactions contemplated thereby and the Amendment to Certificate
of Incorporation, and to recommend that the Shareholders approve (i) the Sale Below NAV Proposal, (ii) the Nasdaq Proposal, (iii)
the Investment Management Agreement Proposal, (iv) the Certificate of Incorporation Amendment Proposal and (v) the Adjournment
Proposal, and directed that the relevant matters be submitted to the Shareholders for approval and adoption at a special meeting
of Shareholders together with the Board’s recommendation that the Shareholders approve those matters.
In
the early evening of January 24, 2019, following the meeting of the Board, the Stock Purchase Agreement was circulated in final
form, with the final form of each of the Shareholder Agreement, the Administration Agreement and the Investment Management Agreement
attached thereto as exhibits, by representatives of Hodgson Russ to the Company, East and Eversheds Sutherland. Thereafter, later
in the evening of January 24, 2019, the Company and East executed the Stock Purchase Agreement.
On
the morning of January 25, 2019, prior to the opening of trading markets, the Company issued a press release announcing the Transactions.
Reasons
for the Transactions
In
recommending that the Shareholders approve (i) the Sale Below NAV Proposal, (ii) the Nasdaq Proposal, (iii) the Investment Management
Agreement Proposal, (iv) the Certificate of Incorporation Amendment Proposal, and (v) the Adjournment Proposal, the Board considered
the terms of the Stock Purchase Agreement, the Investment Management Agreement, the Administration Agreement and the other transactions
and agreements relating thereto, as well as a range of other potential strategic alternatives and proposals. As part of its evaluation,
the Board considered the financial terms, risks, timing and uncertainties of other potential strategic alternatives and proposals,
as well as financial information prepared by the Company’s management. The Board consulted with outside financial and legal
advisors and the Company’s management, and considered a number of reasons, including, among others:
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the
Cash Consideration and Contributed Investment Assets with an aggregate value of $25.0 million that will be received as consideration
from East in the Stock Purchase Transaction;
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the
contribution of the Contributed Investment Assets to the Company increases the total assets under management by the Company,
thereby diversifying the Company’s investment portfolio and increasing the Company’s scale;
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the
Contributed Investment Assets primarily consist of income producing debt investments that will increase the income producing
portion of the Company’s investment portfolio consistent with the shift in the Company’s investment strategy towards
investing in more interest-yielding debt securities;
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the
Externalization Transaction will provide for the management of the Company’s investment
portfolio by an external investment adviser with the experience, expertise in financial
due diligence and evaluation of potential investments and access to a network
of family offices that the Board believes will enhance the Company’s access
to investment opportunities and investment decision process;
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the
administration of the Company by the Adviser, in its capacity as investment adviser and administrator to the Company, under
the Investment Management Agreement and the Administration Agreement, respectively, is anticipated to reduce the Company’s
expense-to-asset ratio;
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the
Transactions, taken as a whole, will help accelerate the shift in the Company’s investment strategy towards investing
in more interest-yielding debt securities;
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the
Company intends for the Shareholders (including East) to receive the Special Dividend after the Closing of the Transactions
and, contingent upon meeting certain tax related conditions, the Company and Rand SBIC expect to elect to be taxed as RICs
for U.S. federal tax purposes;
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the
price per share of Common Stock to be sold to East under the Stock Purchase Transaction of $3.00 per share represents a 33%
premium per share over the closing price of Common Stock on January 24, 2019 (the trading day immediately prior to the announcement
of the Transactions);
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each
of the members of the Board, including a majority of the independent directors thereof, has approved the Investment Management
Agreement, with entry into the Investment Management Agreement by the Company conditioned on approval thereof by the Shareholders
and the consummation of the Transactions;
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the
Board perceived the Transactions as providing better value to the Shareholders and greater certainty of completion than the
other strategic alternatives evaluated by the Board;
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the
Company’s management has consistently stated during the Company’s earnings calls and in other public comments
and communications to investors that the Company was continuing to evaluate potential alternatives and was willing to consider
pursuing potential transactions as they may arise;
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the
financial presentation, dated January 24, 2019, of KBW to the Board and the opinion, dated January 24, 2019, of KBW to the
Board as to the fairness, from a financial point of view and as of the date of the opinion, to the Company of the consideration
of $3.00 per share of Common Stock to be received in the Stock Purchase Transaction, as more fully described below under “Opinion
of the Company’s Financial Advisor;”
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the
Stock Purchase Agreement, the Investment Management Agreement and the Administration Agreement each have customary terms and
were the product of extensive arm’s-length negotiations by the Company with the assistance of its outside advisors;
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East
has provided a representation in the Stock Purchase Agreement that it has sufficient immediately available funds in cash or
cash equivalents or availability under lines of credit to enable it to pay the Cash Consideration due at the Closing and any
other amounts due to be paid by East under the Stock Purchase Agreement;
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under
the Stock Purchase Agreement, the Board’s ability to change its recommendation to Shareholders in certain circumstances,
subject to East’s ability to propose adjustments to the terms and conditions of the Stock Purchase Agreement that may
convince the Board not to change its recommendation, and subject to East’s right to terminate the Stock Purchase Agreement
following such change in recommendation and to collect a Termination Fee of up to $750,000;
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under
the Stock Purchase Agreement, the Board’s ability to engage in discussions regarding, and ultimately accept, a Superior
Proposal (as defined below) subject to East’s ability to match such Superior Proposal and subject to paying a Termination
Fee of up to $750,000;
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under
the Stock Purchase Agreement, the aggregate maximum amount of the Termination Fee payable by the Company is 3.0% of the aggregate
consideration to be paid to the Company by East under the Stock Purchase Transaction, which amount the Board believed was
reasonable in light of, among other matters, the benefits of the Stock Purchase Transaction to the Company and the Shareholders,
the typical size of the termination fees in similar transactions and the likelihood that a fee of such size would not be a
meaningful deterrent to competing acquisition proposals; and
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the
Shareholders could experience future appreciation in the value of the Common Stock if the Adviser is able to successfully
manage the Company.
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In
the course of reaching the determinations and decisions and making the recommendation described above, the Board considered the
risks and potentially negative items relating to the Transactions, including the following material items (which are not necessarily
presented in order of relative importance or significance):
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the
possibility that the consummation of the Transactions may be delayed or not occur at all, and the possible significant adverse
impact that such event would have on the Company and its business;
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the
restrictions on the conduct of the Company’s business during the period between execution of the Stock Purchase Agreement
and the Closing, which may delay or prevent the Company from undertaking business opportunities that may arise during such
time which, absent the Stock Purchase Agreement, the Company might otherwise have pursued;
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the
disruption to the Company’s business that resulted from the negotiation of the Stock Purchase Agreement and the Investment
Management Agreement and the potential disruption that may result from announcement of the Transactions and the resulting
distraction of management’s attention from day-to-day operation of the business;
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the
potential negative effect of the pendency of the Transactions on the Company’s business, including uncertainty about
the effect of the Transactions on the Company’s business partners and other parties, which may impair the Company’s
ability to retain and motivate key personnel, and could cause business partners, the Company’s portfolio companies and
others to seek to change existing business relationships with the Company;
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under
the terms of the Stock Purchase Agreement, the Company is unable to actively solicit other acquisition proposals during the
pendency thereof or to engage in discussions with parties that make unsolicited acquisition proposals;
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the
Company will be required to pay the Termination Fees to East if the Stock Purchase Agreement is terminated under certain circumstances,
including if the Stock Purchase Agreement is terminated in connection with an adverse recommendation change by the Board or
as a result of the Company materially violating the “non-solicitation” or “no-shop” covenants thereof,
or in the event the Board desires to accept an Superior Proposal from a third party;
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some
of the Company’s officers and employees may be deemed to have interests in the Transactions that are different from,
or in addition to, the interests of Shareholders generally; and
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the
items described in the section of this proxy statement captioned “Risk Factors.”
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The
foregoing discussion of reasons considered by the Board contains the material reasons considered by the Board, but is not in any
way intended to be exhaustive. In light of the variety of reasons considered in connection with its evaluation of the Transactions,
the Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific reasons considered
in reaching its determinations and recommendations. Each member of the Board applied his own business judgment to the process
and may have given different weight to different reasons. The Board did not undertake to make any specific determination as to
whether any reason or any particular aspect of a reason supported or did not support their ultimate determination. The Board based
its respective recommendations on the totality of the information presented.
Resolutions
approving the Stock Purchase Agreement, the Investment Management Agreement, the Administration Agreement, the Shareholder Agreement,
the Amendment to the Certificate of Incorporation and the transactions contemplated thereby were unanimously approved by the Board,
including its independent directors, on January 24, 2019.
Opinion
of the Company’s Financial Advisor
The
Company engaged KBW to render financial advisory and investment banking services to the Company, including an opinion to the Board
as to the fairness, from a financial point of view, to the Company of the consideration to be received in the Stock Purchase Transaction.
The Company selected KBW because KBW is a nationally recognized investment banking firm with substantial experience in transactions
similar to the Stock Purchase Transaction. As part of its investment banking business, KBW is regularly engaged in the valuation
of securities of BDCs in connection with mergers and acquisitions.
As
part of its engagement, representatives of KBW attended the meeting of the Board held on January 24, 2019 at which the Board evaluated
the Stock Purchase Transaction. At this meeting, KBW reviewed the financial aspects of the Stock Purchase Transaction and rendered
an opinion to the effect that, as of such date and subject to the procedures followed, assumptions made, matters considered, and
qualifications and limitations on the review undertaken by KBW as set forth in such opinion, the consideration of $3.00 per share
of Common Stock to be received in the Stock Purchase Transaction was fair, from a financial point of view, to the Company. The
Board approved the Stock Purchase Agreement at this Board meeting.
The
description of KBW’s opinion in this proxy statement is qualified in its entirety by reference to the full text of the opinion,
which is attached as
Appendix F
to this proxy statement and is incorporated herein by reference, and describes the procedures
followed, assumptions made, matters considered, and qualifications and limitations on the review undertaken by KBW in preparing
the opinion.
KBW’s
opinion speaks only as of the date of the opinion. The opinion was for the information of, and was directed to, the Board (in
its capacity as such) in connection with its consideration of the financial terms of the Stock Purchase Transaction. The opinion
addressed only the fairness, from a financial point of view, of the consideration of $3.00 per share of Common Stock to be received
in the Stock Purchase Transaction to the Company. It did not address the underlying business decision of the Company to engage
in the Stock Purchase Transaction or enter into the Stock Purchase Agreement or constitute a recommendation to the Board in connection
with the Stock Purchase Transaction, and it does not constitute a recommendation to any Shareholder or any shareholder of any
other entity as to how to vote or act in connection with the Stock Purchase Transaction, the Externalization Transaction or any
other matter (including what election any holder of Common Stock should make in the Special Dividend, if it occurs, with respect
to Common Stock or cash).
KBW’s
opinion was reviewed and approved by KBW’s fairness opinion committee in conformity with its policies and procedures established
under the requirements of Rule 5150 of the Financial Industry Regulatory Authority.
In
connection with the opinion, KBW reviewed, analyzed and relied upon material bearing upon the financial and operating condition
of the Company and bearing upon the Stock Purchase Transaction, including, among other things:
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a
draft of the Stock Purchase Agreement, dated January 23, 2019 (the most recent draft then made available to KBW);
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the
Annual Report on Form 10-K for the year ended December 31, 2017 of the Company, including the audited financial statements
contained therein;
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the
Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2018, June 30, 2018 and September 30, 2018 of the Company,
including the unaudited quarterly financial statements contained therein;
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certain
other interim reports and other communications of the Company to the Shareholders; and
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other
financial information concerning the business and operations of the Company that were furnished to KBW by the Company or that
KBW was otherwise directed to use for purposes of its analysis.
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KBW’s
consideration of financial information and other factors that it deemed appropriate under the circumstances or relevant to its
analyses included, among others, the following:
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the
historical and current financial position and results of operations of the Company;
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the
assets and liabilities of the Company;
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the
nature and terms of certain merger transactions and business combinations in the BDC industry; and
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a
comparison of certain financial and stock market information of the Company with similar information for certain other companies,
the securities of which were publicly traded.
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KBW
also performed such other studies and analyses as it considered appropriate and took into account its assessment of general economic,
market and financial conditions and its experience in other transactions, as well as its experience in securities valuation and
knowledge of the BDC industry generally. KBW also participated in discussions with the Company management regarding the past and
current business operations, financial condition and future prospects of the Company and such other matters as KBW deemed relevant
to its inquiry. KBW was not requested to, and did not, assist the Company with soliciting indications of interest from third parties
other than East and another party regarding a potential transaction with the Company.
In
conducting its review and arriving at its opinion, KBW relied upon and assumed the accuracy and completeness of all of the financial
and other information that was provided to it or that was publicly available and did not independently verify the accuracy or
completeness of any such information or assume any responsibility or liability for such verification, accuracy or completeness.
In connection with its opinion, KBW did not perform any financial analyses to estimate the value of the Company’s existing
investment assets or the Contributed Investment Assets, and KBW expressed no opinion as to the stated fair value of the Company’s
existing investment assets as determined by Company management as of September 30, 2018 or the Contributed Investment Assets Fair
Value as would be determined pursuant to the Stock Purchase Agreement. KBW did not rely upon a liquidation analysis for purposes
of its opinion. The Company advised KBW that the fair value of its existing investment assets (the Company advised KBW that “fair
value” was defined under the applicable accounting rules as the price that would be received to sell an asset in an orderly
transaction between market participants on the measurement date) was not the same as the likely realizable value of those investment
assets in a liquidation scenario where those assets would not be held to maturity or otherwise but would be sold immediately or
over a relatively short period of time. Specifically, the Company advised KBW that: (i) all of the Company’s investment
assets as of September 30, 2018 consisted of private securities of small or development stage companies that were not publicly
traded and for which no orderly market existed; (ii) there was necessarily significant subjectivity and uncertainty involved in
determining the fair value of investments for which there was no orderly market; (iii) in a liquidation scenario, there might
be few or no independent, willing and able buyers for the Company’s investment assets; and (iv) as a result, the likely
realizable value of the Company’s investment assets in a liquidation scenario at any measurement date, including giving
effect to estimated costs to be incurred by the Company in connection with a liquidation and applying a reasonable discount rate
to present value sale proceeds assumed to be received in the future, could be significantly below the value of those investment
assets determined on a fair value basis at that same measurement date. Given this, the Company advised KBW that at September 30,
2018, the likely realizable value of its investment assets in a liquidation scenario, if determined and given effect as of that
date, could reasonably be expected to result in a NAV per share of the Company of less than $3.00 per share. In addition, at the
direction of the Company’s management and with the consent of the Board, KBW did not rely upon a dividend discount analysis
for purposes of its opinion given that the Company’s management did not furnish to KBW financial and operating forecasts
and projections of the Company that provided a reasonable basis upon which KBW could perform such analysis.
KBW
assumed that there were no material changes in the assets, liabilities, financial condition, results of operations, business or
prospects of the Company since the date of the last financial statements of the Company that were made available to KBW and that
KBW was directed to use. In rendering its opinion, KBW did not make or obtain any evaluations or appraisals or physical inspection
of the property, assets or liabilities (contingent or otherwise) of the Company or of or relating to any of the Contributed Investment
Assets, the collateral securing any of such assets or liabilities, or the collectability of any such assets, nor did KBW examine
any individual loan or credit files, nor did it evaluate the solvency, financial capability or fair value of the Company under
any state or federal laws, including those relating to bankruptcy, insolvency or other matters. Estimates of values of companies
and assets do not purport to be appraisals or necessarily reflect the prices at which companies or assets may actually be sold.
Because such estimates are inherently subject to uncertainty, KBW assumed no responsibility or liability for their accuracy.
KBW
assumed, in all respects material to its analyses:
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the
Stock Purchase Transaction would be completed substantially in accordance with the terms set forth in the Stock Purchase Agreement
(the final terms of which KBW assumed would not differ in any respect material to its analyses from the draft version of the
Stock Purchase Agreement that was reviewed by KBW and referred to above) with no adjustments to the transaction consideration
(including the allocation thereof between the Contributed Investment Assets and the Cash Consideration);
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the
representations and warranties of each party in the Stock Purchase Agreement and in all related documents and instruments
referred to in the Stock Purchase Agreement were true and correct;
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each
party to the Stock Purchase Agreement or any of the related documents would perform all of the covenants and agreements required
to be performed by such party under such documents;
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there
were no factors that would delay or subject to any adverse conditions, any necessary regulatory or governmental approval for
the Stock Purchase Transaction and that all conditions to the completion of the Stock Purchase Transaction would be satisfied
without any waivers or modifications to the Stock Purchase Agreement or any of the related documents; and
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in
the course of obtaining the necessary regulatory, contractual, or other consents or approvals for the transaction, no restrictions,
including any divestiture requirements, termination or other payments or amendments or modifications, would be imposed that
would have a material adverse effect on the future results of operations or financial condition of the Company or the contemplated
benefits of the Stock Purchase Transaction.
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For
purposes of KBW’s opinion, no effect was given to the Externalization Transaction, the intended Special Dividend, if any,
or any aspect, implication or effect thereof, including the planned RIC Election. KBW assumed that the Stock Purchase Transaction
would be consummated in a manner that complied with the applicable provisions of the Securities Act of 1933, as amended, the Exchange
Act, and all other applicable federal and state statutes, rules and regulations and the governing organizational documents of
the Company. KBW was further advised by representatives of the Company that the Company relied upon advice from its advisors (other
than KBW) or other appropriate sources as to all legal, financial reporting, tax, accounting and regulatory matters with respect
to the Company, the Stock Purchase Transaction and any related transactions (including the Externalization Transaction and the
intended Special Dividend), and the Stock Purchase Agreement. KBW did not provide advice with respect to any such matters.
KBW’s
opinion addressed only the fairness, from a financial point of view, as of the date of such opinion, to the Company of the $3.00
per share consideration in the Stock Purchase Transaction. KBW expressed no view or opinion as to any other terms or aspects of
the Stock Purchase Transaction or any term or aspect of any related transaction (including the Externalization Transaction or
the intended Special Dividend), including without limitation, the form or structure of the Stock Purchase Transaction (including
the form of the Stock Purchase Transaction consideration or the allocation thereof between the Contributed Investment Assets and
the Cash Consideration) or any such related transaction, any consequences of the transaction to the Company, its Shareholders,
creditors or otherwise (including the ownership dilution to existing holders of the Common Stock), or any terms, aspects, merits
or implications of any agreements, arrangements or understandings contemplated or entered into in connection with the transaction,
any such related transaction, or otherwise. KBW’s opinion was necessarily based upon conditions as they existed and could
be evaluated on the date of such opinion and the information made available to KBW through such date. Developments subsequent
to the date of KBW’s opinion may have affected, and may affect, the conclusion reached in KBW’s opinion and KBW did
not and does not have an obligation to update, revise or reaffirm its opinion. KBW’s opinion did not address, and KBW expressed
no view or opinion with respect to:
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the
underlying business decision of the Company to engage in the Stock Purchase Transaction or any related transaction or enter
into the Stock Purchase Agreement;
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the
relative merits of the Stock Purchase Transaction or any related transaction as compared to any strategic alternatives that
are, have been or may be available to or contemplated by the Company or the Board;
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any
business, operational or other plans with respect to the Company that might be contemplated by the Company or the Board or
that might be implemented by the Company or the Board subsequent to the Closing (including, without limitation, the Externalization
Transaction or the planned RIC Election);
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the
fairness of the amount or nature of any compensation to any of the Company’s officers, directors or employees, or any
class of such persons, relative to the Purchase Price;
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the
effect of the Stock Purchase Transaction or any related transaction on holders of any class of securities of the Company or
any other party to any transaction contemplated by the Stock Purchase Agreement;
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any
election by Shareholders to receive the Common Stock or cash in the Special Dividend, if it occurs, or the actual allocation
among such holders between the Common Stock and cash;
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the
actual value of the Common Stock to be issued in connection with the Stock Purchase Transaction or, if it occurs, the Special
Dividend;
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the
prices, trading range or volume at which the Common Stock would trade following the public announcement of the Transactions
or following the Closing or the prices at which any of the Contributed Investment Assets may be sold at any time;
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any
fees or other terms of the Investment Management Agreement;
|
|
●
|
any
advice or opinions provided by any other advisor to any of the parties to the Transactions or any other transaction contemplated
by the Transactions; or
|
|
|
|
|
●
|
any
legal, regulatory, accounting, tax or similar matters relating to the Company, any of the Shareholders, or relating to or
arising out of or as a consequence of the Transactions or any transaction related thereto, including whether or not the Company
and Rand SBIC would qualify as RICs for U.S. federal income tax purposes following the Transaction, the intended Special Dividend
and the Externalization Transaction.
|
In
performing its analyses, KBW made numerous assumptions with respect to industry performance, general business, economic, market
and financial conditions and other matters, which are beyond the control of KBW and the Company. Any estimates contained in the
analyses performed by KBW are not necessarily indicative of actual values or future results, which may be significantly more or
less favorable than suggested by these analyses. Additionally, estimates of the value of businesses or securities do not purport
to be appraisals or to reflect the prices at which such businesses or securities might actually be sold. Accordingly, these analyses
and estimates are inherently subject to substantial uncertainty. In addition, the KBW opinion was among several factors taken
into consideration by the Board in making its determination to approve the Stock Purchase Agreement and the Stock Purchase Transaction.
Consequently, the analyses described below should not be viewed as determinative of the decision of the Board with respect to
the fairness of the consideration in the Stock Purchase Transaction. The type and amount of consideration payable in the Stock
Purchase Transaction were determined through negotiation between the Company and East, and the decision of the Company to enter
into the Stock Purchase Agreement was solely that of the Board.
The
following is a summary of the material financial analyses presented by KBW to the Board in connection with its opinion. The summary
is not a complete description of the financial analyses underlying the opinion or the presentation made by KBW to the Board, but
summarizes the material analyses performed and presented in connection with such opinion. The financial analyses summarized below
include information presented in tabular format. The tables alone do not constitute a complete description of the financial analyses.
The preparation of a fairness opinion is a complex analytic process involving various determinations as to appropriate and relevant
methods of financial analysis and the application of those methods to the particular circumstances. Therefore, a fairness opinion
is not readily susceptible to partial analysis or summary description. In arriving at its opinion, KBW did not attribute any particular
weight to any analysis or factor that it considered, but rather made qualitative judgments as to the significance and relevance
of each analysis and factor. Accordingly, KBW believes that its analyses and the summary of its analyses must be considered as
a whole and that selecting portions of its analyses and factors or focusing on the information presented below in tabular format,
without considering all analyses and factors or the full narrative description of the financial analyses, including the methodologies
and assumptions underlying the analyses, could create a misleading or incomplete view of the process underlying its analyses and
opinion.
For
purposes of the financial analyses summarized below, no effect was given to the Externalization Transaction, the intended Special
Dividend, if any, or any aspect, implication or effect thereof, including the RIC Election.
Selected
Public Companies Analysis – BDCs with Market Capitalization less than $300 Million.
Using publicly available information,
KBW compared the market performance of the Company to 25 selected publicly-traded internally and externally managed BDCs with
market capitalization less than $300 million.
The
selected companies were as follows:
TriplePoint
Venture Growth BDC Corp.
|
KCAP
Financial, Inc.
|
WhiteHorse
Finance, Inc.
|
Capitala
Finance Corp.
|
Solar
Senior Capital Ltd.
|
GSV
Capital Corp.
|
Oaktree
Strategic Income Corporation
|
Garrison
Capital Inc.
|
Gladstone
Capital Corporation
|
Firsthand
Technology Value Fund, Inc.
|
Monroe
Capital Corporation
|
Alcentra
Capital Corporation
|
Stellus
Capital Investment Corporation
|
CM
Finance Inc.
|
THL
Credit, Inc.
|
Great
Elm Capital Corp.
|
MVC
Capital, Inc.
|
Harvest
Capital Credit Corporation
|
Saratoga
Investment Corp.
|
180
Degree Capital Corp.
|
Medley
Capital Corporation
|
Equus
Total Return, Inc.
|
OFS
Capital Corporation
|
OHA
Investment Corporation
|
Horizon
Technology Finance Corporation
|
|
To
perform this analysis, KBW used market price information as of January 22, 2019 and reported NAV per share data as of the end
of the most recent completed quarterly period available (which in the case of the Company was September 30, 2018). KBW also used
2019 earnings per share (“
EPS
”) estimates taken from consensus “street estimates” of the selected
companies.
KBW’s
analysis showed, among other things, the following concerning the market performance of the Company and the selected companies
(excluding the impact of the 2019 EPS multiples for five of the selected companies, which multiples were considered to be not
meaningful (“
NM
”)):
|
|
|
|
|
|
Selected Companies
|
|
|
|
|
The Company
|
|
|
|
Minimum
|
|
|
|
25
th
Percentile
|
|
|
|
Median
|
|
|
|
Average
|
|
|
|
75
th
Percentile
|
|
|
|
Maximum
|
|
Price / NAV Per Share
|
|
|
0.47
|
x
|
|
|
0.45
|
x
|
|
|
0.60
|
x
|
|
|
0.72
|
x
|
|
|
0.75
|
|
|
|
0.90
|
x
|
|
|
1.00
|
x
|
Price / 2019 Estimated EPS
|
|
|
NM
|
|
|
|
5.0
|
x
|
|
|
7.4
|
x
|
|
|
8.4
|
x
|
|
|
8.5
|
x
|
|
|
9.6
|
x
|
|
|
12.3
|
x
|
KBW
then applied the minimum and median price-to-NAV per share multiples of the selected companies to the reported NAV per share of
the Company as of September 30, 2018. This analysis indicated a range of the implied value per share of Common Stock of $2.18
to $3.48, as compared to the $3.00 per share consideration in the Stock Purchase Transaction.
No
company used as a comparison in the above selected companies analysis is identical to the Company. Accordingly, an analysis of
these results is not mathematical. Rather, it involves complex considerations and judgments concerning differences in financial
and operating characteristics of the companies involved.
Selected
Public Companies Analysis – Total Return BDCs.
Using publicly available information, KBW compared the market performance
of the Company to four selected publicly-traded BDCs that do not issue dividends, but seek to return value to shareholders through
realized gains from their portfolio’s equity investments.
The
selected companies were as follows:
GSV
Capital Corp.
|
180
Degree Capital Corp.
|
Firsthand
Technology Value Fund, Inc.
|
Equus
Total Return
|
To
perform this analysis, KBW used market price information as of January 22, 2019 and reported NAV per share data as of the end
of the most recent completed quarterly period available (which in the case of the Company was September 30, 2018). KBW also used
2019 EPS estimates taken from consensus “street estimates” of the selected companies.
KBW’s
analysis showed, among other things, the following concerning the market performance of the Company and the selected companies
(excluding the impact of the 2019 EPS multiples for three of the selected companies, which multiples were considered to be not
meaningful):
|
|
|
|
|
Selected Companies
|
|
|
|
|
The
Company
|
|
|
|
Minimum
|
|
|
|
25
th
Percentile
|
|
|
|
Median
|
|
|
|
Average
|
|
|
|
75
th
Percentile
|
|
|
|
Maximum
|
|
Price / NAV Per Share
|
|
|
0.47
|
x
|
|
|
0.45
|
x
|
|
|
0.52
|
x
|
|
|
0.55
|
x
|
|
|
0.57
|
x
|
|
|
0.59
|
x
|
|
|
0.72
|
x
|
Price / 2019 Estimated EPS
|
|
|
NM
|
|
|
|
5.0
|
x
|
|
|
5.0
|
x
|
|
|
5.0
|
x
|
|
|
5.0
|
x
|
|
|
5.0
|
x
|
|
|
5.0
|
x
|
KBW
then applied the 25
th
percentile and 75
th
percentile price-to-NAV per share multiples of the selected companies
to the reported NAV per share of the Company as of September 30, 2018. This analysis indicated a range of the implied value per
share of Common Stock of $2.52 to $2.85, as compared to the $3.00 per share consideration in the Stock Purchase Transaction.
No
company used as a comparison in the above selected companies analysis is identical to the Company. Accordingly, an analysis of
these results is not mathematical. Rather, it involves complex considerations and judgments concerning differences in financial
and operating characteristics of the companies involved.
Selected
Transactions Analysis.
KBW reviewed publicly available information related to 11 selected acquisitions of BDCs announced
since the beginning of 2009.
The
selected transactions were as follows:
Acquiror
|
|
Acquired
Company
|
Golub
Capital BDC, Inc.
|
|
Golub
Capital Investment Corporation
|
FS
Investment Corporation
|
|
Corporate
Capital Trust, Inc.
|
Benefit
Street Partners LLC; Barings
|
|
Triangle
Capital Corporation
|
CĪON
Investment Corporation
|
|
Credit
Suisse Park View BDC, Inc.
|
MAST
Capital Management LLC; Great Elm Capital
Group Inc.
|
|
Full
Circle Capital Corporation
|
Ares
Capital Corporation
|
|
American
Capital, Ltd.
|
PennantPark
Floating Rate Capital Ltd.
|
|
MCG
Capital Corporation
|
Saratoga
Investment Corp.
|
|
GSC
Investment Corp.
|
Ares
Capital Corporation
|
|
Allied
Capital Corporation
|
Prospect
Capital Corporation
|
|
Patriot
Capital Funding, Inc.
|
Highland
Credit Strategies Fund
|
|
Highland
Distressed Opportunities, Inc.
|
For
each selected BDC transaction, KBW derived the following implied transaction statistics, in each case based on the transaction
consideration value paid for the acquired company (including contributions by external managers) and using financial data based
on the acquired company’s then latest publicly available financial statements prior to the announcement of the respective
transaction (adjusted to reflect announced pre-closing adjustments):
|
●
|
Price
to reported NAV per share of the acquired company; and
|
|
|
|
|
●
|
Price
to latest 12 months net investment income (“
LTM NII
”)
|
KBW’s
analysis showed, among other things, the following concerning the implied transaction statistics of the selected BDC transactions:
|
|
Selected Transactions
|
|
|
|
Minimum
|
|
|
25
th
Percentile
|
|
|
Median
|
|
|
Average
|
|
|
75
th
Percentile
|
|
|
Maximum
|
|
Price / NAV Per Share
|
|
|
39.4
|
%
|
|
|
50.8
|
%
|
|
|
89.0
|
%
|
|
|
78.9
|
%
|
|
|
100.0
|
%
|
|
|
107.8
|
%
|
Price / LTM NII
|
|
|
2.21
|
x
|
|
|
4.63
|
x
|
|
|
8.18
|
x
|
|
|
7.98
|
x
|
|
|
10.79
|
x
|
|
|
14.30
|
x
|
KBW
then applied the minimum and median price-to-NAV per share multiples of the selected transactions to the reported NAV per share
of the Company as of September 30, 2018. This analysis indicated a range of the implied value per share of Common Stock of $1.91
to $4.31, as compared to the $3.00 per share consideration in the Stock Purchase Transaction.
KBW
separately reviewed an implied transaction multiple for the Stock Purchase Transaction (based on the $3.00 per share consideration
in the Stock Purchase Transaction) of 0.62x, the reported NAV per share of the Company as of September 30, 2018. The implied LTM
NII multiple for the Stock Purchase Transaction was considered to be not meaningful because the Company’s LTM NII was negative.
No
company or transaction used as a comparison in the above selected transaction analysis is identical to the Company or the Stock
Purchase Transaction. Accordingly, an analysis of these results is not mathematical. Rather, it involves complex considerations
and judgments concerning differences in financial and operating characteristics of the companies involved.
Miscellaneous.
KBW acted as financial advisor to the Company in connection with the proposed transaction and did not act as an advisor
to or agent of any other person. As part of its investment banking business, KBW is regularly engaged in the valuation of BDC
securities in connection with acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for various other purposes. In the ordinary course of KBW and its affiliates’ broker-dealer
businesses, KBW and its affiliates may from time to time purchase securities from, and sell securities, to the Company and East.
In addition, as a market maker in securities, KBW and its affiliates may from time to time have a long or short position in, and
buy or sell, debt or equity securities of the Company for its and their own respective accounts and for the accounts of its and
their respective customers and clients.
Pursuant
to the KBW engagement letter, the Company agreed to pay KBW an aggregate cash fee of $500,000, $200,000 of which became payable
with the rendering of KBW’s opinion and the balance of which is contingent upon the Closing. The Company also agreed to
reimburse KBW for reasonable and documented out-of-pocket expenses and disbursements incurred in connection with its engagement
and to indemnify KBW against certain liabilities relating to or arising out of KBW’s engagement or KBW’s role in connection
therewith. Other than in connection with this present engagement, in the two years preceding the date of KBW’s opinion,
KBW did not provide investment banking and financial advisory services to the Company. In the two years preceding the date of
KBW’s opinion, KBW did not provide investment banking and financial advisory services to East. KBW may in the future provide
investment banking and financial advisory services to the Company, East or the Adviser and receive compensation for such services.
Contributed
Investment Assets
Under
the terms of the Stock Purchase Agreement, a portion of consideration payable to the Company in the Stock Purchase Transaction
will consist of the Contributed Investment Assets. The Contributed Investment Assets comprise five current investments
of East. These Contributed Investment Assets consist of term loans and promissory notes with maturity dates ranging between April
2020 and December 2023 and, with respect to certain of the portfolio companies, also include equity securities or warrants
to acquire equity securities. As of the date of execution of the Stock Purchase Agreement, the Company and East intended that
a term note from Spinesmith Holdings LLC to the Company be among the Contributed Investment Assets. In March 2019, this term note
was repaid by Spinesmith, and therefore will not be among the Contributed Investment Assets. As of December 31, 2018, the
total Contributed Investment Assets Fair Value for the Contributed Investment Assets was determined by the parties to be $11.6
million.
The
following table sets forth certain information as of December 31, 2018 for each portfolio company included in the Contributed
Investment Assets. Percentages shown below for a class of investment securities represent the percentage of the class owned and
do not necessarily represent a voting ownership percentage. Percentages shown for equity securities, other than warrants, represent
the actual percentage of the class of security held before dilution. Percentages shown for warrants held represent the percentage
of class of security East may acquire, assuming East exercises its warrants before dilution.
East
directly or indirectly owns less than 5% of the outstanding voting securities, and is therefore not deemed to be an affiliate,
of each of the portfolio companies listed on the table below. East offers to make significant managerial assistance to certain
of East’s portfolio companies. East may also receive rights to observe the meetings of East’s portfolio companies’
boards of directors or other governing bodies.
Name
and Address of Portfolio Company
|
|
Industry
|
|
Type
of Investment
|
|
Interest
Rate
|
|
Maturity
Date
|
|
Principal
Amount or Quantity
|
|
Original
Cost
|
|
Fair
Value of at December 31, 2018
|
|
Interest
Receivable Amount at December 31, 2018
|
AIKG
LLC
“Andretti”
Marietta, GA
|
|
Entertainment
|
|
Term
Note
|
|
|
12.0
|
%
|
|
12/28/2023
|
|
$
|
2,250,000
|
|
|
$
|
2,250,000
|
|
|
$
|
2,250,000
|
|
|
$
|
0
|
|
Filterworks
Acquisition USA, LLC
|
|
Equipment
Distribution ‒Automobile Collision Repair Industry
|
|
Subordinated
Note
|
|
|
12.0
|
%
|
|
12/4/2023
|
|
$
|
1,605,000
|
|
|
$
|
1,605,000
|
|
|
$
|
1,607,497
|
|
|
$
|
14,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
“Filterworks”
Deerfield Beach, FL
|
|
|
Class
A Units
|
|
|
N/A
|
|
|
N/A
|
|
|
562.5
Class A Units (representing a 12% ownership interest in the Class A Units)
|
|
|
$
|
562,500
|
|
|
$
|
562,500
|
|
|
|
N/A
|
|
HDI
Acquisition LLC
|
|
Signage
Manufacturing
|
|
Term
Loan
|
|
|
12.0
|
%
|
|
6/20/2023
|
|
$
|
1,200,000
|
|
|
$
|
1,200,000
|
|
|
$
|
1,224,519
|
|
|
$
|
12,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
“Hilton
Displays”
Greenville, SC
|
|
|
Class
A Units
|
|
|
N/A
|
|
|
N/A
|
|
|
30,000
Class A Units (representing a 9% ownership interest in the Class A Units)
|
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
|
|
N/A
|
|
Mattison
Avenue Holdings LLC
|
|
Consumer
Retail – Beauty Industry
|
|
Promissory
Note
|
|
|
12.0
|
%
|
|
6/9/2022
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
|
$
|
1,015,920
|
|
|
$
|
10,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
“Mattison”
Dallas, TX
|
|
|
Warrant
for membership interests
|
|
|
N/A
|
|
|
N/A
|
|
|
Warrant
for a 1.43% ownership interest in the membership interests
|
|
|
$
|
45,817
|
|
|
$
|
45,817
|
|
|
|
N/A
|
|
MidGuard
Self Storage Greenville LLC
|
|
Real
Estate –
Self Storage
|
|
Promissory
Note
|
|
|
12.0
|
%
|
|
4/21/2020
|
|
$
|
3,400,000
|
|
|
$
|
3,400,000
|
|
|
$
|
3,010,082
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
“MidGuard”
Greenville, SC
|
|
|
PIK
due at maturity
|
|
|
N/A
|
|
|
4/21/2020
|
|
$
|
1,581,418
|
|
|
$
|
0
|
|
|
$
|
1,581,418
|
|
|
|
N/A
|
|
The
above investments were selected as part of a negotiated process between the Company and East in connection with the negotiation
and execution of the Stock Purchase Agreement. Investments were initially selected by East based on a number of factors, including
the attractiveness of an investment’s risk return profile, its relative liquidity and expected repayment date, the size
of the East’s overall holdings in a portfolio company, and the appropriateness of an investment for inclusion in a BDC portfolio
based on regulatory and tax considerations. East did not give a greater weight to any of the above factors, but instead viewed
all of the factors together as a whole when considering which investments to select for transfer the Company. In addition, each
of the above investments was reviewed by Company Management and the Board in connection with its evaluation of the terms of the
Stock Purchase Agreement and certain assets were rejected by Company Management, with the assent of the Board, in the course of
the negotiations.
Interests
of Certain Persons Related to the Company
Shareholders
should be aware that the Company’s executive officers and employees may have interests in the Stock Purchase Transaction,
the Externalization Transaction and the other transactions described herein that are different from, or in addition to, those
of the Shareholders generally.
Upon
the Closing of the Transactions, the Company’s current executive officers and employees will terminate their employment
with the Company and become employees of the Adviser; however, Allen F. “Pete” Grum will remain as President and Chief
Executive Officer of the Company and Daniel P. Penberthy will remain as Executive Vice President and Chief Financial Officer of
the Company. Mr. Grum will be retained as President and Chief Executive Officer of the Adviser, and Mr. Penberthy will be retained
as Executive Vice President and Chief Financial Officer of the Adviser. Messrs. Grum and Penberthy will also serve as members
of the Adviser’s Investment Committee.
Additionally,
the Company’s executive officers, employees and directors, to the extent that they remain Shareholders as of the record
date for the payment of the intended Special Dividend following the Closing date, will participate in such intended Special Dividend
based upon their respective ownership of shares of Common Stock as of such record date.
Closing
of the Stock Purchase Transaction
Unless
otherwise mutually agreed by the Company and East, the Closing will take place no later than the third business day after the
satisfaction or waiver of the latest to occur of the conditions to the Closing (as set forth in the Stock Purchase Agreement and
as described in the section of this proxy statement captioned “The Stock Purchase Agreement — Conditions to the Stock
Purchase Transaction”), other than conditions that by their nature are to be satisfied at the Closing and subject to the
satisfaction or waiver of such conditions.
We
currently expect the Closing to occur during the third quarter of 2019. However, the exact timing of the Closing cannot be predicted
because it is subject to the satisfaction or waiver of the closing conditions specified in the Stock Purchase Agreement, some
of which are outside of our direct control.
Required
Regulatory Approvals
The
Stock Purchase Transaction will not occur until the following consents of, or actions with respect to, governmental or regulatory
authorities have been obtained or completed: (i) approval of the Stock Purchase Transaction by the SBA or receipt of confirmation
from the SBA that approval of the Stock Purchase Transaction from the SBA is not required; (ii) registration of the Adviser as
an investment adviser under the Advisers Act for purposes of serving as investment adviser to the Company under the Investment
Management Agreement; (iii) filing and acceptance of the Amendment with the Department of State of the State of New York; and
(iv) satisfaction of applicable requirements of Nasdaq.
Following
the consummation of the Transactions, after declaration and payment of the intended Special Dividend and contingent upon meeting
certain other tax-related conditions, the Company expects to elect to be taxed as a RIC for U.S. tax purposes. In order to qualify
to make the RIC Election, the Company must, among other things, distribute the Company’s previously undistributed “accumulated
earnings and profits” to Shareholders. RIC qualification also requires meeting specified source-of-income and asset diversification
requirements. In addition, we must distribute to our Shareholders, in respect of each taxable year, dividends for U.S. federal
income tax purposes in an amount generally at least equal to 90% of our “investment company taxable income,” which
is generally equal to the sum of our net ordinary income plus the excess of our realized net short-term capital gains over our
realized net long-term capital losses, determined without regard to any deduction for distributions paid. As a RIC, we generally
will not have to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our
Shareholders.
Other
than the approvals listed above, we are unaware of any other material federal, state or foreign regulatory requirements or approvals
required for completion of the Stock Purchase Transactions.
Appraisal
Rights
Pursuant
to the BCL and the Certificate of Incorporation, there are no appraisal or dissenters’ rights that apply to the execution,
delivery and performance of the Stock Purchase Agreement or the consummation of the Transactions.
U.S.
Federal Income Tax Consequences of the Stock Purchase Transaction
The
following discussion is a general summary of the anticipated U.S. federal income tax consequences of the Stock Purchase Transaction
to U.S. Shareholders. Its content is based upon the Code, its legislative history, currently applicable and proposed treasury
regulations under the Code and published rulings and decisions, all as currently in effect as of the date of this proxy statement,
and all of which are subject to change, possibly with retroactive effect. Tax considerations under state, local and non-U.S. laws,
or federal laws other than those pertaining to income tax, are not addressed in this proxy statement. This discussion has no binding
effect on the IRS or the courts.
The
Stock Purchase Transaction is not a Shareholder-level action, and our U.S. and non-U.S. Shareholders, in their capacities as such,
are not expected to realize any gain or loss for U.S. federal income tax purposes solely as a result of the Stock Purchase Transaction.
In addition, the Company does not expect to recognize income or gain in connection with the Stock Purchase Transaction.
RIC
Election
Following
the consummation of the Transactions, after declaration and payment of the intended Special Dividend and contingent upon meeting
certain other tax-related conditions, the Company expects to elect to be taxed as a RIC for U.S. tax purposes. In order to qualify
to make the RIC Election, the Company must, among other things, distribute the Company’s previously undistributed “accumulated
earnings and profits” to Shareholders. RIC qualification also requires meeting specified source-of-income and asset-diversification
requirements. In addition, we must distribute to our Shareholders, in respect of each taxable year, dividends for U.S. federal
income tax purposes in an amount generally at least equal to 90% of our “investment company taxable income,” which
is generally equal to the sum of our net ordinary income plus the excess of our realized net short-term capital gains over our
realized net long-term capital losses, determined without regard to any deduction for distributions paid (the “
Annual
Distribution Requirement
”). As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on
any ordinary income or capital gains that we distribute to our Shareholders. Even if we qualify as a RIC, we generally will be
subject to corporate-level U.S. federal income tax on our undistributed taxable income and could be subject to U.S. federal excise,
state, local and foreign taxes.
In
connection with the Company making the RIC Election, the Company expects that Rand SBIC will also make an election to be taxed
as a RIC for U.S. federal tax purposes. In order to be eligible to be taxed as a RIC, Rand SBIC must satisfy the source-of-income,
asset-diversification, and minimum distribution requirements discussed above. Because a substantial portion of the Company’s
assets are held through Rand SBIC, the Company will not be able to satisfy the asset-diversification requirements unless Rand
SBIC also qualifies to be taxed as a RIC for U.S. federal tax purposes.
Assuming
that the Company elects to be taxed as, and qualifies to be taxed as, a RIC and satisfies the Annual Distribution Requirement,
the Company will not be subject to U.S. federal income tax on the portion of its “investment company taxable income”
and net capital gain (which we define as net long-term capital gain in excess of net short-term capital loss) that it timely distribute
to Shareholders. Similarly, assuming that Rand SBIC elects to be taxed as a RIC and qualifies to be taxed as a RIC and satisfies
the Annual Distribution Requirement, Rand SBIC will also not be subject to U.S. federal income tax on the portion of its “investment
company taxable income” and net capital gain (which we define as net long-term capital gain in excess of net short-term
capital loss) that it timely distributes to the Company. The Company will be subject to U.S. federal income tax at the regular
corporate rates on any income or capital gain not distributed (or deemed distributed) to our Shareholders. Rand SBIC will also
be subject to U.S. federal income tax at the regular corporate rates on any income or capital gain not distributed (or deemed
distributed) to the Company.
The
Company and Rand SBIC, respectively, will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income
of RICs unless each distribute in a timely manner an amount at least equal to the sum of (1) 98% of its ordinary income for each
calendar year, (2) 98.2% of its capital gain net income for the one-year period ending October 31 in that calendar year and (3)
any income recognized, but not distributed, in preceding years and on which it paid no U.S. federal income tax.
In
order to maintain qualification as a RIC for U.S. federal income tax purposes going forward, each of the Company and Rand SBIC
must, among other things: (1) meet the Annual Distribution Requirement; (2) qualify to be regulated as a BDC or be registered
as a management investment company under the 1940 Act; (3) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock or other securities
or currencies or other income derived with respect to its business of investing in such stock, securities or currencies and net
income derived from an interest in a “qualified publicly-traded partnership” (as defined in the Code); and (4) diversify
its holdings so that at the end of each quarter of the taxable year: (a) at least 50% of the value of its assets consists of cash,
cash equivalents, U.S. Government securities, securities of other RICs, and other securities if such other securities of any one
issuer do not represent more than 5% of the value of its assets or more than 10% of the outstanding voting securities of the issuer
(which for these purposes includes the equity securities of a “qualified publicly-traded partnership”); and (b) no
more than 25% of the value of its assets is invested in the securities, other than U.S. Government securities or securities of
other RICs, (i) of one issuer (ii) of two or more issuers that are controlled, as determined under applicable tax rules, by us
and that are engaged in the same or similar or related trades or businesses or (iii) of one or more “qualified publicly-traded
partnerships.” Because a substantial portion of the Company’s assets consist of its shares in Rand SBIC, the Company
will not be eligible to be taxed as a RIC for U.S. federal income tax purposes unless Rand SBIC is eligible to be taxed as a RIC
for U.S. federal tax purposes.
Even
if the Company and Rand SBIC qualify for taxation as RICs, they will be subject to corporate-level U.S. federal income tax on
any unrealized net built-in gains in their respective assets as of the first day they qualify as RICs to the extent that such
gains are realized by the Company or Rand SBIC during the five-year period following the first day that they qualify as RICs.
If
the Company and Rand SBIC qualify for taxation as RICs, distributions by the Company out of its earnings and profits to Shareholders
generally will be taxable to Shareholders for U.S. federal income tax purposes, either as ordinary income or capital gains, depending
upon the nature of the income giving rise to the distribution. The tax consequences to a Shareholder attributable to the acquisition,
ownership, and disposition of Common Stock, are complex and will depend on the facts of the Shareholder’s own unique circumstances.
We encourage Shareholders to consult their own tax advisers regarding the specific tax consequences to them (including tax reporting
requirements, the applicability of federal, state, local and foreign tax laws, eligibility for the benefits of any applicable
tax treaty, and the effect of any possible changes in the tax laws) of the acquisition, ownership, and disposition of Common Stock.
THE
STOCK PURCHASE AGREEMENT
Explanatory
Note Regarding the Stock Purchase Agreement
The
following summary describes the material provisions of the Stock Purchase Agreement. The descriptions of the Stock Purchase Agreement
in this summary and elsewhere in this proxy statement are not complete and are qualified in their entirety by reference to the
Stock Purchase Agreement, a copy of which is attached to this proxy statement as
Appendix A
and incorporated by reference
in its entirety into this proxy statement. We encourage you to read the Stock Purchase Agreement carefully and in its entirety
because this summary may not contain all the information about the Stock Purchase Agreement that is important to you.
The
representations, warranties and covenants of the Company and East contained in the Stock Purchase Agreement have been made solely
for the benefit of the parties thereto. In addition, such representations, warranties and covenants (i) have been made only for
purposes of the Stock Purchase Agreement, (ii) have been qualified by (a) matters specifically disclosed in the Company’s
filings with the SEC filed or furnished since December 31, 2016 and (b) confidential disclosures made in the disclosure schedules
delivered in connection with the Stock Purchase Agreement, (iii) are subject to applicable materiality qualifications contained
in the Stock Purchase Agreement, which may differ from what may be viewed as material by investors, (iv) were made only as of
the date of the Stock Purchase Agreement or such other date as is specified in the Stock Purchase Agreement and (v) have been
included in the Stock Purchase Agreement for the purpose of allocating risk between the contracting parties rather than establishing
matters as fact. Accordingly, the Stock Purchase Agreement is included with this filing only to provide investors with information
regarding the terms of the Stock Purchase Agreement, and not to provide investors with any other factual information regarding
the Company or East or their respective businesses. Investors should not rely on the representations, warranties and covenants
or any descriptions thereof as characterizations of the actual state of facts or condition of the Company or East or any of their
respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations and warranties
may change after the date of the Stock Purchase Agreement, which subsequent information may or may not be fully reflected in the
Company’s public disclosures.
The
representations and warranties in the Stock Purchase Agreement and the description of them in this proxy statement should not
be read alone but instead should be read in conjunction with the other information contained in this proxy statement and the other
reports, statements and filings the Company files publicly with the SEC.
Purchase
Price and Assets Acquired by the Company from East
At
the Closing, subject to the provisions of the Stock Purchase Agreement, East will pay the Company the Purchase Price, consisting
of the following:
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(i)
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the
Cash Consideration in an amount equal to $25.0 million less the amount of the Contributed Investment Assets Fair Value;
plus
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(ii)
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the
Contributed Investment Assets Fair Value, which shall be computed as the fair value of the Contributed Investment Assets,
plus (without duplication) the aggregate amount of accrued but unpaid interest (including uncapitalized payment-in-kind interest
earned), penalties, fees, charges and other amounts on the Contributed Investment Assets, with the Contributed Investment
Assets consisting of:
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●
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each
of the loans and other securities as described on the contributed loan schedule attached to the Stock Purchase Agreement (as
described in greater detail in this proxy statement above in “The Stock Purchase Transaction ‒ Contributed Investment
Assets”) (the “
Contributed Loans
” and such schedule of Contributed Loans being the “
Contributed
Loan Schedule
”), including, to the extent permitted to be assigned under applicable law, all claims, suits, causes
of action and any other right of East under the Contributed Loan Documents (as defined below) against any person or entity,
whether known or unknown, arising under, out of, or in connection with the Contributed Loan Documents or in any way based
on or related to any of the foregoing;
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●
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the
credit and financing agreements, guarantees, subordination agreements, Contributed Loan Notes (as defined below), mortgages,
deeds of trust, security agreements (including pledge and control agreements), financing statements, intercreditor agreements,
and other instruments and documents affecting East’s ownership, economic or other rights with respect to the Contributed
Loans or in which East has an interest, relating to each Contributed Loan (the “
Contributed Loan Documents
”);
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●
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the
original executed promissory notes (or copies, to the extent that only copies of such promissory notes are in East’s
possession or control) issued to the order of East, or copies of a “master” note if no such note was issued to
East or an allonge endorsing a note in favor of East, evidencing indebtedness owing to East under each Contributed Loan (the
“
Contributed Loan Notes
”);
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●
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the
assets and properties securing payment of outstanding obligations of the borrowers under the Contributed Loan Documents relating
to each Contributed Loan (the “
Contributed Loan Collateral
”);
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●
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the
credit and transaction files of East relating to the Contributed Loans, including Contributed Loan Documents, third party
reports, operating statements, financial statements of borrowers of the Contributed Loans, budgets, recent borrowing base,
compliance and advance certificates, and all other documents that relate to each Contributed Loans (the “
Contributed
Loan Files
”); and
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●
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the
original (or copies, in the event East is required to retain the original under applicable law) books and records, information,
files, records, data, plans, contracts and recorded knowledge of East (in whatever format) to the extent relating to the ownership
of the Contributed Investment Assets, but excluding the Contributed Loan Documents, Contributed Loan Files and Contributed
Loan Notes, relating to each Contributed Loan (the “
Contributed Books and Records
”).
|
The
Purchase Price, consisting of the sum of the Cash Consideration and the Contributed Investment Assets Fair Value, will be $25.0
million. In consideration for payment of the Purchase Price by East, the Company will issue 8,333,333.33 shares of Common Stock
to East.
Immediately
following the close of business on the second business day prior to the Closing date (the “
Closing Cut-off Time
”),
the Contributed Loan Schedule will be updated as necessary to reflect changes to the information contained therein between 5:00
p.m. (New York, New York time) on January 23, 2019 and the Closing Cut-off Time. The Contributed Loan Schedule and the Contributed
Investment Assets Fair Value, each as updated as of the Closing Cut-off Time and as agreed to between East and the Company, shall
be used for purposes of calculating the Cash Consideration.
East
shall provide to the Company, contemporaneously with the delivery of the updated Contributed Loan Schedule, a certificate of an
officer of East setting forth its good faith calculation of the Contributed Investment Assets Fair Value, together with reasonable
supporting documentation for such calculation. East will provide the Company and its representatives during normal business hours
access reasonably requested by the Company to the work papers and other books and records and personnel of East and its affiliates
for purposes of assisting the Company and its representatives in their review of the calculation of the Contributed Investment
Assets Fair Value.
To
the extent that the Company does not agree with the calculation of the Contributed Investment Assets Fair Value presented by East,
the parties shall promptly negotiate in good faith so as to agree upon the calculation of the Contributed Investment Assets Fair
Value. The calculation of Contributed Investment Assets Fair Value as agreed between the Company and East shall be used as the
Contributed Investment Assets Fair Value for purposes of the Stock Purchase Agreement.
Liabilities
Acquired by the Company under Contributed Investment Assets
From
and after the Closing, the Company assumes all obligations, if any, with respect to the Contributed Investment Assets under the
Contributed Loan Documents.
Principal
Repayments between Closing Cut-off Time and Closing
If
any principal payment, interest payment or other payment is made to East with respect to any Contributed Investment Asset between
the Closing Cut-off Time and the Closing, this amount shall be received by East in trust for the Company’s benefit, and
East shall either (i) pay the amount over to the Company via wire transfer of immediately available funds, or (ii) if Closing
has not yet occurred, reduce the Contributed Investment Assets Fair Value, and increase the amount of the Cash Consideration,
by the amount so received.
Closing
of the Stock Purchase Transaction
Unless
otherwise mutually agreed to by the Company and East, the Closing will take place no later than the third business day following
the satisfaction or waiver of all of the conditions to the Closing (as set forth in the Stock Purchase Agreement and as described
in the section of this proxy statement captioned “The Stock Purchase Agreement – Conditions to the Stock Purchase
Transaction”), other than conditions that by their terms are to be satisfied at the Closing and subject to the satisfaction
or waiver of such conditions.
At
the Closing, in addition to other customary closing documents, East shall deliver to the Company:
|
(i)
|
a
counterpart of each assignment and assumption agreement relating to a Contributed Investment Asset, duly executed by East
and each person from whom a consent (as set forth in the disclosure schedules to the Stock Purchase Agreement) is required
in connection with the transfer of such Contributed Investment Asset (unless a separate consent from each such person has
been delivered to the Company);
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(ii)
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the
Contributed Loan Notes with respect to such Contributed Loans;
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(iii)
|
the
Contributed Loan Documents in the possession or control of East;
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(iv)
|
the
Contributed Loan Files in the possession or control of East;
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(v)
|
the
Contributed Books and Records; and
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(vi)
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the
Cash Consideration.
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In
addition, at the Closing, the Company and the Adviser will each execute and deliver the Investment Management Agreement and the
Administration Agreement. In addition, the Company and East will each execute and deliver the Shareholder Agreement and East will
deliver its designation of two or three persons, as applicable based upon the size of the Board, for nomination for election to
the Board at the next annual meeting of Shareholders under the terms of the Shareholder Agreement. Under the terms of the Shareholder
Agreement, East will have the right to designate (i) up to two persons if the size of the Board is composed of fewer than seven
directors or (ii) up to three persons if the size of the Board is composed of seven or more directors. Upon Closing, it is expected
that the Board will consist of five members, of which East will have the right to designate two persons for nomination for election
to the Board.
At
the Closing, the employment of each employee of the Company and each existing benefit plan of the Company will be terminated.
Representations
and Warranties of the Company
The
Stock Purchase Agreement contains certain representations and warranties made by the Company to East including, but not limited
to, representations regarding:
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●
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corporate
organization, qualification and good standing;
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●
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capitalization;
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●
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authorization
of the Stock Purchase Agreement, the Investment Management Agreement and the Administration Agreement, and the execution,
delivery and enforceability of the Stock Purchase Agreement;
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●
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absence
of conflicts and no violations of law, governance documents and certain agreements;
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●
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third
party and governmental consents and approvals;
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●
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SEC
reports and regulatory matters;
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●
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financial
statements and internal controls and procedures;
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●
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the
absence of undisclosed liabilities;
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●
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broker’s
fees;
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●
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absence
of certain changes or events;
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●
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legal
proceedings and compliance with law;
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●
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taxes
and tax returns;
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●
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employee
matters;
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●
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certain
material contracts;
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●
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property
and investments securities;
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●
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intellectual
property;
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●
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state
takeover laws;
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●
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the
information to be provided by the Company for inclusion in this proxy statement; and
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●
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insurance.
|
The
Stock Purchase Agreement also contains certain representations and warranties made by East to the Company including, but not limited
to, representations regarding:
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●
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organization;
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●
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limited
liability company authority and absence of conflicts;
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●
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third
party and governmental consents and approvals;
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●
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regulatory
matters;
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●
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broker’s
fees;
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●
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legal
proceedings;
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●
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state
takeover laws;
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●
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the
information to be provided by East for inclusion in this proxy statement;
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●
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sufficiency
of funds;
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●
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no
arrangements with management or Shareholders;
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●
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certain
securities laws matters; and
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●
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certain
matters related to the Contributed Assets.
|
Many
of the representations and warranties contained in the Stock Purchase Agreement are qualified by materiality or a “Material
Adverse Effect” standard.
For
purposes of the Stock Purchase Agreement, “
Material Adverse Effect
” means any occurrence, change, event, effect
or development that, individually, or taken together with all other occurrences, changes, events, effects or developments, has
or would reasonably be likely to have, a material adverse effect on:
(a)
with respect to the Company, the financial condition, results of operations, assets, liabilities, or business of the Company and Rand SBIC taken as a whole, provided, however, that, the determination of whether a “Material Adverse Effect” exists or has occurred shall not include effects attributable to:
|
(i)
|
changes,
after the date of the Stock Purchase Agreement, in GAAP or regulatory accounting requirements applicable generally to companies
in the industry in which the Company and Rand SBIC operate;
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(ii)
|
changes,
after the date of the Stock Purchase Agreement, in laws, rules or regulations of general applicability to companies in the
industry in which the Company and Rand SBIC operate;
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(iii)
|
actions
or omissions taken with the prior express written consent of East;
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(iv)
|
changes,
after the date of the Stock Purchase Agreement, in global or national political conditions or general economic or market conditions
generally affecting other companies in the industry in which the Company and Rand SBIC operate;
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(v)
|
conditions
arising out of acts of terrorism, war, weather conditions or other force majeure events;
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(vi)
|
any
legal proceedings made or brought by any of the current or former Shareholders (on their own behalf or on behalf of the Company)
in connection with the Stock Purchase Agreement or the Stock Purchase Transaction; or
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(vii)
|
the
public disclosure of this Stock Purchase Agreement or the Stock Purchase Transaction;
|
except,
with respect to items (i), (ii), (iv) and (v) above, to the extent that the effects of such change disproportionately impact the
financial condition, results of operations, assets, liabilities or business of the Company and Rand SBIC, taken as a whole, as
compared to other companies in the industry in which the Company and Rand SBIC operate;
(b)
with respect to East, the financial condition, results of operations, assets, liabilities, or business of East and its subsidiaries taken as a whole, provided, however, that, the determination of whether a Material Adverse Effect exists or has occurred shall not include effects attributable to:
|
(i)
|
changes,
after the date of the Stock Purchase Agreement, in GAAP or regulatory accounting requirements applicable generally to companies
in the industry in which East operates;
|
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(ii)
|
changes,
after the date of the Stock Purchase Agreement, in laws, rules or regulations of general applicability to companies in the
industry in which East operates;
|
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(iii)
|
actions
or omissions taken with the prior express written consent of the Company;
|
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(iv)
|
changes,
after the date of the Stock Purchase Agreement, in global or national political conditions or general economic or market conditions
generally affecting other companies in the industry in which East operates; or
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(v)
|
conditions
arising out of acts of terrorism, war, weather conditions or other force majeure events,
|
except,
with respect to items (i), (ii), (iv) and (v) above, to the extent that the effects of such change disproportionately impact the
financial condition, results of operations, assets, liabilities or business of East and its subsidiaries, taken as a whole, as
compared to other companies in the industry in which East and its subsidiaries operate;
|
(c)
|
with
respect to East, the Contributed Investment Assets; or
|
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(d)
|
with
respect to East or the Company, the ability of East or the Company, as applicable, to timely consummate the Stock Purchase
Transaction.
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Company’s
Pre-Closing Covenants
Under
the Stock Purchase Agreement, the Company has agreed that, between the execution of the Stock Purchase Agreement and the Closing,
the Company will, and will cause Rand SBIC to, conduct its business in the ordinary course; use reasonable best efforts to maintain
and preserve intact the Company’s business organization and advantageous business relationships and retain the services
of its key officers and key employees; and not take or omit to take any action which would have an Material Adverse Effect on
the Company and Rand SBIC. The Company has also agreed not to take any action that is intended or would reasonably be expected
to adversely affect or delay the Company’s or East’s ability to obtain any necessary approval of any governmental
entity required to complete the Stock Purchase Transaction or perform its covenants or agreements under the Stock Purchase Agreement
or consummate the Stock Purchase Transaction.
In
addition, the Company has agreed, subject to the terms and conditions of the Stock Purchase Agreement, not to take (or omit to
take) certain actions without the written consent of East (which shall not be unreasonably withheld, conditioned or delayed),
including, but not limited to:
|
(i)
|
other
than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money, assume,
guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation
or other entity, or, make any loan or advance or capital contribution to, or investment in, any person or entity;
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(ii)
|
adjust,
split, combine or reclassify any of its capital stock;
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(iii)
|
make,
declare or pay any dividend, other than (A) any regular quarterly dividend consistent with past practice and (B) dividends
paid by Rand SBIC to the Company;
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(iv)
|
make
any other distribution on, or directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital stock
or any securities or obligations convertible (whether currently convertible or convertible only after the passage of time
or the occurrence of certain events) into or exchangeable for any shares of its capital stock;
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(v)
|
grant
any stock options or restricted shares under any equity incentive plan of the Company, or grant any individual, corporation
or other entity any right to acquire any shares of its capital stock, or issue any additional shares of capital stock or other
securities;
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(vi)
|
except
as required under any contract of the Company or benefit plan of the Company existing as of the date of the Stock Purchase
Agreement or as required by applicable law:
|
|
●
|
increase
in any material manner the compensation or benefits of any of employees of the Company;
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●
|
become
a party to, establish, amend, commence participation in, terminate or commit itself to the adoption of any benefit plan of
the Company or plan, agreement or arrangement which would be a benefit plan of the Company if in effect on the date of the
Stock Purchase Agreement; or
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●
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hire
any senior management employee or terminate the employment of any senior management employee other than for cause;
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(vii)
|
other
than in the ordinary course of business consistent with past practice with respect to securities of any of the Company’s
portfolio companies, sell, transfer, pledge, lease, license, mortgage, encumber or otherwise dispose of any material amount
of its properties or assets (including pursuant to securitizations) to any individual, corporation or other entity other than
a subsidiary of the Company or cancel, release or assign any material amount of indebtedness to any person or entity or any
claims held by any person or entity, in each case other than pursuant to contracts in force at the date of the Stock Purchase
Agreement;
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(viii)
|
other
than the Amendment, amend the Certificate of Incorporation or the Company’s by-laws or the organizational documents
of Rand SBIC, or take any action to exempt any person or entity (other than East or any of its subsidiaries) or any action
taken by any person or entity from any state takeover statute or similarly restrictive provisions of its organizational documents;
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(ix)
|
take
any action or willfully fail to take any action that is intended or may reasonably be expected to result in any of the conditions
to the Stock Purchase Transaction as set forth in the Stock Purchase Agreement not being satisfied;
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(x)
|
incur
any capital expenditures that would exceed $25,000 individually or $75,000 in the aggregate;
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(xi)
|
commence
or settle any material claims, actions, suits or legal proceedings;
|
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(xii)
|
amend,
terminate, cancel, renew or agree to any material amendment of, or change in or waiver under any material contract of the
Company;
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(xiii)
|
make
any material change to its principles, practices or methods of accounting, except (A) as required by GAAP (or any interpretation),
(B) as required by a change in applicable law, or (C) recommended by the audit committee of the Board;
|
|
|
|
|
(xiv)
|
enter
into any material transaction other than in the ordinary course of business consistent with past practice; or
|
|
|
|
|
(xv)
|
agree,
resolve to or commit to do, or publicly announce an intention to do, any of the foregoing.
|
East’s
Pre-Closing Covenants
Under
the Stock Purchase Agreement, East has agreed that, between the execution of the Stock Purchase Agreement and the Closing, subject
to the terms and conditions of the Stock Purchase Agreement, East will not take any action that is intended or would reasonably
be expected to adversely affect or delay the Company’s or East’s ability to obtain any necessary approval of any governmental
entity required to complete the Stock Purchase Transaction or perform its covenants or agreements under the Stock Purchase Agreement
or consummate the Stock Purchase Transaction.
In
addition, East has agreed, subject to the terms and conditions of the Stock Purchase Agreement, to not take (or omit to take)
certain actions without the written consent of the Company (which shall not be unreasonably withheld, conditioned or delayed),
including, but not limited to:
|
(i)
|
sell,
transfer, pledge, lease, license, mortgage, encumber or otherwise dispose of any Contributed Investment Asset to any individual,
corporation or other entity other than a subsidiary or cancel, release or assign, or sell or transfer a participating or other
interest in, any material amount of indebtedness under a Contributed Loan;
|
|
|
|
|
(ii)
|
take
any action or willfully fail to take any action that is intended or may reasonably be expected to result in any of the conditions
to the Stock Purchase Transaction not being satisfied;
|
|
|
|
|
(iii)
|
commence
or settle any material claims relating to the Contributed Investment Assets;
|
|
|
|
|
(iv)
|
amend,
terminate, cancel, renew or agree to any material amendment of, or change in or waiver under any, Contributed Loan Document;
or
|
|
|
|
|
(v)
|
agree,
resolve to or commit to do, or publicly announce an intention to do, any of the foregoing.
|
Additional
Covenants
The
Company and East have agreed to additional covenants between the execution of the Stock Purchase Agreement and the Closing related
to the following matters:
Regulatory
Matters and Proxy Statement
The
Company and East have agreed to cooperate with each other and use their respective commercially reasonable efforts to promptly
prepare and file all necessary documentation, to effect all applications, notices, petitions and filings, to obtain as promptly
as practicable all permits, consents, approvals and authorizations of all third parties and governmental entities that are necessary
or advisable to consummate the Stock Purchase Transaction. The Company and East have also agreed to certain covenants regarding
the preparation, filing and mailing of the proxy statement to the Shareholders and the holding of the special meeting. In addition,
the Company and East have agreed to take additional steps in order to ensure the accuracy of the information contained in the
proxy statement.
SBA
Matters
The
Company has agreed to notify the SBA of the Stock Purchase Transaction. In connection therewith, the Company has also agreed to
take such actions in accordance with SBA regulations and guidelines and make such filings as may be reasonably necessary to obtain
the SBA’s approval or consent of the continued effectiveness of the Company’s SBA licenses after the completion of
the Stock Purchase Transaction (“
SBA Approval
”) or to receive confirmation that SBA Approval is not required.
To the extent Rand SBIC does not receive the approval from the SBA, Rand SBIC may be required to repay its outstanding SBA
debentures and relinquish its related SBA license, or its SBA debentures may not be able to remain outstanding after the Closing.
Access
to Information
Upon
reasonable notice and subject to applicable laws relating to the confidentiality of information, the Company shall, and shall
cause Rand SBIC to, afford to the officers, employees, accountants, counsel, advisors, agents and other representatives of East,
reasonable access, during normal business hours during the period prior to the Closing, to all its properties, books, contracts,
commitments and records, and, during this period, the Company shall, and shall cause Rand SBIC to, make available to East (i)
a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant
to the requirements of federal securities laws (other than reports or documents that the Company is not permitted to disclose
under applicable law) and (ii) all other information concerning its business, properties and personnel as East may reasonably
request that is relevant to the Stock Purchase Transaction.
In
addition, upon reasonable notice and subject to applicable laws relating to the confidentiality of information, East shall afford
to the officers, employees, accountants, counsel, advisors, agents and other representatives of the Company, reasonable access,
during normal business hours during the period prior to the Closing, to all its properties, books, contracts, commitments and
records related to the Contributed Investment Assets or East’s business, properties and personnel as the Company may request
that is relevant to the Stock Purchase Transaction.
However,
neither the Company nor East shall be required to provide access to nor to disclose information where such access or disclosure
would jeopardize the attorney-client privilege of the Company or East, as applicable, or contravene any applicable law, fiduciary
duty or binding agreement entered into prior to the date of the Stock Purchase Agreement.
Shareholder
Meeting and Board Recommendation
The
Board shall be permitted to adjourn, delay or postpone the special meeting in accordance with applicable law (but not beyond November
30, 2019) (i) to the extent necessary to allow reasonable additional time for the filing and mailing of any supplemental or amended
disclosure which the Board has determined in good faith after consultation with outside counsel is reasonably likely to be necessary
or appropriate under applicable law and for such supplemental or amended disclosure to be disseminated and reviewed by Shareholders
prior to the special meeting, (ii) if there are insufficient shares of Common Stock represented (either in person or by proxy)
to constitute a quorum necessary to conduct the business of the special meeting, or (iii) to allow reasonable additional time
to solicit additional proxies to the extent Board or any committee thereof reasonably believes necessary in order to obtain the
required approvals of the Shareholders and the Board determines that such delay or postponement is consistent with its fiduciary
duties.
The
Board has declared the Stock Purchase Transaction advisable and approved the Stock Purchase Agreement, as well as the Externalization
Transaction contemplated by the Investment Management Agreement, and has recommended that Shareholders vote
“FOR”
the approval of (i) the Sale Below NAV Proposal, (ii) the Nasdaq Proposal, (iii) the Certificate of Incorporation Amendment
Proposal, (iv) the Investment Management Agreement Proposal, and (v) the Adjournment Proposal (clauses (i) – (iii) being
the “
Stock Purchase Transaction Board Recommendation
”). As it relates to the Stock Purchase Transaction Board
Recommendation, the Stock Purchase Agreement provides that, except as discussed below, the Board shall not (i) withhold, withdraw
or modify or qualify, or propose publicly to withhold, withdraw or modify or qualify, in a manner adverse to East, the Stock Purchase
Transaction Board Recommendation, (ii) fail to reaffirm the Stock Purchase Transaction Board Recommendation or fail to publicly
state that the Stock Purchase Transaction and the Stock Purchase Agreement are in the best interests of the Shareholders, within
fifteen business days after East requests in writing that such action be taken, (iii) fail to publicly announce, within fifteen
business days after a tender offer or exchange offer relating to the securities of the Company having been commenced, a statement
disclosing that the Board recommends rejection of such tender offer or exchange offer, (iv) take or resolve to take any other
action or make any other statement in connection with the special meeting inconsistent with the Stock Purchase Transaction Board
Recommendation or (v) approve, determine to be advisable, or recommend, or propose publicly to approve, determine to be advisable,
or recommend, any Competing Proposal (as defined below) (any of the foregoing clauses (i) through (v) being referred to as an
“
Adverse Recommendation Change
”).
Notwithstanding
the foregoing, the Board may make an Adverse Recommendation Change in the circumstances described below under “Non-Solicitation
of Competing Transaction Proposals.” Unless the Board has appropriately made an Adverse Recommendation Change, the Company
shall, through the Board, make the Stock Purchase Transaction Board Recommendation, and shall include such Stock Purchase Transaction
Board Recommendation in this proxy statement, and use its commercially reasonable efforts to (x) solicit proxies from Shareholders
in connection with the Stock Purchase Transaction Board Recommendation, and (y) take all other action necessary or advisable to
secure the approvals of Shareholders in connection with the Stock Purchase Transaction Board Recommendation.
Indemnification
of Directors and Officers
Pursuant
to the terms of the Stock Purchase Agreement, the Company has agreed, to the fullest extent permitted by applicable law, to indemnify,
defend and hold harmless, and to provide advancement of expenses for (subject to receipt of an undertaking to reimburse the portion
of any expenses advanced if it is ultimately determined that the standard of conduct has not been met by such person to be entitled
to indemnification), each director or officer of the Company or who is or was serving at the request of the Company as a director
or officer of another person or entity against all losses, claims, damages, costs, expenses, liabilities or judgments or amounts
that are paid in settlement of or in connection with any claim based in whole or in part on or arising in whole or in part out
of the fact that such person is or was a director or officer of the Company, and pertaining to any matter existing or occurring,
or any acts or omissions occurring, at or prior to the Closing, whether asserted or claimed prior to, or at or after, the Closing,
including matters, acts or omissions occurring in connection with the approval of the Stock Purchase Agreement and the consummation
of the Stock Purchase Transaction, or taken at the request of East.
Directors’
and Officers’ Insurance
For
a period of not less than six years from the Closing Date, the Company must, at its sole cost, either (i) maintain officers’
and directors’ liability insurance covering the individuals serving as officers and directors of the Company immediately
prior to the Closing in an amount not less than, and on terms no less favorable in the aggregate to, such officers and directors
of the Company than under the directors’ and officers’ liability insurance policy maintained by the Company as of
the Closing or (ii) cause the individuals serving as officers and directors of the Company immediately prior to the Closing to
be covered for a period of six years from the Closing by the directors’ and officers’ liability insurance policy maintained
by the Company through the purchase of “tail” insurance (provided that the Company may substitute policies of at least
the same coverage and amounts containing terms and conditions that are not less advantageous than such policy) with respect to
acts or omissions occurring prior to the Closing that were committed by the officers and directors of the Company. However, the
Company shall not be required to expend in the aggregate for the entire six-year period an amount in excess of 300% of the annual
premiums currently paid by the Company for such insurance.
Non-Solicitation
of Competing Transaction Proposals
Subject
to certain exceptions described below, the Company has agreed to (and will cause its representatives to) immediately cease and
cause to be terminated any existing solicitation of, or discussions or negotiations relating to any Competing Proposal or discussions
or negotiations that could reasonably be expected to lead to a Competing Proposal. In addition, between the date of the Stock
Purchase Agreement and earlier of Closing or termination of the Stock Purchase Agreement, subject to certain exceptions, the Company
may not initiate, solicit, propose, induce or knowingly encourage, facilitate or assist in the making of any proposal or offer
that constitutes, or could reasonably be expected to lead to, any Competing Proposal; engage in negotiations or substantive discussions
with, or furnish any material nonpublic information to, or enter into any agreement, arrangement or understanding with, any person
relating to a Competing Proposal or any inquiry or proposal that could reasonably be expected to lead to a Competing Proposal;
or approve, endorse or recommend any proposal that constitutes, or could reasonably be expected to lead to, a Competing Proposal.
However, the Company may inform other persons of these provisions contained in the Stock Purchase Agreement and grant a waiver
of, or terminate, any “standstill” or similar obligation of any person in order to allow such person to confidentially
submit a Competing Proposal.
In
the event the Company receives a Competing Proposal or any inquiry that could reasonably be expected to lead to a Competing Proposal,
the Company must promptly notify East within two business days of such Competing Proposal and deliver to East a written notice
setting forth: (A) the identity of the person making such Competing Proposal or inquiry (except to the extent prohibited by the
terms of any confidentiality agreement entered into prior to the date of the Stock Purchase Agreement) and (B) the material terms
and conditions of any such Competing Proposal or an unredacted copy of any documents in connection with such Competing Proposal.
The Company shall keep East reasonably informed of any amendment or modification of any such Competing Proposal on a prompt basis,
and in any event within two (2) business days.
In
addition, in the event the Company receives an unsolicited Competing Proposal that did not result from a breach of the Stock Purchase
Agreement by the Company, the Company may, subject to satisfying certain procedural requirements, engage in negotiations or substantive
discussions with, and provide information and access to, the person making the proposal if the Board determines in good faith
(after consultation with its outside financial advisors and outside legal counsel) that such Competing Proposal constitutes, or
could reasonably be expected to lead to, a Superior Proposal (as defined below), and the failure to consider the Competing Proposal
would reasonably be expected to be inconsistent with the Board’s fiduciary duties under New York law.
The
Stock Purchase Agreement also provides that the Board may not withdraw (or modify or qualify in any manner) the Stock Purchase
Transaction Board Recommendation or take certain other actions that would constitute an Adverse Recommendation Change, except
as a result of an Intervening Event (as defined below) if the Board determines in good faith (after consultation with its outside
financial advisors and outside legal counsel) that failure to do so would reasonably be expected to be inconsistent with the Board’s
fiduciary duties. The Stock Purchase Agreement also provides that, if the Company receives a Competing Proposal that the Board
determines in good faith (after consultation with its outside financial advisors and outside legal counsel) constitutes a Superior
Proposal, the Board may authorize, adopt or approve, or enter into a definitive agreement with respect to, such Superior Proposal.
Each
of the foregoing rights of the Company is subject to satisfying a number of procedural steps under the Stock Purchase Agreement.
In addition, taking any such action would give rise to certain termination rights and a corresponding obligation to reimburse
East for its expenses in the form of the Termination Fee, as discussed below under “Termination of the Stock Purchase Agreement.”
For
purposes of the non-solicitation and related provisions of the Stock Purchase Agreement, the following definitions apply:
A
“Competing Proposal” means any inquiry, proposal or offer made by any third party (including any inquiry, proposal
or offer from any of the Shareholders): (a) to purchase or otherwise acquire, directly or indirectly, in one transaction or a
series of transactions (including any merger, consolidation, tender offer, exchange offer, stock acquisition, asset acquisition,
binding share exchange, business combination, recapitalization, liquidation, dissolution, joint venture or similar transaction),
(i) beneficial ownership (as defined under Section 13(d) of the Exchange Act) of fifteen percent (15%) or more of any class of
equity securities of the Company (for the avoidance of doubt, this fifteen percent (15%) threshold shall be in addition to any
shares of Common Stock owned by such third party or its affiliates as of the date of the inquiry, proposal or offer) or (ii) assets
(including equity of Rand SBIC) or operations of the Company or Rand SBIC that constitute fifteen percent (15%) or more of the
revenues or assets of the Company and Rand SBIC, taken as a whole; or (b) any other transaction not covered in the foregoing clause
(a) involving a restructuring or any other change in the operations of the Company that would result in the Company converting
from an internally managed BDC to an externally managed BDC, whether or not such transaction is coupled with a capital infusion
or purchase of shares of the Company; or (c) any liquidation of the Company, in each case other than the Stock Purchase Transaction.
An
“Intervening Event” means any fact, circumstance, occurrence, effect, change, event or development that is material
to the Company that was not known to the Board prior to the execution of the Stock Purchase Agreement, which fact, circumstance,
occurrence, effect, change, event or development, or any material consequence thereof, becomes known to the Board prior to the
receipt of the approvals from Shareholders for the Stock Purchase Transaction; provided, that in no event shall the receipt, existence
or terms of a Competing Proposal or any matter relating directly thereto or consequence directly thereof constitute an Intervening
Event.
A
“Superior Proposal” means a bona fide written Competing Proposal that the Board determines in good faith, after consultation
with its outside financial advisors and legal advisors, and taking into account the terms and conditions of such proposal, the
party making such proposal, and the likelihood and anticipated timing of consummation of such Competing Proposal, and all other
all legal, financial, regulatory and other aspects of such Competing Proposal, (a) is reasonably likely to be consummated without
undue delay relative to the Stock Purchase Transaction, taking into account all financial, legal, regulatory and other aspects
of such offer, and (b) is more favorable to the Shareholders from a financial point of view than the Transactions (including any
revisions to the terms of the Stock Purchase Agreement committed to by East in writing in response to such Competing Proposal);
provided however, for these purposes, to the extent relevant to the Competing Proposal in question, all percentages in subsections
(a)(i) and (a)(ii) of the definition of Competing Proposal shall be increased to (i) for purposes of subsection (a)(i) of the
definition of Competing Proposal, the lesser of (1) fifty percent (50%) of the outstanding Common Stock and (2) such percentage
of Common Stock such that the person submitting the Competing Proposal, together with its affiliates, would become, upon the closing
of the proposed transaction set forth in the Competing Proposal, the beneficial owner of at least fifty percent (50%) of the outstanding
Common Stock and (ii) for purposes of subsection (a)(ii) of the definition of Competing Proposal, fifty percent (50%).
Takeover
Statutes
The
Company and East have each agreed to use their respective commercially reasonable efforts (a) to take all action necessary so
that no “takeover statute” is or becomes applicable to the Stock Purchase Transaction, and (b) if any such takeover
statute is or becomes applicable to the Stock Purchase Transaction, to take all action necessary so that the Stock Purchase Transaction
may be consummated as promptly as reasonably practicable on the terms contemplated by the Stock Purchase Agreement and otherwise
to eliminate or minimize the effect of such takeover statute on the Stock Purchase Transaction.
Litigation
Between
the signing of the Stock Purchase Agreement and the Closing, the Company shall (i) provide prompt notice to East of all shareholder
litigation relating to the Stock Purchase Agreement or the Stock Purchase Transaction, and (ii) consult with East regarding the
defense and settlement of any litigation outstanding as of the date of the Stock Purchase Agreement.
Adviser
Registration as an Investment Adviser
Pursuant
to the Stock Purchase Agreement, the Adviser has agreed to, and East has agreed to cause the Adviser to, within five business
days after receipt of the approvals from Shareholders for the Stock Purchase Transaction, file a Form ADV with the SEC and make
any other filings with any other governmental entities in order for the Adviser to become registered as an investment adviser
under the Advisers Act. In connection therewith, the Adviser has agreed to use its best efforts to, and East has agreed to cause
the Adviser to use its best efforts to, become, and to take any and all actions necessary to avoid or eliminate each and every
impediment or to fulfill each and every requirement under the Advisers Act or other applicable law that may be asserted or required
by any governmental entity so as to become, registered as an investment adviser under the Advisers Act as promptly as possible
after receipt of approvals from Shareholders for the Stock Purchase Transaction.
Transaction
Expenses
Pursuant
to the terms of the Stock Purchase Agreement, all fees and expenses incurred in connection with the Stock Purchase Transaction
are to be paid by the party incurring these fees or expenses.
Conditions
to the Stock Purchase Transaction
The
Company and East will not be obligated to complete the Stock Purchase Transaction, unless a number of conditions are satisfied
or properly waived, including:
|
(i)
|
approvals
by the Shareholders of (1) the Sale Below NAV Proposal, (2) the Nasdaq Proposal and (3) the Certificate of Incorporation Amendment
Proposal have been obtained;
|
|
|
|
|
(ii)
|
the
Investment Management Agreement and Administration Agreement have each been duly and validly executed and delivered by the
Company and constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their
terms;
|
|
|
|
|
(iii)
|
the
Adviser has been registered as an investment adviser under the Advisers Act;
|
|
|
|
|
(iv)
|
the
Company has delivered evidence reasonably satisfactory to East that (1) the Company’s existing change in control agreements
that have entered into with each member of Company Management have been terminated effective prior to the Closing and no payment
has been or will be made under those agreements; and (2) each employee of the Company has been terminated or otherwise resigned
effective as of immediately prior to the Closing;
|
|
|
|
|
(v)
|
the
Company has delivered evidence reasonably satisfactory to East that each of the Company’s benefit plans has been terminated
effective as of immediately prior to the Closing and that no payment has been or will be made under those benefit plans by
the Company or any other party in connection with those terminations;
|
|
(vi)
|
no
order, injunction or decree entered by any court or agency of competent jurisdiction or other law preventing or making illegal
the consummation of the Stock Purchase Transaction is in effect preventing or prohibiting the consummation of the Stock Purchase
Transaction;
|
|
|
|
|
(vii)
|
there
is no pending suit or proceeding by a governmental entity (i) challenging the Stock Purchase Transaction, seeking to restrain
or prohibit the consummation of the Stock Purchase Transaction or seeking to obtain from the Company or East any damages that
are material in relation to the Company and Rand SBIC taken as a whole, or (ii) seeking to prohibit the Adviser from becoming
the external investment adviser to the Company; and
|
|
|
|
|
(viii)
|
unless
the Company has received SBA Approval or confirmation from the SBA that the SBA Approval is not required and that Company’s
SBA debentures are permitted to remain outstanding in accordance with their terms, the Company has delivered evidence of the
payoff of, or escrowing of funds in an amount sufficient to pay off, the Company’s SBA debentures in accordance with
SBA regulations.
|
In
addition to the mutual conditions to Closing, East’s obligation to consummate the Stock Purchase Transaction is further
conditioned upon the following conditions that must be satisfied or properly waived:
|
(i)
|
the
accuracy of the representations and warranties of the Company (subject to the interpretive standards set forth in the Stock
Purchase Agreement);
|
|
|
|
|
(ii)
|
the
performance by the Company, in all material respects, of its covenants and obligations under the Stock Purchase Agreement;
|
|
|
|
|
(iii)
|
no
Material Adverse Effect with respect to the Company has occurred between the date of execution of the Stock Purchase Agreement
and Closing; and
|
|
|
|
|
(iv)
|
the
Company has entered into the Shareholder Agreement.
|
In
addition to the mutual conditions to Closing, the Company’s obligation to consummate the Stock Purchase Transaction is further
conditioned upon the following conditions that must be satisfied or properly waived:
|
(i)
|
the
accuracy of the representations and warranties of East (subject to the interpretive standards set forth in the Stock Purchase
Agreement);
|
|
|
|
|
(ii)
|
the
performance by East, in all material respects, of its covenants and obligations under the Stock Purchase Agreement;
|
|
|
|
|
(iii)
|
the
receipt of each of the required consents to transfer the Contributed Investment Assets to the Company;
|
|
|
|
|
(iv)
|
the
Investment Management Agreement and Administration Agreement have each been duly and validly executed and delivered by the
Adviser and constitute valid and binding obligations of the Adviser, enforceable against the Adviser in accordance with their
terms; and
|
|
|
|
|
(v)
|
East
has entered into the Shareholder Agreement.
|
Termination
of the Stock Purchase Agreement
The
Stock Purchase Agreement may be terminated at any time prior to the Closing, whether before or after receipt of approval of the
Shareholders:
|
(i)
|
by
mutual consent of the Company and East, in a written instrument duly authorized by the Company and East;
|
|
(ii)
|
by
either the Company or East, if the Stock Purchase Transaction has not been consummated on or before November 30, 2019, unless
the failure of the Closing to occur by such date was due to the failure of the party seeking to terminate the Stock Purchase
Agreement to perform or observe the covenants and agreements of such party set forth in the Stock Purchase Agreement (the
“
Outside Date Termination
”);
|
|
|
|
|
(iii)
|
by
either the Company or East, at any time prior to the Closing, in the event that the Company shall has failed to obtain approval
by the Shareholders of (1) the Sale Below NAV Proposal, (2) the Nasdaq Proposal and (3) the Certificate of Incorporation Amendment
Proposal at the special meeting or any adjournment thereof (the “
No Vote Termination
”);
|
|
|
|
|
(iv)
|
by
either of the Company or East (provided that the terminating party is not then in material breach of any representation, warranty,
covenant or other agreement contained in the Stock Purchase Agreement), if there has been a breach of any of the covenants
or agreements or any of the representations or warranties set forth in this Agreement on the part of the Company, in the case
of a termination by East, or of East, in the case of a termination by the Company, which breach, either individually or in
the aggregate, would result in, if occurring or continuing on the Closing, the failure of certain conditions set forth in
the Stock Purchase Agreement, and which is not cured within 30 days following written notice to the party committing such
breach or by its nature or timing cannot be cured within such time period (“
Breach Termination
”);
|
|
|
|
|
(v)
|
by
East, (i) within ten business days after the Board has effected an Adverse Recommendation Change prior to receipt of the Shareholder
approval, or (ii) in the event the Board has approved, or authorized the Company or Rand SBIC to enter into, a merger agreement,
letter of intent, acquisition agreement, stock purchase agreement or other similar agreement with respect to a Competing Proposal
(either being a “
East Special Termination Event
”);
|
|
|
|
|
(vi)
|
by
the Company, in the event that, the Company has received a Superior Proposal, the Board has authorized the Company to enter
into a definitive agreement to consummate the transaction contemplated by such Superior Proposal, and concurrently with the
termination of the Stock Purchase Agreement, the Company pays the Termination Fee to East and enters into the definitive agreement
to consummate the transaction contemplated by such Superior Proposal; or
|
|
|
|
|
(vii)
|
by
the Company, in the event that, the Board has effected an Adverse Recommendation Change (clauses (vi) or (vii) each being
a “
Company Special Termination Event
”).
|
Termination
Fee
For
purposes of the Stock Purchase Agreement, the “
Termination Fee
” is an amount in cash equal to East’s
documented out-of-pocket costs and expenses paid or payable to third parties (including legal, accounting, tax, regulatory, operations,
advisory, management, human resources (including pension), consulting, insurance, audit, search, asset appraisal, title, surveys,
financing, filing, compensation, travel and other similar fees, costs and expenses) and incurred or accrued by or on behalf of
East, the Adviser or their respective affiliates in connection with the Stock Purchase Agreement, the Stock Purchase Transaction
and the Externalization Transaction, including East’s and the Adviser’s due diligence investigation of the Company
and Rand SBIC and the preparation, negotiation, execution and delivery of definitive agreements in connection with the Stock Purchase
Transaction and the Externalization Transaction, which amount shall in no event exceed $750,000.
The
Termination Fee is payable in the event the Stock Purchase Agreement is terminated:
|
(i)
|
by
East in connection with an East Special Termination Event; or
|
|
|
|
|
(ii)
|
by
the Company in connection with a Company Special Termination Event.
|
Alternatively,
the Company will pay East the Termination Fee in the event that:
|
(i)
|
the
Stock Purchase Agreement is terminated by East or the Company by reason of an Outside Date Termination or a No Vote Termination
or by East by reason of a Breach Termination by the Company;
|
|
|
|
|
(ii)
|
prior
to such termination, an Competing Proposal has been made or proposed to the Company and disclosed to the Shareholders or any
person has publicly announced an intention to make an Competing Proposal after the date of the Stock Purchase Agreement but
prior to the date of termination; and
|
|
|
|
|
(iii)
|
within
twelve (12) months after the date of such termination, the Company enters into a definitive agreement with respect to and
consummates a Competing Proposal (or transaction that would have constituted a Competing Proposal if made prior to the termination
of the Stock Purchase Agreement) or consummates a Competing Proposal (provided that, in each case, the references to “fifteen
percent (15%)” in the definition of Competing Proposal shall be deemed references to “fifty percent (50%)”).
|
Notwithstanding
the foregoing, in no event shall the Company be obligated to pay the Termination Fee more than once.
Effect
of Termination
In
the event of termination of the Stock Purchase Agreement, none of the Company, East, any of their respective subsidiaries or any
of the officers or directors of any of them shall have any liability of any nature whatsoever under the Stock Purchase Agreement,
or in connection with the Stock Purchase Transaction, except that (a) provisions regarding confidentiality, termination and Termination
Fees, and the provisions of Article X of the Stock Purchase Agreement (General Provisions) shall survive termination of the Stock
Purchase Agreement, and (b) neither the Company nor East shall be relieved or released from any liabilities or damages arising
out of its knowing and intentional breach of any provision of the Stock Purchase Agreement.
No
Survival of Representations, Warranties and Agreements
The
representations, warranties, covenants and agreements set forth in the Stock Purchase Agreement or in any other agreement or instrument
delivered in connection with the Stock Purchase Agreement shall not survive the Closing, except for indemnification obligations
in favor of the directors and officers of the Company set forth in the Stock Purchase Agreement and for those other covenants
and agreements contained in the Stock Purchase Agreement that by their terms are to be performed in whole or in part after the
Closing.
Remedies;
Specific Performance
Except
as otherwise provided in the Stock Purchase Agreement, any and all remedies expressly conferred upon a party are cumulative with
and not exclusive of any other remedy conferred under the Stock Purchase Agreement, or by law or equity upon such party, and the
exercise by a party of any one remedy will not preclude the exercise of any other remedy.
Notwithstanding
the foregoing, the right to receive the Termination Fee is the sole and exclusive remedy available to East in the event the Stock
Purchase Agreement is terminated by reason of an East Special Event Termination or a Company Special Event Termination.
In
addition, the parties have agreed that, in the event of a breach or threatened breach of the covenants or obligations in the Stock
Purchase Agreement, each of the parties are entitled to an injunction or other equitable relief to prevent or restrain such breach
or threatened breach, or to enforce compliance with, the covenants and obligations under the Stock Purchase Agreement, in addition
to other legal and equitable remedies which may be available. No party shall be obligated to first seek specific enforcement or
other equitable relief, nor does seeking specific enforcement or other equitable relief preclude the pursuit of any other remedy.
Amendment
and Waiver
The
Stock Purchase Agreement may be amended only by a written document executed by each of the parties to the Stock Purchase Agreement
at any time prior to Shareholder approval. After receipt of the Shareholder approval, there may not be, without further approval
of the Shareholders, any amendment of the Stock Purchase Agreement that requires further approval of the Shareholders under applicable
law.
Governing
Law; Jurisdiction
The
Stock Purchase Agreement is governed by New York law. The parties have agreed that any suit, action or proceeding brought by either
party to enforce any provision of, or based on any matter arising out of or in connection with, the Stock Purchase Agreement or
the Stock Purchase Transaction will be brought in United States District Court for the Western District of New York and, if such
court does not have jurisdiction over such dispute, the Supreme Court of the State of New York located in the County of Erie.
Terms
of the Shareholder Agreement
The
following description of the Shareholder Agreement is qualified in its entirety by reference to the form of Shareholder Agreement
attached hereto as
Appendix D
.
In
connection with the Closing, the Company will enter into a Shareholder Agreement with the East. Under the terms of the Shareholder
Agreement, until the date on which East ceases to beneficially own more than fifteen percent of the outstanding Common Stock (the
“
East Nomination Period
”), East will have the right to designate (i) up to two persons, of which at least one
person cannot be an “interested person” (as that term is defined in Section 2(a)(19) of the 1940 Act) of the Company,
for nomination for election to the Board if the size of the Board is composed of fewer than seven directors or (ii) up
to three persons, of which at least one person cannot be an interested person, for nomination for election to the Board if the
size of the Board is composed of seven or more directors (each designated person being a “
East Nominee
”). For
purposes of determining the East Nomination Period, if East’s ownership of outstanding Common Stock falls below fifteen
percent as a result of a sale or other issuance of Common Stock by the Company, then the fifteen percent threshold will automatically
be reduced by a percentage equal to the percentage by which East’s ownership of Common Stock was reduced as a result of
such sale or issuance by the Company.
Under
the terms of the Shareholder Agreement, the Company must, at least 45 days prior to the expected mailing date of a proxy statement
in connection with the election of directors, notify East of the date on which such proxy statement is expected to be mailed and
provide a form of prospective director questionnaire. Upon receipt of the Company’s notice, East must, within 15 days after
the date of the notice from the Company, deliver the name, address and completed questionnaire for each East Nominee that it desires
to be designated for nomination for election as a director. Thereafter, the Board or the nominating committee of the Board (the
“
Nominating Committee
”), must promptly and in good faith consider each East Nominee applying the same standard
used in consideration of other nominees. If the Board or Nominating Committee, as applicable, determines that any East Nominee
would not be qualified under applicable law, rule or regulation to serve as a director of the Company and fails to approve the
nomination, then East has the right to designate another person as an East Nominee and such new East Nominee will be subject to
the same review by the Board or Nominating Committee, as applicable.
In
the event that the Shareholders fail to elect any East Nominee to the Board at any meeting of Shareholders at which directors
are elected, East may designate another person as an East Nominee and, subject to applicable law, the terms of the Certificate
of Incorporation and the Company’s by-laws, and the rules of the stock exchange on which the Common Stock is listed, the
Board shall elect this alternate East Nominee to the Board. In no event, however, shall the Board be required to elect any East
Nominee to the Board if the Shareholders failed to elect such East Nominee at the prior meeting of Shareholders at which directors
are elected.
In
addition, in the event that there is a vacancy on the Board due to the death, resignation or removal of any director of the Company
that was an East Nominee, subject to applicable law, the terms of the Certificate of Incorporation and the Company’s by-laws,
and the rules of the stock exchange on which the Common Stock is listed, this vacancy may only be filled with a substitute East
Nominee.
If
during the East Nomination Period, the size of the Board is increased to seven or more directors and East provides written notice
setting forth the name and address of a third East Nominee, then no later than the 90th day after the Company’s receipt
of such notice, subject to (i) applicable law, the terms of the Certificate of Incorporation and the Company’s by-laws,
and the rules of the stock exchange on which the Common Stock is listed and (ii) review of such East Nominee by the Board or Nominating
Committee, as applicable, the Board shall elect the East Nominee to the Board such that there will be three East Nominees on the
Board.
Under
the terms of the Shareholder Agreement, the Company and East have agreed that the rights provided to East under the Shareholder
Agreement will be the exclusive means for East to designate, nominate, seek to designate or seek to nominate, as applicable, any
person for election as a director to the Board, and East shall not, directly or indirectly, make use of, or otherwise seek to
avail itself of, any other rights or means to designate, nominate, seek to designate or seek to nominate, as applicable, any person
for election as a director to the Board, including pursuant to any rights available to any Shareholder under the Certificate of
Incorporation, the Company’s by-laws or applicable law.
ANNUAL
REPORT
The
Company will provide without charge to each Shareholder upon written request a copy of Company’s Annual Report on Form 10-K
(without exhibits, unless otherwise requested) required to be filed with the SEC for the year ended December 31, 2018.
Requests for copies should be addressed to Investor Relations, Rand Capital Corporation, 2200 Rand Building, Buffalo, New York,
14203. Requests may also be directed to (716) 853-0802 or to eadonaldson@randcapital.com via email. Copies may also
be accessed electronically by means of the SEC’s EDGAR home page on the internet at http://www.sec.gov/edgar.
Appendix
A
Execution
Version
STOCK
PURCHASE AGREEMENT
by
and among
EAST
ASSET MANAGEMENT, LLC,
RAND
CAPITAL CORPORATION, and,
SOLELY
FOR PURPOSES OF BEING BOUND BY SECTIONS 7.10 and 10.9(a) and (b)
,
RAND CAPITAL MANAGEMENT LLC
DATED
AS OF JANUARY 24, 2019
TABLE
OF CONTENTS
List
of Exhibits
Exhibit
A
|
–
|
Form
of Administration Agreement
|
Exhibit
B
|
–
|
Form
of Investment Advisory and Management Agreement
|
Exhibit
C
|
–
|
Contributed
Loan Schedule
|
Exhibit
D
|
–
|
Form
of Shareholder Agreement
|
STOCK
PURCHASE AGREEMENT
STOCK
PURCHASE AGREEMENT
, dated as of January 24, 2019 (this “
Agreement
”), by and among East Asset Management,
LLC, a Delaware limited liability company (“
East
”), Rand Capital Corporation, a New York corporation
(“
Rand
”) and, solely for purposes of being bound by Sections 7.10 and 10.9(a) and (b), Rand Capital
Management LLC, a Delaware limited liability company (“
NEWCO
”). Each of East, Rand and, solely for purposes
of being bound by Sections 7.10 and 10.9(a) and (b), NEWCO, may, from time to time, be referred to individually herein as a “
Party
”
and collectively as the “
Parties.
” Capitalized terms used but not otherwise defined herein shall have
the meanings ascribed to such terms in Article I.
RECITALS:
WHEREAS
,
Rand is currently an internally managed business development company subject to the Investment Company Act of 1940, as amended,
and the rules and regulations promulgated thereunder (the “
Investment Company Act
”);
WHEREAS
,
the Parties desire to enter into a transaction pursuant to which East will acquire shares of Rand’s common stock, par value
$0.10 (the “
Rand Common Stock
”) from Rand in exchange for the Contributed Investment Assets and the
Cash Consideration (the “
Stock Purchase
”) on the terms and subject to the conditions set forth herein;
WHEREAS
,
NEWCO will register with the Securities and Exchange Commission (“
SEC
”) as an investment adviser under
the Investment Advisers Act of 1940, as amended, and the rules and regulations promulgated thereunder (the “
Investment
Advisers Act
”);
WHEREAS
,
the board of directors of Rand (the “
Rand Board
”), including the independent directors thereof, has
unanimously determined that the Stock Purchase is advisable and in the best interests of Rand and the holders of Rand Common Stock
(the “
Rand Stockholders
”), and has resolved to recommend that the Rand Stockholders approve the proposals
related to the Rand Stockholder Approvals as set forth herein;
WHEREAS
,
in connection with the consummation of the Stock Purchase, NEWCO and Rand intend to enter into the Investment Advisory Agreement
and the Administration Agreement pursuant to which NEWCO will serve as investment adviser and administrator to Rand effective
as of the closing of the Stock Purchase (the “
Externalization
”); and
WHEREAS
,
the Parties desire to make certain representations, warranties and agreements in connection with the Stock Purchase and to prescribe
certain conditions to the Stock Purchase.
NOW,
THEREFORE
, in consideration of the mutual covenants, representations, warranties and agreements contained in this Agreement,
and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally
bound hereby, the Parties agree as follows:
Article
I
DEFINED TERMS
1.1 For
purposes of this Agreement, the following terms shall have the meanings set forth below:
“
1940
Act Majority
” means (a) 67% or more of the shares of Rand Common Stock present at the Rand Stockholder Meeting if
the holders of more than 50% of the outstanding shares of Rand Common Stock are present or represented by proxy; or (b) 50% of
the outstanding shares of Rand Common Stock, whichever is the less.
“
Acceptable
Confidentiality Agreement
” has the meaning set forth in Section 7.7(d).
“
Administration
Agreement
” means the Administration Agreement substantially in the form of
Exhibit A
attached hereto, to
be entered into between Rand and NEWCO, as administrator, in connection with the Externalization.
“
Adverse
Recommendation Change
” has the meaning set forth in Section 7.3(c).
“
Affiliate
”
means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control
with such Person.
“
Agreement
”
has the meaning set forth in the preamble to this Agreement.
“
Bankruptcy
and Equity Exception
” has the meaning set forth in Section 4.3(a).
“
BDC
”
means a business development company as defined in Section 2(a)(48) of the Investment Company Act.
“
Borrowers
”
means those Persons who constitute “borrowers” (or any similarly defined term) under the Contributed Loan Documents.
“
Business
Day
” means a day, other than Saturday, Sunday or other day on which commercial banks in New York, New York are authorized
or required by applicable Law to close.
“
Cash
Consideration
” means an amount in cash equal to (a) $25,000,000, minus (b) the Contributed Investment Assets Fair
Value, as determined in accordance with Section 3.2.
“
Claim
”
means any claim, action, suit or legal, administrative, arbitral or other proceeding, whether civil, criminal or administrative.
“
Closing
”
has the meaning set forth in Section 3.1.
“
Closing
Cut-off Time
” means 5:00 p.m. (New York, New York time) on the second Business Day immediately prior to the Closing
Date.
“
Closing
Date
” has the meaning set forth in Section 3.1.
“
Code
”
means the United States Internal Revenue Code of 1986, as amended.
“
Competing
Proposal
” means any inquiry, proposal or offer made by any Third Party (including any inquiry, proposal or offer
from any of Rand’s Stockholders): (a) to purchase or otherwise acquire, directly or indirectly, in one transaction or a
series of transactions (including any merger, consolidation, tender offer, exchange offer, stock acquisition, asset acquisition,
binding share exchange, business combination, recapitalization, liquidation, dissolution, joint venture or similar transaction),
(i) beneficial ownership (as defined under Section 13(d) of the Exchange Act) of fifteen percent (15%) or more of any class of
equity securities of Rand (for the avoidance of doubt, this fifteen percent (15%) threshold shall be in addition to any shares
of Rand Common Stock owned by such Third Party or its Affiliates as of the date of the inquiry, proposal or offer) or (ii) assets
(including equity of the Subsidiary) or operations of Rand or its Subsidiary that constitute fifteen percent (15%) or more of
the revenues or assets of Rand and its Subsidiary, taken as a whole; or (b) any other transaction not covered in the foregoing
clause (a) involving a restructuring or any other change in the operations of Rand that would result in Rand converting from an
internally managed BDC to an externally managed BDC, whether or not such transaction is coupled with a capital infusion or purchase
of shares of Rand; or (c) any liquidation of Rand, in each case other than the Stock Purchase.
“
Confidentiality
Agreement
” has the meaning set forth in Section 7.2(d).
“
Consent
”
means, with respect to any Contributed Investment Asset, any consent, approval, or authorization of, notice to, or filing with,
the Borrower, the administrative agent, the issuer, any co-investor or other Person required or otherwise necessary to sell, assign,
transfer, convey, contribute or deliver, or in connection with selling, assigning, transferring, conveying, contributing or delivering,
such Contributed Investment Asset to Rand pursuant to the Stock Purchase.
“
Contract
”
means any legally binding written or oral contract, deed, mortgage, lease, commitment, agreement or other binding commitment,
arrangement, understanding, document or instrument.
“
Contributed
Books and Records
” means the original (or copies, in the event East is required to retain the original under applicable
Law) books and records, information, files, records, data, plans, Contracts and recorded knowledge of East (in whatever format)
to the extent relating to the ownership of the Contributed Investment Assets, but excluding the Contributed Loan Documents, Contributed
Loan Files and Contributed Loan Notes.
“
Contributed
Investment Assets
” has the meaning set forth in Section 2.1(a).
“
Contributed
Investment Assets Fair Value
” the fair value of the Contributed Investment Assets as determined on the Closing Cut-off
Time plus (without duplication) the aggregate amount of accrued but unpaid interest (including uncapitalized payment-in-kind interest
earned), penalties, fees, charges and other amounts on the Contributed Investment Assets as of the Closing Cut-off Time, in each
case as determined in accordance with GAAP.
“
Contributed
Loan Collateral
” means the assets and properties securing payment of outstanding obligations of Borrowers under
the Contributed Loan Documents.
“
Contributed
Loan Documents
” means the credit and financing agreements, guarantees, subordination agreements, Contributed Loan
Notes, mortgages, deeds of trust, security agreements (including pledge and control agreements), financing statements, intercreditor
agreements, and other instruments and documents affecting East’s ownership, economic or other rights with respect to the
Contributed Loans or in which East has an interest, in connection with the Contributed Loans.
“
Contributed
Loan Files
” means credit and transaction files of East relating to the Contributed Loans, including Contributed
Loan Documents, third party reports, operating statements, Borrower financial statements, budgets, recent borrowing base, compliance
and advance certificates, and all other documents that relate to the Contributed Loans.
“
Contributed
Loan Notes
” means the original executed promissory notes (or copies, to the extent that only copies of such promissory
notes are in East’s possession or control) issued to the order of East, or copies of a “master” note if no such
note was issued to East or an allonge endorsing a note in favor of East, evidencing indebtedness owing to East under a Contributed
Loan.
“
Contributed
Loans
” means, collectively, the loans and other securities identified on the Contributed Loan Schedule.
“
Contributed
Loan Schedule
” means the schedule attached hereto as
Exhibit C
, which identifies (i) each loan and other
security to be contributed by East to Rand on the Closing Date, (ii) the name of the Borrower of each such loan, (iii) the interest
rate on each such loan, (iv) the maturity date of each such loan, (v) the outstanding unpaid principal amount of each such loan
as of the Cut-off Time, (vi) the amount of accrued interest for each such loan; (vii) the amount of accrued but unpaid fees or
other amounts (other than accrued interest) for each such loan; (viii) any undrawn commitments with respect to each such loan;
and (ix) the Contributed Investment Assets Fair Value for each such loan as of the Cut-off Time; provided, however, that the Contributed
Loan Schedule shall be updated in accordance with the provisions of Section 3.2 in order to reflect changes to the information
contained therein.
“
Cut-off
Time
” means 5:00 p.m. (New York, New York time) on January 23, 2019.
“
East
”
has the meaning set forth in the preamble to this Agreement.
“
East
Disclosure Schedule
” means that certain disclosure schedule delivered by East to Rand concurrent with the execution
of this Agreement.
“
East
Expenses
” means an amount equal to East’s documented out of pocket costs and expenses paid or payable to third
parties (including legal, accounting, tax, regulatory, operations, advisory, management, human resources (including pension),
consulting, insurance, audit, search, asset appraisal, title, surveys, financing, filing, compensation, travel and other similar
fees, costs and expenses) and incurred or accrued by or on behalf of East, NEWCO or their respective Affiliates in connection
with this Agreement, the Stock Purchase and the Externalization including East’s and NEWCO’s, or their respective
Affiliates’ due diligence investigation of Rand and its Subsidiary and the preparation, negotiation, execution and delivery
of definitive agreements in connection with the Stock Purchase and the Externalization.
“
East
Regulatory Agreement
” has the meaning set forth in Section 5.4.
“
Employment
Agreements
” has the meaning set forth in Section 4.11(a).
“
ERISA
”
means the Employee Retirement Income Security Act of 1974, as amended.
“
ERISA
Affiliate
” has the meaning set forth in Section 4.11(a).
“
Exchange
Act
” means the Securities Exchange Act of 1934, as amended.
“
Externalization
”
has the meaning set forth in the Recitals to this Agreement.
“
GAAP
”
means United States generally accepted accounting principles consistently applied during the periods involved.
“
Governmental
Entity
” means any federal, state or local government or any court, administrative or regulatory agency or commission
or other governmental authority or agency, domestic or foreign.
“
Indemnified
Parties
” has the meaning set forth in Section 7.4(a).
“
Intellectual
Property Rights
” means, collectively, all trademarks, trade names, patent rights, copyrights, domain names, licenses,
approvals, trade secrets, software and other similar rights.
“
Intervening
Event
”
means any fact, circumstance, occurrence, effect, change, event or development that is material to
Rand that was not known to the Rand Board prior to the execution of this Agreement, which fact, circumstance, occurrence, effect,
change, event or development, or any material consequence thereof, becomes known to the Rand Board prior to the receipt of the
Rand Stockholder Approvals; provided, that in no event shall the receipt, existence or terms of a Competing Proposal or any matter
relating directly thereto or consequence directly thereof constitute an Intervening Event.
“
Investment
Advisers Act
” has the meaning set forth in the Recitals to this Agreement.
“
Investment
Advisory Agreement
” means the Investment Advisory and Management Agreement in the form of
Exhibit B
attached
hereto, to be entered into between Rand and NEWCO, as investment adviser, in connection with the Externalization.
“
Investment
Company Act
” has the meaning set forth in the Recitals to this Agreement.
“
IRS
”
means the United States Internal Revenue Service.
“
Law
”
means any federal, state, local, municipal, or foreign constitution, treaty, law (including the common law), statute, code, ordinance,
rule, administrative interpretation, regulation, directive (including those of any SRO), judgment, order, writ, decree or injunction.
“
Liens
”
means liens, pledges, charges, claims and security interests and similar encumbrances.
“
Management
Agreements
” means, collectively, the Investment Advisory Agreement and the Administration Agreement.
“
Material
Adverse Effect
” means any occurrence, change, event, effect or development that, individually, or taken together
with all other occurrences, changes, events, effects or developments, has or would reasonably be likely to have, a material adverse
effect on (a) with respect to Rand, the financial condition, results of operations, assets, liabilities, or business of Rand and
its Subsidiary taken as a whole (provided, however, that, with respect to this subsection (a), the determination of whether a
“Material Adverse Effect” exists or has occurred shall not include effects attributable to (i) changes, after the
date hereof, in GAAP or regulatory accounting requirements applicable generally to companies in the industry in which Rand and
its Subsidiary operate, (ii) changes, after the date hereof, in laws, rules or regulations of general applicability to companies
in the industry in which Rand and its Subsidiary operate, (iii) actions or omissions taken with the prior express written consent
of East, (iv) changes, after the date hereof, in global or national political conditions or general economic or market conditions
generally affecting other companies in the industry in which Rand and its Subsidiary operate, (v) conditions arising out of acts
of terrorism, war, weather conditions or other force majeure events, (vi) any legal proceedings made or brought by any of the
current or former Rand Stockholders (on their own behalf or on behalf of Rand) in connection with the Agreement or the Stock Purchase,
or (vii) the public disclosure of this Agreement or the Stock Purchase except, with respect to clauses (i), (ii), (iv) and (v)
of this subsection (a), to the extent that the effects of such change disproportionately impact the financial condition, results
of operations, assets, liabilities or business of Rand and its Subsidiary, taken as a whole, as compared to other companies in
the industry in which Rand and its Subsidiary operate), (b) with respect to East, the financial condition, results of operations,
assets, liabilities, or business of East and its Subsidiaries taken as a whole (provided, however, that, with respect to this
subsection (b), the determination of whether a “Material Adverse Effect” exists or has occurred shall not include
effects attributable to (i) changes, after the date hereof, in GAAP or regulatory accounting requirements applicable generally
to companies in the industry in which East, as applicable, operate, (ii) changes, after the date hereof, in laws, rules or regulations
of general applicability to companies in the industry in which East, as applicable, operate, (iii) actions or omissions taken
with the prior express written consent of Rand, (iv) changes, after the date hereof, in global or national political conditions
or general economic or market conditions generally affecting other companies in the industry in which East, as applicable, operate
or (v) conditions arising out of acts of terrorism, war, weather conditions or other force majeure events, except, with respect
to clauses (i), (ii), (iv) and (v) of this subsection (b), to the extent that the effects of such change disproportionately impact
the financial condition, results of operations, assets, liabilities or business of East and its Subsidiaries, taken as a whole,
as applicable, as compared to other companies in the industry in which East and its Subsidiaries, as applicable, operate), (c)
with respect to East, the Contributed Investment Assets or (d) with respect to East or Rand, the ability of East or Rand, as applicable,
to timely consummate the Stock Purchase.
“
NASDAQ
”
means the Nasdaq National Market System.
“
NEWCO
”
has the meaning set forth in the preamble to this Agreement.
“
New
York Courts
” has the meaning set forth in Section 10.6.
“
NYBCL
”
means the New York Business Corporation Law, as amended.
“
Notice
of Adverse Recommendation
” has the meaning set forth in Section 7.7(f).
“
Notice
of Superior Proposal
” has the meaning set forth in Section 7.7(f).
“
Organizational
Documents
” means, with respect to a Person other than a natural person, (i) the articles or certificate of incorporation
and the bylaws of a corporation; (ii) the certificate of formation and operating agreement of a limited liability company; (iii)
the partnership agreement and any statement of partnership of a general partnership; (iv) the limited partnership agreement and
the certificate of limited partnership of a limited partnership; (v) any charter or similar document adopted or filed in connection
with the creation, formation, or organization of any other Person; (vi) any stockholder or similar agreement among holders of
securities of an issuer; and (vii) any amendment to any of the foregoing.
“
Outside
Date
” has the meaning set forth in Section 9.1(b).
“
Party
”
and “
Parties
” have the meaning set forth in the preamble to this Agreement.
“
Permit
”
means any license, permit, variance, exemption, franchise, consent, approval, authorization, qualification, or order of any Governmental
Entity.
“
Permitted
Liens
” means (i) Liens for Taxes and other statutory Liens securing payments not yet due and payable or that are
being contested in good faith in appropriate proceedings, (ii) Liens of landords, carriers, warehousemen, mechanics and materialmen
or other like Liens granted or arising in the ordinary course of business securing payment not yet due and payable or being consented
in good faith in appropriate proceedings, (iii) Liens arising under the SBA Debentures, (iv) easements, rights of way, and other
similar encumbrances that do not materially impact the value of or materially affect the use of the properties or assets subject
thereto or affected thereby or otherwise materially impair business operations at such properties, (v) Liens imposed by applicable
securities Laws, and (vi) such imperfections or irregularities of title or Liens as do not materially affect the use of the properties
or assets subject thereto or affected thereby or otherwise materially impair business operations at such properties.
“
Person
”
means an individual, corporation, partnership, limited liability company, association, joint venture, estate, trust, sole proprietorship,
unincorporated organization, other entity, organization, group (as defined in Section 13(d) of the Exchange Act), or any other
business entity or any Governmental Entity, including a government or political subdivision or an agency or instrumentality thereof.
“
Portfolio
Company
” means any entity in which Rand or its Subsidiary has made, makes or proposes to make a debt or equity investment
that is or would be reflected in the Schedule of Investments included in Rand’s quarterly or annual reports.
“
Proxy
Statement
” has the meaning set forth in Section 4.4(a).
“
Purchased
Shares
” has the meaning set forth in Section 2.1(d).
“
Rand
”
has the meaning set forth in the preamble to this Agreement.
“
Rand
Benefit Plans
” has the meaning set forth in Section 4.11(a).
“
Rand
Board
” has the meaning set forth in the Recitals to this Agreement.
“
Rand
Board Recommendation
” has the meaning set forth in Section 4.3(b).
“
Rand
Bylaws
” means the by-laws of Rand, as amended and/or restated through the date hereof.
“
Rand
Certificate
” means the certificate of incorporation of Rand, as amended and/or restated through the date hereof.
“
Rand
Common Stock
” has the meaning set forth in the Recitals to this Agreement.
“
Rand
Contracts
” has the meaning set forth in Section 4.3(c).
“
Rand
Disclosure Schedule
” means that certain disclosure schedule delivered by Rand to East in connection with the execution
of this Agreement.
“
Rand
Employees
” has the meaning set forth in Section 4.11(a).
“
Rand
Material Contracts
” has the meaning set forth in 4.12(a)(vi).
“
Rand
Regulatory Agreement
” has the meaning set forth in Section 4.5(b).
“
Rand
SEC Reports
” has the meaning set forth in Section 4.5(c).
“
Rand
Stockholder Approvals
” has the meaning set forth in Section 7.3(a).
“
Rand
Stockholder Meeting
” has the meaning set forth in Section 4.3(b).
“
Rand
Stockholders
” has the meaning set forth in the Recitals to this Agreement.
“
Rand
Voting Debt
” means bonds, debentures, notes or other indebtedness of Rand having the right to vote on any matters
on which Rand Stockholders may vote.
“
Sarbanes-Oxley
Act
” means the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations promulgated thereunder.
“SBA”
means the United States Small Business Administration.
“SBA
Approval”
has the meaning set forth in Section 7.1(c).
“SBA
Debentures”
means, collectively, all debentures issued by the SBIC Subsidiary to the SBA.
“SBIC”
has the meaning set forth in Section 4.9(c).
“SBIC
Subsidiary”
means
Rand Capital SBIC, Inc.
“
SEC
”
has the meaning set forth in the Recitals to this Agreement.
“
Securities
Act
” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“
Shareholder
Agreement
” means the Shareholder Agreement substantially in the form of
Exhibit D
attached hereto, to be
entered into between Rand and East in connection with the Closing.
“
SRO
”
has the meaning set forth in Section 4.4(a).
“
Stock
Purchase
” has the meaning set forth in the Recitals to this Agreement.
“
Subsidiary
”,
when used with respect to a Party, means any corporation, partnership, limited liability company or other organization, whether
incorporated or unincorporated, (i) that, in the case where the specified Party is an SEC-reporting company, is consolidated with
such Party for financial reporting purposes under GAAP and, to the extent applicable, Article 6 of the SEC’s Regulation
S-X, and (ii) in the case where the specified Party is not an SEC-reporting company, whose securities or other interests having
the power to elect a majority of the relevant entity’s board of directors or similar governing body, or otherwise having
the power to direct the business and policies of the relevant entity, are held by the specified Party or by one or more other
Subsidiaries of such Party or by such Party and one or more other Subsidiaries of such Party; provided, however, that in no event
shall a Portfolio Company of Rand shall be deemed to be an “Subsidiary” of Rand.
“
Superior
Proposal
” means a bona fide written Competing Proposal that the Rand Board determines in good faith, after consultation
with its outside financial advisors and legal advisors, and taking into account the terms and conditions of such proposal, the
party making such proposal, and the likelihood and anticipated timing of consummation of such Competing Proposal, and all other
all legal, financial, regulatory and other aspects of such Competing Proposal, (a) is reasonably likely to be consummated without
undue delay relative to the Stock Purchase, taking into account all financial, legal, regulatory and other aspects of such offer,
and (b) is more favorable to the Rand Stockholders from a financial point of view than the Stock Purchase and Rand’s entry
into the Management Agreements (including any revisions to the terms of this Agreement committed to by East to Rand in writing
in response to such Competing Proposal made to Rand under the provisions of Section 7.7(f)); provided however, for these purposes,
to the extent relevant to the Competing Proposal in question, all percentages in subsections (a)(i) and (a)(ii) of the definition
of Competing Proposal shall be increased to (i) for purposes of subsection (a)(i) of the definition of Competing Proposal, the
lesser of (1) fifty percent (50%) of the outstanding Rand Common Stock and (2) such percentage of Rand Common Stock such that
the Person submitting the Competing Proposal, together with its Affiliates, would become, upon the closing of the proposed transaction
set forth in the Competing Proposal, the beneficial owner of at least fifty percent (50%) of the outstanding Rand Common Stock
and (ii) for purposes of subsection (a)(ii) of the definition of Competing Proposal, fifty percent (50%).
“
Takeover
Statute
” has the meaning set forth in Section 4.15.
“
Tax
”
or “
Taxes
” means (i) all federal, state, local, and foreign income, excise, gross receipts, gross income,
ad valorem, profits, gains, property, capital, sales, transfer, use, payroll, employment, severance, withholding, duties, intangibles,
franchise, backup withholding, value added and other taxes, charges, levies or like assessments together with all penalties and
additions to tax and interest thereon and (ii) any liability for Taxes described in clause (i) above under Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local or foreign law).
“
Tax
Return
” means, with respect to a Person, a report, return or other information (including any amendments) required
to be supplied to a Governmental Entity with respect to Taxes including, where permitted or required, combined or consolidated
returns for any group of entities that includes the Person or any of its Subsidiaries.
“
Termination
Fee
” has the meaning set forth in Section 9.4(a).
“
Third
Party
” means a third party (or group of Persons) not affiliated with Rand or East, but shall include all Rand Stockholders.
“
Welfare
Plan
” has the meaning set forth in Section 4.11(f).
Article
II
TRANSACTION
2.1
Stock
Purchase
.
(a)
Contributed
Investment Assets
. On the terms and subject to the conditions of this Agreement, on the Closing Date, East shall sell, transfer,
assign, convey, contribute and deliver to Rand, free and clear of all Liens (but subject to the terms of the Contributed Loan
Documents and restrictions on transfer arising under applicable Law), and Rand shall purchase, accept, assume and acquire from
East all of East’s right, title and interest in, to and under the following, wherever located (collectively, the “
Contributed
Investment Assets
”):
(i) each
Contributed Loan including, to the extent permitted to be assigned under applicable Law, all claims, suits, causes of action and
any other right of East under the Contributed Loan Documents against any Person, whether known or unknown, arising under, out
of, or in connection with the Contributed Loan Documents or in any way based on or related to any of the foregoing;
(ii) the
Contributed Loan Documents relating to each Contributed Loan;
(iii) the
Contributed Loan Collateral relating to each Contributed Loan;
(iv) the
Contributed Loan Files relating to each Contributed Loan; and
(v) the
Contributed Books and Records.
(b)
Assumed
Obligations
. From and after the Closing, Rand shall assume all obligations with respect to the Contributed Investment Assets
under the Contributed Loan Documents.
(c)
Stock
Purchase Price
. The aggregate consideration payable for the Purchased Shares shall be the sum of (i) the Cash Consideration
plus (ii) the Contributed Investment Assets Fair Value, as finally determined in accordance with Section 3.2 below.
(d)
Stock
Issuance
. At the Closing, East shall purchase from Rand, and Rand shall, upon receipt by Rand of the Cash Consideration and
the Contributed Investment Assets in accordance with Sections 3.1 and 3.3 below, issue to East a number of newly issued shares
of Rand Common Stock equal to (a) (i) the Cash Consideration, plus (ii) Contributed Investment Assets Fair Value, divided by (b)
$3.00. The shares of the Rand Common Stock to be issued in the Stock Purchase are referred to herein as the “
Purchased
Shares
”.
(e)
Principal
Repayments between Closing Cut-off Time and Closing
. If any principal payment, interest payment or other payment is made
by any Borrower to East with respect to any Contributed Investment Asset between the Closing Cut-off Time and the Closing, such
amounts shall be received by East in trust for Rand’s benefit, and East shall either (i) pay over to Rand such amounts via
wire transfer of immediately available funds at Closing or as soon thereafter as reasonably practicable (but in no event later
than five (5) Business Days following receipt), or (ii) if Closing has not yet occurred, reduce the Contributed Investment Assets
Fair Value, and increase the amount of the Cash Consideration, by the amount so received.
Article
III
CLOSING;
CLOSING DELIVERIES
3.1
Closing
.
The closing of the Stock Purchase (the “
Closing
”) shall take place at 10:00 a.m. on the date and place
to be specified by the Parties, which date shall be no later than three (3) Business Days after the satisfaction or waiver (subject
to applicable Law) of the latest to occur of the conditions set forth in Article VIII (other than those conditions that by their
nature are to be satisfied or waived at the Closing), unless extended by mutual agreement of the Parties. The date on which the
Closing occurs is referred to herein as the “
Closing Date
”.
3.2
Update
of Contributed Loan Schedule and Contributed Investment Assets Fair Value
.
(a) Immediately
following the close of business on the second Business Day prior to the Closing Date, the Contributed Loan Schedule shall be updated
as necessary to reflect changes to the information contained therein between the Cut-off Time and Closing Cut-off Time, including,
without limitation, changes to the information therein that would result in an adjustment to the Contributed Investment Assets
Fair Value and the corresponding calculation of the Cash Consideration. The Contributed Loan Schedule, as so updated as of the
Closing Cut-off Time and, with respect to the Contributed Investment Assets Fair Value, as agreed to between the Parties pursuant
to Section 3.2(c) below, shall be used for purposes of calculating the Cash Consideration amount.
(b) Contemporaneously
with the delivery of the updated Contributed Loan Schedule in accordance with Section 3.2(a), East shall provide Rand a certificate
of an officer of East setting forth its good faith calculations of the Contributed Investment Assets Fair Value and the corresponding
Cash Consideration, in each case, as determined in accordance with the terms of this Agreement, together with reasonable supporting
documentation for such calculation. East will provide Rand and its representatives during normal business hours access reasonably
requested by Rand to the work papers and other books and records and personnel of East for purposes of assisting Rand and its
representatives in their review of the calculation of the Contributed Investment Assets Fair Value and corresponding Cash Consideration.
(c) To
the extent that Rand does not agree with the calculation of the Contributed Investment Assets Fair Value presented by East, the
Parties shall promptly negotiate in good faith so as to agree upon the calculation of the Contributed Investment Assets Fair Value.
The Contributed Loan Schedule, as so updated as of the Closing Cut-off Time and as agreed to by the Parties, shall be used for
purposes of calculating the Contributed Investment Assets Fair Value and corresponding Cash Consideration payable at closing.
3.3
Closing
Deliveries
. At the Closing,
(a) East
shall deliver or cause its Affiliates to deliver, as applicable, to Rand:
(i) a
counterpart of each assignment and assumption agreement relating to a Contributed Investment Asset, duly executed on behalf of
East, its Affiliate (if applicable) and each Person from whom a Consent, as set forth on Section 5.13(j) of the East Disclosure
Schedule, is required in connection with the transfer of such Contributed Investment Asset (unless a separate Consent from each
such Person has been delivered to Rand);
(ii) the
Contributed Loan Notes with respect to such Contributed Loans;
(iii) the
Contributed Loan Documents in the possession or control of East;
(iv) the
Contributed Loan Files in the possession or control of East;
(v) the
Contributed Books and Records;
(vi) the
Cash Consideration by wire transfer of immediately available funds to an account of Rand designated in writing by Rand to East;
(vii) nomination
in writing of two or three directors, as applicable based upon the terms of the Shareholder Agreement, to stand for election at
the annual meeting of stockholders of Rand, subject to the provisions of the Shareholder Agreement;
(viii) an
officer’s certificate signed by an officer of East as required to be delivered under Sections 8.3(a) and 8.3(b);
(ix) (A)
a certification of non-foreign status that complies with the requirements of Code Section 1445 and Treasury Regulation Section
1.1445-2(b) and (B) certification pursuant to Code Section 1446(f)(2), in each case, in form and substance reasonably satisfactory
to Rand;
(x) a
certificate of the Secretary or Assistant Secretary (or equivalent officer) of the East certifying that attached thereto are true
and complete copies of all resolutions adopted by the members of East authorizing the execution, delivery, and performance of
this Agreement and the consummation of the Stock Purchase, and that all such resolutions are in full force and effect and are
all the resolutions adopted in connection with the transactions contemplated hereby;
(xi) a
copy of the Shareholder Agreement, duly executed by East; and
(xii) such
other documents as may be reasonably required by Rand, each in form and substance satisfactory to Rand, to effect the intentions
of the Parties contemplated by this Agreement, duly executed by East.
(b) Rand
shall deliver to East:
(i) a
counterpart of each assignment and assumption agreement relating to a Contributed Investment Asset, duly executed on behalf of
Rand;
(ii) the
Purchased Shares by book entry transfer to an account for East at Rand’s transfer agent;
(iii) copies
of the Management Agreements, duly executed by Rand;
(iv) an
officer’s certificate signed by the Chief Executive Officer or the Chief Financial Officer of Rand as required to be delivered
under Sections 8.2(a) and 8.2(b);
(v) a
certificate of the Secretary or Assistant Secretary (or equivalent officer) of the Company certifying that attached thereto are
true and complete copies of all resolutions adopted by the Rand Board authorizing the execution, delivery, and performance of
this Agreement and the Management Agreements and the consummation of the Stock Purchase, and that all such resolutions are in
full force and effect and are all the resolutions adopted in connection with the transactions contemplated hereby and thereby;
(vi) a
copy of the Shareholder Agreement, duly executed by Rand; and
(vii) such
other documents as may be reasonably required by East, in form and substance satisfactory to East, to effect the intentions of
the Parties contemplated by this Agreement, duly executed by Rand.
Article
IV
REPRESENTATIONS
AND WARRANTIES OF RAND
Except
as disclosed in (i) the Rand SEC Reports (as defined in Section 4.5(c) below) filed prior to the date of this Agreement, or (ii)
the Rand Disclosure Schedule, Rand hereby represents and warrants to East as follows:
4.1
Corporate
Organization
.
(a) Rand
is a corporation duly incorporated, validly existing and in good standing under the laws of the State of New York. Rand has the
requisite corporate power and corporate authority to own or lease all of its properties and assets and to carry on its business
as it is now being conducted.
(b) Rand
is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character
or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the
failure to be so licensed or qualified would not, individually or in the aggregate, have a Material Adverse Effect on Rand.
(c) True,
complete and correct copies of Rand Certificate and Rand Bylaws have previously been made available to East. Rand is not in violation
of Rand Certificate or Rand Bylaws.
(d) The
SBIC Subsidiary is the only Subsidiary of Rand. The SBIC Subsidiary (i) is duly incorporated and validly existing and in good
standing under the laws of the state of its incorporation, (ii) has the requisite corporate power and authority to own or lease
all of its properties and assets and to carry on its business as it is now being conducted and (iii) is duly licensed or qualified
to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties
and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or
qualified would not, individually or in the aggregate, have a Material Adverse Effect on Rand. True, complete and correct copies
of the Organizational Documents of the SBIC Subsidiary have previously been made available to East. The SBIC Subsidiary is not
in violation of its Organizational Documents.
4.2
Capitalization
.
(a) The authorized capital stock of Rand consists of 10,000,000 shares of Rand Common Stock, par value $0.10 per share, of which,
as of the date of this Agreement, 6,863,034 shares were issued, 6,321,988 shares were outstanding and 541,046 shares were held
by the Company as treasury stock. As of the date of this Agreement, no shares of preferred stock were issued and outstanding.
All of the issued and outstanding shares of Rand Common Stock have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. No Rand Voting Debt
is issued or outstanding. Except pursuant to this Agreement, Rand does not have and is not bound by any outstanding subscriptions,
options, warrants, calls, rights, commitments or agreements of any character calling for the purchase or issuance of, or the payment
of any amount based on, any shares of Rand Common Stock, Rand preferred stock, Rand Voting Debt or any other equity securities
of Rand or any securities representing the right to purchase or otherwise receive any shares of Rand Common Stock, Rand preferred
stock, Rand Voting Debt or other equity securities of Rand. There are no contractual obligations of Rand or its Subsidiary (A)
to repurchase, redeem or otherwise acquire any shares of capital stock of Rand or any equity security of Rand or its Subsidiary
or any securities representing the right to purchase or otherwise receive any shares of capital stock or any other equity security
of Rand or its Subsidiary or (B) pursuant to which Rand or its Subsidiary is or could be required to register shares of Rand capital
stock or other securities under the Securities Act.
(b) All
of the issued and outstanding shares of capital stock or other equity ownership interests of the SBIC Subsidiary are owned, directly
or indirectly, by Rand, free and clear of any Liens, except for any Permitted Liens, and all of such shares or equity ownership
interests are duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights. The SBIC Subsidiary
does not have or is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character
calling for the purchase or issuance of any shares of capital stock or any other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital stock or any other equity security of such Subsidiary.
(c) Except
as set forth in Section 4.2(c) of the Rand Disclosure Schedule, neither Rand nor the SBIC Subsidiary has any indebtedness for
borrowed money.
4.3
Authority;
No Violation
.
(a) Rand
has full corporate power and authority to execute and deliver this Agreement and to consummate the Stock Purchase. The execution
and delivery of this Agreement, the Management Agreements and the consummation of the Stock Purchase have been duly and validly
approved by the Rand Board. This Agreement has been duly and validly executed and delivered by Rand and (assuming due authorization,
execution and delivery by East) constitutes the valid and binding obligation of Rand, enforceable against Rand in accordance with
its terms, except as may be limited by bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization or similar laws
of general applicability relating to or affecting the rights of creditors generally and subject to general principles of equity
(the “
Bankruptcy and Equity Exception
”).
(b) The
Rand Board has determined that this Agreement and the Stock Purchase are advisable and in the best interests of Rand and the Rand
Stockholders, approved this Agreement and the Stock Purchase in accordance with the NYBCL and Section 23 of the Investment Company
Act, resolved to recommend that that Rand Stockholders approve the Rand Stockholder Approvals, and directed that the proposals
related to the Rand Stockholder Approvals be submitted to the Rand Stockholders for approval and adoption at a duly held meeting
of such Rand Stockholders (the “
Rand Stockholder Meeting
”), together with the recommendation of Rand
Board that Rand Stockholders approve and adopt the proposals related to the Rand Stockholder Approvals (the “
Rand
Board Recommendation
”).
(c) Neither
the execution and delivery of this Agreement or the Management Agreements by Rand nor the consummation by Rand of the Stock Purchase,
nor compliance by Rand with any of the terms or provisions of this Agreement or the Management Agreements, will (i) assuming the
completion of the amendment of the Rand Certificate to increase the number of authorized shares of Rand Common Stock as described
in Section 7.3(a)(ii), violate any provision of the Rand Certificate or Rand Bylaws, or (ii) assuming that the consents, approvals
and filings referred to in Sections 4.4(a)(i)-(v), Sections 4.4(b)(i) and (iv) and Section 4.4(a) and (b) of the Rand Disclosure
Schedule are duly obtained and/or made, (A) violate any Law applicable to Rand or its Subsidiary, or (B) except as would not,
individually or in the aggregate, have a Material Adverse Effect on Rand, violate, conflict with, result in a breach of any provision
of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute
a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required
by, or result in the creation of any Lien upon any of the respective properties or assets of Rand or its Subsidiary under, any
of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, franchise, agreement
or other instrument or obligation to which Rand or its Subsidiary is a party or by which either of them or any of their respective
properties or assets is bound (collectively, the “
Rand Contracts
”).
4.4
Consents
and Approvals
.
(a) Except
for (i) the filing with the SEC of a proxy statement in definitive form (the “
Proxy Statement
”) relating
to the Rand Stockholder Meeting, (ii) any notices, consents, authorizations, approvals, filings or exemptions in connection with
compliance with the rules and regulations of NASDAQ, or any other applicable self-regulatory organization (“
SRO
”),
(iii) such filings and approvals as are required to be made or obtained under the securities or “Blue Sky” laws of
various states in connection with the Stock Purchase pursuant to this Agreement and the filing of a Form D with the SEC, (iv)
compliance with the Investment Company Act, and the rules and regulations promulgated thereunder, (v) any notices, consents, authorizations,
approvals, filings or exemptions in connection with compliance with the rules and regulations of SBA, or (vi) as set forth on
Section 4.4(a) of Rand Disclosure Schedule, no other consents, authorizations, approvals, or exemptions from, or notices to, or
filings with, any Governmental Entity by Rand are necessary in connection with the execution and delivery by Rand of this Agreement
or the consummation by Rand of the Stock Purchase.
(b) Except
for (i) receipt of Rand Stockholder Approvals as contemplated in Section 7.3, (ii) consents under Rand Contracts set forth on
Section 4.4(b) of Rand Disclosure Schedule, (iii) matters covered in the immediately preceding Section 4.4(a), and (iv) approval
of the Investment Advisory Agreement as described in Section 8.1(b)(i), no consents or approvals of any Person are necessary in
connection with the execution and delivery by Rand of this Agreement or the consummation by Rand of the Stock Purchase.
4.5
Reports;
Regulatory Matters
.
(a) Rand
and its Subsidiary have timely filed all reports, registration statements and certifications, together with any amendments required
to be made with respect thereto, that they were required to file since December 31, 2016 with (i) the SEC, (ii) NASDAQ, (iii)
the SBA, and (iv) any other applicable SRO or Governmental Entity, and all other reports and statements required to be filed by
them since December 31, 2016, including any report or statement required to be filed pursuant to the laws, rules or regulations
of the United States, any state, any foreign entity, or any SRO or Governmental Entity, and have paid all fees and assessments
due and payable in connection therewith. Except for normal examinations of Rand and its Subsidiary conducted by a SRO or Governmental
Entity in the ordinary course of the business, no SRO or Governmental Entity has, since December 31, 2016, initiated any proceeding,
enforcement action or, to the knowledge of Rand, investigation into the business, disclosures or operations of Rand or its Subsidiary.
Since December 31, 2016, no SRO or Governmental Entity has resolved any proceeding, enforcement action or, to the knowledge of
Rand, investigation into the business, disclosures or operations of Rand or its Subsidiary. There is no unresolved, or, to Rand’s
knowledge, threatened comment or stop order by any SRO or Governmental Entity with respect to any report or statement relating
to any examinations or inspections of Rand or its Subsidiary.
(b) Neither
Rand nor its Subsidiary is subject to any cease-and-desist or other order or enforcement action issued by, or is a party to any
written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking
to, or is subject to any order or directive by, any SRO or Governmental Entity that currently restricts in any material respect
the conduct of its business, or that in any material manner relates to its credit, risk management or compliance policies, its
internal controls, its management or its business (each item in this sentence, a “
Rand Regulatory Agreement
”),
nor has Rand or its Subsidiary been advised since December 31, 2016 by any SRO or Governmental Entity that it is considering issuing,
initiating, ordering, or requesting any such Rand Regulatory Agreement.
(c) Rand
has filed on the SEC’s EDGAR system each (i) final registration statement, prospectus, report, schedule and definitive proxy
statement filed with or furnished to the SEC by Rand or its Subsidiary pursuant to the Securities Act or the Exchange Act since
December 31, 2016 (the “
Rand SEC Reports
”) and prior to the date of this Agreement and (ii) communication
mailed by Rand to Rand Stockholders since December 31, 2016 and prior to the date of this Agreement. No such Rand SEC Report or
communication, at the time filed, furnished or communicated (and, in the case of registration statements and proxy statements,
on the dates of effectiveness and the dates of the relevant meetings, respectively), contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements made therein,
in light of the circumstances under which they were made, not misleading, except that information as of a later date (but before
the date of this Agreement) shall be deemed to modify information as of an earlier date. As of their respective dates, all Rand
SEC Reports complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto.
No executive officer of Rand has failed in any respect to make the certifications required of him or her under Section 302 or
906 of the Sarbanes-Oxley Act. As of the date of this Agreement, there are not outstanding or unresolved comments from the SEC
with respect to any Rand SEC Report and, as of the date of this Agreement, no Rand SEC Report is subject to any ongoing review
by the SEC.
4.6
Financial
Statements
.
(a) The
consolidated financial statements of Rand and its Subsidiary included in the Rand SEC Reports (including the related notes, where
applicable) (i) have been prepared from, and are in accordance with, the books and records of Rand and its Subsidiary, (ii) fairly
present in all material respects the consolidated results of operations, cash flows, changes in stockholders’ equity and
consolidated financial position of Rand and its Subsidiary for the respective fiscal periods or as of the respective dates therein
set forth (subject in the case of unaudited statements to recurring year-end audit adjustments immaterial in nature and amount),
(iii) complied as to form, as of their respective dates of filing with the SEC, in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with respect thereto, and (iv) have been prepared in accordance
with GAAP consistently applied during the periods involved, except, in each case, as indicated in such statements or in the notes
thereto.
(b) Neither
Rand nor its Subsidiary has any material liability or obligation of any nature whatsoever required by GAAP to be reserved for
in a balance sheet (whether absolute, accrued, contingent or otherwise and whether due or to become due), except for those liabilities
that are reflected or reserved against on the consolidated balance sheet of Rand included in its Annual Report on Form 10-K for
the annual period ended December 31, 2017 (including any notes thereto) and for liabilities and obligations incurred in a commercially
reasonable manner since the date of such balance sheet and such liabilities as would not, individually or in the aggregate, have
a Material Adverse Effect on Rand.
(c) Rand
has implemented and maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) to ensure
that material information relating to Rand, including its consolidated Subsidiary, required to be disclosed by Rand in the reports
that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
rules and regulations of the SEC, and that all such material information is accumulated and communicated to the “principal
executive officer” and the “principal financial officer” (each as defined in the Sarbanes-Oxley Act) of Rand
by others within those entities in connection with the reports Rand is required to file under the Exchange Act to allow timely
decisions regarding required disclosure and to make the certifications required pursuant to Sections 302 and 906 of the Sarbanes
Oxley Act.
(d) Since
December 31, 2016, the principal executive officer and the principal financial officer of Rand have complied in all material respects
with (i) the applicable provisions of the Sarbanes-Oxley Act and under the Exchange Act and (ii) the applicable listing and corporate
governance rules and regulations of NASDAQ. The principal executive officer and the principal financial officer of Rand have made
all certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act with respect to each Rand SEC Document filed by
Rand.
4.7
Broker’s
Fees
. Except for Keefe, Bruyette & Woods, Inc., neither Rand nor its Subsidiary has utilized any broker, finder or financial
advisor or incurred any liability for any broker’s fees, commissions or finder’s fees in connection with the Stock
Purchase.
4.8
Absence
of Certain Changes or Events
. Since December 31, 2016, (a) the respective businesses of Rand and its Subsidiary have been
conducted in the ordinary course of business consistent with past practice, and (b) neither Rand nor its Subsidiary has taken
any action that has resulted in, or is reasonably likely to result in, a Material Adverse Effect on Rand.
4.9
Legal
Proceedings; Compliance with Law
.
(a) Except
as would not, individually or in the aggregate, have a Material Adverse Effect on Rand, neither Rand nor its Subsidiary is a party
to any, and there are no pending or, to Rand’s knowledge, threatened, legal, administrative, arbitral or other proceedings,
claims, actions, suits or governmental or regulatory investigations of any nature against Rand or its Subsidiary or to which any
of their assets are subject or against or into any officers or directors of Rand or its Subsidiary in such capacities.
(b) Except
as would not, individually or in the aggregate, have a Material Adverse Effect on Rand, there is no judgment, settlement agreement,
order, injunction, decree or regulatory restriction (other than those of general application that apply to similarly situated
companies or their Subsidiaries) imposed upon Rand, its Subsidiary or the assets of Rand or its Subsidiary.
(c) The
SBIC Subsidiary is licensed to operate as a Small Business Investment Company (“
SBIC
”) by the SBA. The
SBIC Subsidiary’s SBIC license is in good standing with the SBA and no adverse regulatory findings contained in any examination
report prepared by the SBA regarding the SBIC Subsidiary are outstanding or unresolved.
(d) Rand
and its Subsidiary hold all Permits necessary for the lawful conduct of their respective businesses, and have complied with and
are not in default in any respect under any, Permit or applicable Law, except for such failures, non-compliance or defaults that
would not, individually or in the aggregate, have a Material Adverse Effect on Rand.
4.10
Taxes
and Tax Returns
.
(a) Each
of Rand and its Subsidiary (i) has duly and timely filed (including all applicable extensions) all federal, state, local and foreign
income and other material Tax Returns required to be filed by it on or prior to the date of this Agreement and all such Tax Returns
are accurate and complete, (ii) has paid all Taxes shown thereon as due and (iii) has duly paid or made provision for the payment
of all Taxes that have been incurred or are due or claimed to be due from it by the IRS or any other federal, state, foreign or
local taxing authorities other than Taxes that are not yet delinquent or are being contested in good faith, have not been finally
determined and have been adequately reserved against under GAAP. There are no material disputes pending, or written claims asserted,
for Taxes or assessments upon Rand or its Subsidiary for which Rand does not have reserves that are adequate under GAAP. Neither
Rand nor its Subsidiary is a party to or is bound by any Tax sharing, allocation or indemnification agreement or arrangement (other
than such an agreement or arrangement exclusively between or among Rand and its Subsidiary as described in Section 4.10(a) of
the Rand Disclosure Schedule).
(b) Rand
and its Subsidiary have complied in all material respects with all Laws relating to the payment and withholding of Taxes and have,
within the time and in the manner prescribed by such Laws, withheld from and paid over all amounts required to be so withheld
and paid over under such Laws.
(c) There
are no Liens for Taxes upon the assets of Rand or its Subsidiary, except for Liens for Taxes not yet due and payable and Liens
for Taxes that are both being contested in good faith and adequately reserved for in accordance with GAAP.
(d) Neither
Rand nor its Subsidiary has granted any waiver, extension, or comparable consent regarding the application of the statute of limitations
with respect to any Taxes or Tax Return that is outstanding, nor any request for such waiver or consent has been made.
(e) No
Subsidiary of Rand is a “specified foreign corporation” as defined in Section 965(e) of the Code.
4.11
Employee
Matters
.
(a) Section
4.11(a) of Rand Disclosure Schedule sets forth a true, complete and correct list of each “employee benefit plan” as
defined in Section 3(3) of ERISA, and each incentive, deferred compensation, paid-time-off, equity-based, phantom equity, severance,
separation, termination, retention, change-of-control, pension, profit-sharing, retirement, leave of absence, layoff, vacation,
day or dependent care, legal services, cafeteria, life, health, medical, dental, vision, welfare, accident, disability, workmen’s
compensation or other insurance, collective bargaining, material fringe benefit, or other similar plan, program, agreement, practice,
policy, arrangement or commitment for the benefit of any employee, former employee, director or former director of Rand or its
Subsidiary (collectively, “
Rand Employees
”), entered into, maintained or contributed to, or required
to be maintained or contributed to by Rand, its Subsidiary or any Person that, together with Rand or its Subsidiary, is treated
as a single employer under Section 414(b), (c), (m) or (o) of the Code, (each such Person, an “
ERISA Affiliate
”),
whether written or oral, and whether or not subject to ERISA (such plans, programs, agreements, practices, policies, arrangements
and commitments, herein referred to as the “
Rand Benefit Plans
”). In addition, Section 4.11(a) of Rand
Disclosure Schedule sets forth a true, complete and correct list of each employment agreement or independent contractor agreement
for substantial personal services to which Rand or its Subsidiary is a party, other than oral agreements that can be terminated
on prior notice of 30 days’ or less, without continuing obligation or penalty (such agreements herein referred to as the
“
Employment Agreements
”).
(b) With
respect to each Rand Benefit Plan, Rand has made available to East true, complete and correct copies of the following (as applicable):
(i) the current written document evidencing such Rand Benefit Plan (including any related trust agreements or other funding arrangements)
and any amendment thereto or, with respect to any such plan that is not in writing, a written description of the material terms
thereof, (ii) the current summary plan description, and all summaries of material modifications thereto, (iii) the two (2) most
recent Form 5500s, annual reports, financial statements and/or actuarial reports, (iv) the most recent IRS determination, opinion
or advisory letter, and (v) all material written communications provided to employees in the last twelve (12) months relating
to such Rand Benefit Plans and all other material written communications with any governmental agency in the last thirty-six (36)
months relating to such Rand Benefit Plans, including any materials relating to any government investigation or audit or any submissions
under any voluntary compliance procedure. Rand has made available to East true, complete and correct copies of any written Employment
Agreements including all amendments thereto and, with respect to any Employment Agreement that is not in writing, a written description
of the material terms thereof.
(c) (i)
Each Rand Benefit Plan (including any related trust) has been maintained, operated and administered (including with respect to
reporting and disclosure) in accordance with its terms in all material respects, (ii) all Rand Benefit Plans are in compliance
with the applicable provisions of ERISA, the Code and all other applicable Laws, including Section 409A of the Code, in each case
in all material respects, (iii) to Rand’s knowledge no non-exempt “prohibited transaction” (as defined in Section
4975 of the Code or Section 406 of ERISA) has occurred with respect to any Rand Benefit Plan which would result in a material
penalty, (iv) all contributions to, and payments from, Rand Benefit Plans have been made in accordance with the terms of Rand
Benefit Plans, ERISA, the Code and all other applicable Laws in all material respects, (v) there are no current or, to Rand’s
knowledge, threatened investigations by any Governmental Entity, termination proceedings, or other claims by any Person (except
routine claims for benefits) with respect to Rand Benefit Plans or, to Rand’s knowledge, any fiduciary thereof.
(d) Except
as set forth in Section 4.11(d) of Rand Disclosure Schedule, (i) Rand and its Subsidiary and, to Rand’s knowledge, each
other party to each Employment Agreement has duly performed all obligations required to be performed by it to date under such
agreement, and (ii) to Rand’s knowledge, no event or condition exists that constitutes or, after notice or lapse of time
or both, will constitute, a breach, violation or default on the part of Rand or its Subsidiary or, to Rand’s knowledge,
any other party thereto under any such Employment Agreement.
(e) Each
Rand Benefit Plan intended to be qualified under Section 401(a) of the Code (including each related trust intended to be exempt
from taxation under Section 501(a) of the Code) has received an IRS determination letter or is comprised of a master and prototype
or volume submitter plan that has received a favorable opinion or advisory letter from the IRS. Since the date of each such determination,
opinion or advisory letter, no event has occurred and no condition exists that could reasonably be expected to result in the revocation
of any such determination, opinion or advisory letter or that could reasonably be expected to result in the loss of the qualified
status of any such Rand Benefit Plan (or the tax-exempt status of any such trust).
(f) Except
as set forth on Section 4.11(f) of Rand Disclosure Schedule, no Rand Benefit Plan that is a “welfare benefit plan”
as defined in Section 3(1) of ERISA (each, a “
Welfare Plan
”) or Employment Agreement provides for continuing
benefits or coverage for any participant or beneficiary or covered dependent of a participant after such participant’s termination
of employment, except to the extent required by law. Each Welfare Plan which provides medical, dental, health or long-term disability
benefits (except a flexible spending account) is fully insured and claims with respect to any participant or covered dependent
under such Welfare Plan could not result in any uninsured liability to Rand, its Subsidiary or NEWCO (except a flexible spending
account).
(g) Except
as set forth in Section 4.11(g)(i) of Rand Disclosure Schedule, the execution of this Agreement and the Stock Purchase do not
constitute a triggering event under any Rand Benefit Plan, Employment Agreement, policy, arrangement, statement, commitment or
agreement, whether or not legally enforceable, which (either alone or upon the occurrence of any additional or subsequent event)
will or may result in any “parachute payment” (as defined in Section 280G of the Code). Except as set forth on Section
4.11(g)(ii) of Rand Disclosure Schedule, no Rand Benefit Plan or Employment Agreement provides for the payment of severance, termination,
change-in-control or any similar type of payments or benefits.
4.12
Certain
Contracts
. (a) Except as set forth in Section 4.12(a) of Rand Disclosure Schedule or as expressly contemplated by this Agreement,
neither Rand nor its Subsidiary is a party to or bound by any Rand Contract that is:
(i) a
“material contract” (as such term is defined in Item 601(b)(10) of Regulation S-K of the SEC) to be performed after
the date of this Agreement that has not been filed or incorporated by reference in the Rand SEC Reports filed prior to the date
hereof or that is material to Rand and its Subsidiary, taken as a whole, or their financial condition or results of operations;
(ii) except
with respect to investments set forth in the Rand SEC Reports or any other arrangement regarding a Portfolio Company, a joint
venture, alliance or partnership agreement;
(iii) other
than any arrangement regarding any Portfolio Company, a loan, guarantee of indebtedness or credit agreement, note, mortgage, indenture
or other binding commitment (other than those between or among Rand and its Subsidiary) relating to indebtedness for borrowed
money in an amount in excess of $25,000 individually;
(iv) a
non-competition or non-solicitation contract or agreement that purports to limit the manner in which, or the localities in which,
the business of Rand and its Subsidiary, taken as a whole, is conducted or the types of businesses that Rand and its Subsidiary,
taken as a whole, conduct;
(v) is
a contract or agreement requiring expenditures by Rand, and/or its Subsidiary in excess of $25,000 in the aggregate on or after
the date of this Agreement or under which Rand and/or its Subsidiary is entitled to receive in excess of $25,000 in the aggregate
on or after the date of this Agreement, in each case, excluding payments received related to Portfolio Company investments; or
(vi) other
than any arrangement regarding any Portfolio Company, is a contract or agreement relating to the acquisition or disposition of
any business or operations (whether by merger, sale of stock, sale of assets or otherwise) that has not yet been consummated (all
Rand Contracts described in clauses (i) through (vi), collectively the “
Rand Material Contracts
”).
(b) Except
as set forth in Section 4.12(b) of Rand Disclosure Schedule, (i) each Rand Material Contract is valid and binding on Rand or its
Subsidiary and, to the knowledge of Rand, the other parties thereto, enforceable against it in accordance with its terms (subject
to the Bankruptcy and Equity Exception) and is in full force and effect, (ii) Rand and its Subsidiary and, to Rand’s knowledge,
each other party thereto has duly performed all obligations required to be performed by it to date under each Rand Material Contract
and (iii) no event or condition exists that constitutes or, after notice or lapse of time or both, will constitute, a breach,
violation or default on the part of Rand or its Subsidiary or, to Rand’s knowledge, any other party thereto under any such
Rand Material Contract.
4.13
Property;
Investment Securities
.
(a) Except
as set forth on Section 4.13 of the Rand Disclosure Schedule, Rand or its Subsidiary (a) has good and marketable title to all
the properties and assets reflected in the latest audited balance sheet included in such Rand SEC Report as being owned by Rand
or its Subsidiary or acquired after the date thereof (except properties sold or otherwise disposed of since the date thereof in
the ordinary course of business), free and clear of all Liens of any nature whatsoever, except Permitted Liens, and (b) is the
lessee of all leasehold estates reflected in the latest audited financial statements included in such Rand SEC Report or acquired
after the date thereof (except for leases that have expired by their terms since the date thereof), free and clear of all Liens
of any nature whatsoever, except for Permitted Liens, and is in possession of the properties purported to be leased thereunder,
and each such lease is valid without default thereunder by the lessee or, to Rand’s knowledge, the lessor.
(b) Without
limiting the foregoing Section 4.13(a), each of Rand and its Subsidiary has good title to all securities and investment assets
owned by it, free and clear of any Liens, except (i) for those Liens or restrictions arising under the Organizational Documents
of the issuers of such securities, (ii) to the extent such securities or investment assets are pledged in connection with the
SBA Debentures, (iii) Permitted Liens or (iv) for Liens or restrictions that would not individually or in the aggregate be material
with respect to the value, ownership or transferability of such securities or investment assets.
4.14
Intellectual
Property
. Rand and its Subsidiary own or have the right to use in the manner currently used all Intellectual Property Rights
material to the respective businesses of Rand and its Subsidiary as now conducted and as described in Rand SEC Reports, and the
expected expiration of any of such Intellectual Property Rights would not be material to Rand and its Subsidiary, taken as a whole.
4.15
State
Takeover Laws
. The Rand Board has unanimously approved this Agreement and the Stock Purchase as required to render inapplicable
to the Agreement and such transaction the restrictions on “business combinations” set forth in Section 912 of the
NYBCL or any other “moratorium”, “control share”, “fair price”, “takeover”, or
“interested stockholder” law (any such laws, “
Takeover Statute
”).
4.16
Rand
Information
. The information relating to Rand and its Subsidiary that is provided by Rand or its representatives for inclusion
in the Proxy Statement, or in any application, notification or other document filed with any other SRO or Governmental Entity
in connection with the Stock Purchase, will not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances in which they are made, not misleading. The Proxy Statement
as it relates to Rand and its Subsidiary and other portions within the reasonable control of Rand and its Subsidiary will comply
in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder.
4.17
Insurance
.
Rand and its Subsidiary maintain, or are covered by, policies of insurance in such amounts and against such risks as are customary
in the industries in which Rand and its Subsidiary operate. Rand and its Subsidiary have paid, or caused to be paid, all premiums
due under all insurance policies of Rand and its Subsidiary and have not received written notice that they are in default with
respect to any material obligations under such policies. Neither Rand nor its Subsidiary has received any written notice of cancellation
or termination with respect to any existing material insurance policy that is held by, or for the benefit of, Rand or its Subsidiary,
other than as would not, individually or in the aggregate, be material to Rand and its Subsidiary, taken as a whole.
4.18
No
Other Representations or Warranties
. Except for the representations and warranties contained in this Article IV or any certificate
delivered pursuant to this Agreement, neither Rand nor any other Person on behalf of Rand makes any express or implied representation
or warranty with respect to Rand, its Subsidiary, any investment assets or Portfolio Company, or any other information provided
to East in connection with the Stock Purchase, including the accuracy, completeness or timeliness thereof. Neither Rand nor any
other Person will have or be subject to any claim, liability or indemnification obligation to East, or any other Person resulting
from the distribution or failure to distribute to East, or East’s use of, any such information, including any information,
documents, projections, estimates, forecasts or other material made available to East in the electronic data room maintained by
Rand for purposes of the Stock Purchase or management presentations in expectation of the Stock Purchase, unless and to the extent
any such information is expressly included in a representation or warranty contained in this Article IV or in any certificate
delivered pursuant to this Agreement.
Article
V
REPRESENTATIONS
AND WARRANTIES OF EAST
Except
as disclosed in East Disclosure Schedule, East hereby represents and warrants to Rand as follows:
5.1.
Corporate
Organization
.
(a) East
is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware. East
has the requisite limited liability company power and authority to own or lease all of its properties and assets and to carry
on its business as it is now being conducted.
(b) East
is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character
or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the
failure to be so licensed or qualified would not, individually or in the aggregate, have a Material Adverse Effect on East.
5.2.
Authority;
No Violation
. (a) East has full limited liability company power and authority to execute and deliver this Agreement and to
consummate the Stock Purchase. The execution and delivery of this Agreement and the consummation of the Stock Purchase have been
duly and validly approved by East. No other limited liability company or other proceedings on the part of East are necessary to
approve the Stock Purchase. This Agreement has been duly and validly executed and delivered by East and (assuming due authorization,
execution and delivery by Rand) constitutes the valid and binding obligations of East, enforceable against East in accordance
with its terms (subject to the Bankruptcy and Equity Exception).
(b) Neither
the execution and delivery of this Agreement by East or the consummation by East of the Stock Purchase, nor compliance by East
with any of the terms or provisions of this Agreement, will (i) violate any provision of East’s Organizational Documents,
or (ii) assuming that the consents, approvals and filings referred to in Section 5.3 are duly obtained and/or made, (A) violate
any Laws applicable to East or any of its properties or assets, or (B) except as would not, individually or in the aggregate,
have a Material Adverse Effect on East, violate, conflict with, result in a breach of any provision of or the loss of any benefit
under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result
in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the
creation of any Lien upon any of the respective properties or assets of East under, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, deed of trust, license, lease, franchise, agreement or other instrument or obligation
to which East or any of its Subsidiaries is a party or by which any of them or any of their respective properties or assets is
bound.
5.3.
Consents
and Approvals
.
(a) Except
for (i) filings under Section 13(d) and Section 16 of the Exchange Act with the SEC and (ii) compliance with the Investment Company
Act and the rules and regulations promulgated thereunder, no other consents, authorizations, approvals, or exemptions from, or
notices to, or filings with, any Governmental Entity by East are necessary in connection with the execution and delivery by East
of this Agreement or the consummation by East of the Stock Purchase.
(b) Except
for matters covered in the immediately preceding Section 5.3(a), no consents or approvals of any Person are necessary in connection
with the execution and delivery by East of this Agreement or the consummation by East of the Stock Purchase.
5.4.
Regulatory
Matters
. East is not subject to any cease-and-desist or other order or enforcement action issued by, or is a party to any
written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking
to, or is subject to any order or directive by, or has been ordered to pay any civil money penalty by, or has been a recipient
of any supervisory letter from, or has adopted any policies, procedures or board resolutions at the request or suggestion of,
any SRO or Governmental Entity that currently restricts in any material respect the conduct of its business, or that in any material
manner relates to its credit, risk management or compliance policies, its internal controls, its management or its business, or
would in any way adversely affect the Stock Purchase (each item in this sentence, a “
East Regulatory Agreement
”),
nor has East been advised by any SRO or Governmental Entity that it is considering issuing, initiating, ordering, or requesting
any such East Regulatory Agreement.
5.5.
Broker’s
Fees
. None of East or any of its Subsidiaries, nor any of their respective officers or directors, has employed any broker
or finder or incurred any liability for any broker’s fees, commissions or finder’s fees in connection with the Stock
Purchase.
5.6.
Legal
Proceedings
.
(a) Except
as would not, individually or in the aggregate, have a Material Adverse Effect on East, neither East nor any of its Affiliates
is a party to any, and there are no pending or, to East’s knowledge, threatened, legal, administrative, arbitral or other
proceedings, claims, actions, suits or governmental or regulatory investigations of any nature against East or any of its Affiliates
or to which its assets are subject.
(b) Except
as would not, individually or in the aggregate, have a Material Adverse Effect on East, there is no judgment, settlement agreement,
order, injunction, decree or regulatory restriction imposed upon East or any of its Subsidiaries or any of their respective assets
(or that, upon consummation of the Stock Purchase, would apply to Rand or its Subsidiary).
5.7.
State
Takeover Laws
. No Takeover Statute under the laws of the State of Delaware applies to East in connection with the Stock Purchase.
5.8.
East
Information
. The information relating to East that is provided by East or its representatives for inclusion in the Proxy Statement,
or in any application, notification or other document filed with any other SRO or Governmental Entity in connection with the Stock
Purchase, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
therein, in light of the circumstances in which they are made, not misleading.
5.9.
Sufficiency
of Funds
. East has sufficient immediately available funds in cash or cash equivalents, or availability under lines of credit
in effect, in each case as necessary to pay the full amount of the Cash Consideration and any other amounts required to be paid
by East under this Agreement, together with expenses incurred by East or its Affiliates in connection with the preparation, negotiation
and execution of this Agreement and the Stock Purchase, and to effect the consummation of the Stock Purchase.
5.10.
No
Arrangements with Management or Stockholders
. Other than this Agreement, as of the date hereof, there are no binding contracts,
undertakings, commitments, agreements or obligations or understandings, whether written or oral, between East or any of its Affiliates,
on the one hand, and any member of Rand’s management or Rand Board, or any Rand Stockholder, on the other hand, relating
to the Stock Purchase.
5.11.
Securities
Laws Matters
.
(a) East
is an “Accredited Investor” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. East agrees
to furnish any additional information requested by Rand to assure compliance with applicable U.S. federal and state securities
laws in connection with the Stock Purchase. The Purchased Shares will be acquired by East for its own account for investment purposes,
not as a nominee or agent, and not with a view to or in connection with the public sale or public distribution of any part thereof,
without prejudice, however, subject to East’s right at all times to sell or otherwise dispose of all or any part of the
Purchased Shares at any time pursuant to an effective registration statement under the Securities Act and applicable state securities
laws, or under an exemption from such registration available under the Securities Act and other applicable state securities laws.
East is not acting as an agent, representative, intermediary, nominee, derivative counterparty or in a similar capacity for any
other Person, nominee account or beneficial owner, whether a natural person or entity.
(b) East
understands that Purchased Shares are restricted securities within the meaning of Rule 144 under the Securities Act; and that
Purchased Shares are not registered and must be held indefinitely unless they are subsequently registered or an exemption from
such registration is available.
(c) East
is able to bear the economic risk of holding the Purchased Shares for an indefinite period (including total loss of its investment),
and has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and
risk of its investment in the Purchased Shares.
(d) East
further understands that (i) each certificate representing Purchased Shares shall be stamped or otherwise imprinted with a legend
substantially in the following form or (ii) with respect to any Purchased Shares held in book entry form, Rand shall cause its
transfer agent to apply a legend substantially in the following form to such Purchased Shares:
THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR
UNDER THE SECURITIES LAWS OF ANY STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND NEITHER
THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT AS PERMITTED
UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO AN EFFECTIVE REGISTRATION OR AN EXEMPTION FROM REGISTRATION
WHICH, IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO RAND, IS AVAILABLE. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED
TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE SECURITIES REPRESENTED HEREBY ARE SUBJECT
TO A SHAREHOLDER AGREEMENT, DATED AS ________, BY AND BETWEEN EAST ASSET MANAGEMENT, LLC AND RAND CAPITAL CORPORATION, A COPY
OF WHICH IS ON FILE WITH RAND CAPITAL CORPORATION.
The
legend set forth above shall be removed by Rand from any certificate evidencing Purchased Shares upon delivery to Rand of an opinion
by counsel, reasonably satisfactory to Rand, that a registration statement under the Securities Act is at that time in effect
with respect to the legend security or that such security can be freely transferred in a public sale without such a registration
statement being in effect and that such transfer will not jeopardize the exemption or exemptions from registration pursuant to
which Rand issued the shares of Rand Common Stock to East.
5.12.
Certain
Regulatory Matters
. As of the date of this Agreement, East is not, and as of the Closing Date, East will not be, (i) relying
on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act for an exclusion from the definition of “investment
company” under the Investment Company Act or (ii) otherwise required to be registered as an “investment company”
under the Investment Company Act.
5.13.
Contributed
Investment Assets; Title to Contributed Investment Assets
.
(a) Except
as set forth in Section 5.13(a) of the East Disclosure Schedule, East is the sole owner and holder of the Contributed Investment
Assets and East has good and marketable title and all legal and beneficial ownership interest in and to all of the Contributed
Investment Assets, free and clear of any Liens (but subject to the Contributed Loan Documents and Liens arising under applicable
Law). Except as set forth in Section 5.13(a) of East Disclosure Schedule, none of the Contributed Loans are subject to a participation
or other participating or other interest of any nature whatsoever pursuant to which East has, or prior to the Closing Date will
have, participated its interests (or sold a participating or other interest) in such Contributed Loan.
(b) Except
as set forth in Section 5.13(b) of East Disclosure Schedule, there are no actions, suits, claims or proceedings pending in which
one of the Borrowers has (i) filed, or consented (by answer or otherwise) to the filing against it, of a petition for relief under
any bankruptcy or insolvency law of any jurisdiction, (ii) made an assignment for the benefit of its creditors, (iii) consented
to the appointment of a custodian, receiver, trustee, liquidator or other judicial officer with similar power over itself or any
substantial part of its property, (iv) been adjudicated by a court to be insolvent, or (v) taken corporate or other entity action
for the purpose of authorizing any of the foregoing. Neither East nor, to East’s knowledge, any Borrower is in breach of
or under default pursuant to the terms, conditions or provisions of, any Contributed Loan Documents. No event or condition exists
that constitutes or, after notice or lapse of time or both, will constitute, a breach, violation or default on the part of East
or any of its Subsidiaries or, to East’s knowledge, any other party thereto under any Contributed Loan Document. There are
no disputes pending or, to East’s knowledge, threatened with respect to any Contributed Loan Document.
(c) Except
as set forth in Section 5.13(c) of the East Disclosure Schedule, each Contributed Loan complies in all material respects, and
did comply as of the date on which it was originated, with applicable Laws.
(d) The
obligations of each Borrower with respect to the applicable Contributed Loans are not subject to any right of rescission, setoff,
counterclaim or defense, including the defense of usury, and the operation of any of the terms of any of the Contributed Loan
Documents, or the exercise of any right thereunder, will not render such Contributed Loan Document unenforceable in whole or in
part or subject to any right of rescission, setoff, counterclaim or defense, including the defense of usury, and East has not
received written notice of the assertion of any such right of rescission, setoff, counterclaim or defense asserted with respect
thereto.
(e) Complete
and correct copies of all the Contributed Loan Documents and Contributed Loan Files, including all material modifications, amendments
and supplements thereto, have been made available to Rand prior to the date hereof. Except as set forth in such documents or files
provided to Rand, (1) the Contributed Loan Documents (A) have not been modified in any material respect, satisfied or canceled
in whole or in part (except for repayments occurring after the date of the Contributed Loan Schedule), or subordinated to any
other indebtedness of the applicable Borrower and (B) are not subject to any release or compliance waiver that is currently in
effect as to any provision thereof (or, if such release or compliance waiver exists, was made available to Rand), and (2) except
to the extent permitted under the terms of the applicable Contributed Loan Documents, (I) no underlying obligor with respect to
the Contributed Loan Documents has been released from liability, and (II) no Contributed Loan Collateral has been released from
the Liens granted under the Contributed Loan Documents.
(f) None
of the Contributed Loan Notes has any marks or notations indicating that it has been pledged, assigned or otherwise conveyed to
any Person.
(g) As
of the date hereof, except as set forth on Section 5.13(g) of the East Disclosure Schedule, no Contributed Loan is more than thirty
(30) days delinquent in the payment of interest or principal therein.
(h) Each
Contributed Loan Document to which East is a party constitutes the legal, valid and binding obligations of East and, to the knowledge
of East, each Borrower party thereto, enforceable against East and, to the knowledge of East, each Borrower party thereto, in
accordance with their respective terms (subject to the Bankruptcy and Equity Exception).
(i) The
Contributed Loan Schedule is accurate in all material respects.
(j) Except
as set forth in Section 5.13(j) of the East Disclosure Schedule, no Consent of any Person is required to sell, assign, transfer,
convey, contribute or deliver, or in connection with selling, assigning, transferring, conveying, contributing or delivering,
a Contributed Investment Asset to Rand pursuant to the Stock Purchase.
Article
VI
COVENANTS
RELATING TO CONDUCT OF BUSINESS
6.1.
Conduct
of Businesses Prior to the Closing
. Except as expressly contemplated by or permitted by this Agreement or with the prior written
consent of the other Party, during the period from the date of this Agreement to the Closing Date, (a) Rand shall, and shall cause
its Subsidiary to, (i) conduct its business in the ordinary course, as such business is being conducted as of the date hereof,
(ii) use reasonable best efforts to maintain and preserve intact its business organization and advantageous business relationships
and retain the services of its key officers and key employees and (iii) not take or omit to take any action that would reasonably
be expected to have a Material Adverse Effect, and (b) both of Rand and East shall, and shall cause each of its respective Subsidiaries
or Affiliates to, take no action that is intended to or would reasonably be expected to adversely affect or delay the ability
of Rand or East either to obtain any necessary approvals of any SRO or Governmental Entity required for the Stock Purchase or
to perform its covenants and agreements under this Agreement or to consummate the Stock Purchase.
6.2.
Rand
Forbearances
. During the period from the date of this Agreement to the Closing Date, except as expressly contemplated or permitted
by this Agreement, or as provided on Section 6.2 to the Rand Disclosure Schedule, Rand shall not, and shall not permit its Subsidiary
to, without the prior written consent of East (which consent shall not be unreasonably withheld, conditioned or delayed):
(a) other
than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money, assume, guarantee,
endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other
entity, or, make any loan or advance or capital contribution to, or investment in, any Person;
(b) (i)
adjust, split, combine or reclassify any of its capital stock;
(ii)
make, declare or pay any dividend, other than (A) any regular quarterly dividend consistent with past practice and (B)
dividends paid by the SBIC Subsidiary to Rand;
(iii) make
any other distribution on, or directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital stock or
any securities or obligations convertible (whether currently convertible or convertible only after the passage of time or the
occurrence of certain events) into or exchangeable for any shares of its capital stock; or
(iv) grant
any stock options or restricted shares under any equity incentive plan of Rand, or grant any individual, corporation or other
entity any right to acquire any shares of its capital stock, or issue any additional shares of capital stock or other securities;
(c) except
as required under any Rand Contract or Rand Benefit Plan existing as of the date hereof or as required by applicable Law, (i)
increase in any material manner the compensation or benefits of any of Rand Employees, (ii) become a party to, establish, amend,
commence participation in, terminate or commit itself to the adoption of any Rand Benefit Plan or plan, agreement or arrangement
which would be a Rand Benefit Plan if in effect on the date hereof, or (iii) hire any senior management employee or terminate
the employment of any senior management employee other than for cause;
(d) other
than in the ordinary course of business consistent with past practice with respect to securities of Portfolio Companies, sell,
transfer, pledge, lease, license, mortgage, encumber or otherwise dispose of any material amount of its properties or assets (including
pursuant to securitizations) to any individual, corporation or other entity other than a Subsidiary or cancel, release or assign
any material amount of indebtedness to any such Person or any claims held by any such Person, in each case other than pursuant
to contracts in force at the date of this Agreement;
(e) other
than the amendment of the Rand Certificate to increase the number of authorized shares of Rand Common Stock as described in Section
7.3(a)(ii), amend the Rand Certificate or the Rand Bylaws or the Organizational Documents of the SBIC Subsidiary, or take any
action to exempt any person or entity (other than East or any of its Subsidiaries) or any action taken by any person or entity
from any Takeover Statute or similarly restrictive provisions of its Organizational Documents;
(f) take
any action or willfully fail to take any action that is intended or may reasonably be expected to result in any of the conditions
to the Stock Purchase set forth in Article VIII not being satisfied;
(g) incur
any capital expenditures that would exceed $25,000 individually or $75,000 in the aggregate;
(h) commence
or settle any material Claims;
(i) amend,
terminate, cancel, renew or agree to any material amendment of, or change in or waiver under any Rand Material Contract;
(j) make
any material change to its principles, practices or methods of accounting, except (i) as required by GAAP (or any interpretation),
(ii) as required by a change in applicable Law, or (iii) recommended by the audit committee of the Rand Board;
(k) enter
into any material transaction other than in the ordinary course of business consistent with past practice; or
(l) agree,
resolve to or commit to do, or publicly announce an intention to do, any of the foregoing.
6.3.
East
Forbearances
. During the period from the date of this Agreement to the Closing Date, except as expressly contemplated or permitted
by this Agreement, or as provided on Section 6.3 to the East Disclosure Schedule, East shall not, and shall not permit any of
its Subsidiaries to, without the prior written consent of Rand (which consent shall not be unreasonably withheld, conditioned
or delayed):
(a) sell,
transfer, pledge, lease, license, mortgage, encumber or otherwise dispose of any Contributed Investment Asset to any individual,
corporation or other entity other than a Subsidiary or cancel, release or assign, or sell or transfer a participating or other
interest in, any material amount of indebtedness under a Contributed Loan;
(b) take
any action or willfully fail to take any action that is intended or may reasonably be expected to result in any of the conditions
to the Stock Purchase set forth in Article VIII not being satisfied;
(c) commence
or settle any material Claims relating to the Contributed Investment Assets;
(d) amend,
terminate, cancel, renew or agree to any material amendment of, or change in or waiver under any, Contributed Loan Document; or
(e) agree,
resolve to or commit to do, or publicly announce an intention to do, any of the foregoing.
Article
VII
ADDITIONAL
AGREEMENTS
7.1.
Regulatory
and Other Matters
.
(a) The
Parties shall cooperate with each other and use their respective commercially reasonable efforts to promptly prepare and file
all necessary documentation, to effect all applications, notices, petitions and filings, to obtain as promptly as practicable
all Permits of all third parties and Governmental Entities and Consents that are necessary or advisable to consummate the Stock
Purchase and defend any lawsuits or other Claims challenging this Agreement or the consummation of the Stock Purchase, and to
comply with the terms and conditions of all such Permits of all such third parties or Governmental Entities. Each of the Parties
shall have the right to review in advance, and, to the extent practicable, each will consult with the other Party on, in each
case subject to applicable Laws relating to the confidentiality of information, all information relating to Rand or East, as the
case may be, and any of their respective Subsidiaries, that appear in any filing made with, or written materials submitted to,
any third party or any Governmental Entity in connection with the Stock Purchase. In exercising the foregoing right, each of the
Parties shall act reasonably and as promptly as reasonably practicable. The Parties shall consult with each other with respect
to the obtaining of all Permits of all third parties and Governmental Entities necessary or advisable to consummate the Stock
Purchase and each Party will keep the other apprised of the status of matters relating to completion of the Stock Purchase.
(b) Without
in any way limiting the foregoing Section 7.1(a), as promptly as reasonably practicable after the date of this Agreement, Rand
shall prepare (with East’s reasonable cooperation), and use its commercially reasonable efforts to file, as soon as reasonably
practicable following the date of this Agreement, the preliminary Proxy Statement with the SEC. No filing of, or amendment or
supplement to, the Proxy Statement as it relates to East or the Stock Purchase will be made by Rand without providing East a reasonable
opportunity to review and comment thereon, which comments Rand will consider for inclusion in good faith. In connection with the
foregoing, each of East and Rand shall, upon request, furnish, and cause its accountants and other agents and service providers
to furnish to the other and the other’s agents, all information concerning itself, its Subsidiaries, members, managers,
directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with the
Proxy Statement. Rand will advise East promptly after it receives any oral or written request by the SEC for amendment of the
Proxy Statement or comments thereon and responses thereto or requests by the SEC for additional information, in each case to the
extent related to East or the Stock Purchase, and will promptly provide East with copies of any written communication from the
SEC or any state securities commission and a reasonable opportunity to participate in the responses thereto. If, at any time prior
to the Closing Date, any information relating to Rand or East, or any of their respective Affiliates, officers or directors, should
be discovered by Rand or East that should be set forth in an amendment or supplement to the Proxy Statement, so that the Proxy
Statement would not contain any misstatement of a material fact or omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not misleading, the Party that discovers such information shall
promptly notify the other Party hereto and an appropriate amendment or supplement describing such information shall promptly be
filed with the SEC and, to the extent required under applicable Law, disseminated to Rand Stockholders; provided that the delivery
of such notice and the filing of any such amendment or supplement shall not affect or be deemed to modify any representation or
warranty made by either Party hereunder or otherwise affect the remedies available hereunder to either Party.
(c) Promptly
following the date hereof, Rand shall inform the SBA of the Stock Purchase take such actions in accordance with SBA regulations
and guidelines, and make such filings, as may be reasonably necessary to obtain the SBA’s approval and/or consent of the
continued effectiveness of the SBA licenses held by Rand or the SBIC Subsidiary (the “
SBA Approval
”)
or to receive confirmation that SBA Approval is not required.
7.2.
Access
to Information
. (a) Upon reasonable notice and subject to applicable Laws relating to the confidentiality of information,
Rand shall, and shall cause its Subsidiary to, afford to the officers, employees, accountants, counsel, advisors, agents and other
representatives of East, reasonable access, during normal business hours during the period prior to the Closing, to all its properties,
books, contracts, commitments and records, and, during such period, Rand shall, and shall cause its Subsidiary to, make available
to East (i) a copy of each report, schedule, registration statement and other document filed or received by it during such period
pursuant to the requirements of federal securities laws (other than reports or documents that Rand is not permitted to disclose
under applicable Law) and (ii) all other information concerning its business, properties and personnel as East may reasonably
request that is relevant to the Stock Purchase. Neither Rand nor its Subsidiary shall be required to provide access to or to disclose
information where such access or disclosure would jeopardize the attorney-client privilege of Rand or its Subsidiary or contravene
any applicable Law, fiduciary duty or binding agreement entered into prior to the date of this Agreement. The Parties shall make
appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply.
(b) Upon
reasonable notice and subject to applicable Laws relating to the confidentiality of information, East shall, and shall cause each
of its Subsidiaries or Affiliates, as applicable, to, afford to the officers, employees, accountants, counsel, advisors, agents
and other representatives of Rand, reasonable access, during normal business hours during the period prior to the Closing, to
all its properties, books, contracts, commitments and records relating to the Contributed Investment Assets and, during such period,
East shall, and shall cause its Subsidiaries or Affiliates, as applicable, to, make available to Rand all information concerning
the Contributed Investment Assets or its business, properties and personnel as Rand may reasonably request that is relevant to
the Stock Purchase. Neither East nor any of its respective Subsidiaries shall be required to provide access to or to disclose
information where such access or disclosure would jeopardize the attorney-client privilege of East or any of its Subsidiaries
or Affiliates, as applicable, or contravene any applicable Law, fiduciary duty or binding agreement entered into prior to the
date of this Agreement. The Parties shall make appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
(c) Rand
shall file all periodic reports required to be filed by it between the date hereof and the Closing. Each such filing shall be
prepared in accordance with the applicable forms, rules and regulations of the SEC and shall satisfy the standard set forth in
Section 4.5(c) for Rand SEC Reports.
(d) All
information and materials provided pursuant to this Agreement shall be subject to (i) the provision regarding confidentiality
set forth in Section 8 of the Letter of Intent entered into by and among Rand, East and Callodine Capital Management LP as of
November 1, 2018 and (ii) the Non-Disclosure Agreement entered into by and among Rand, East and Callodine Capital Management LP
as of March 26, 2018 (together, the “
Confidentiality Agreement
”).
(e) No
investigation by a Party hereto or its representatives shall affect the representations and warranties of the other Party set
forth in this Agreement.
7.3.
Rand
Stockholder Approvals
.
(a) Subject
to the earlier termination of this Agreement in accordance with Article IX, as promptly as reasonably practicable following Rand’s
receipt of notice from the SEC that the SEC has completed its review of the Proxy Statement, Rand, acting through Rand Board,
shall duly call, give notice of, convene and hold the Rand Stockholder Meeting for the purpose of obtaining the following stockholder
approvals (collectively, such stockholder approvals, the “
Rand Stockholder Approvals
”):
(i) approval
and adoption of a proposal to issue Rand Common Stock at a price that is below the then current net asset value per share of the
Rand Common Stock in connection with the Stock Purchase by the 1940 Act Majority and the 1940 Act Majority excluding Rand Common
Stock held by Affiliates of Rand, which, for this purpose, includes Rand’s directors, officers, employees and five percent
stockholders in accordance with Section 15 of the Investment Company Act;
(ii) approval
and adoption of an amendment to the Rand Certificate to increase the number of shares of authorized Rand Common Stock to 100,000,000
shares of Rand Common Stock by an affirmative vote of holders of a majority of the outstanding shares of Rand Common Stock; and
(iii) approval
and adoption of a proposal to approve, for purposes of complying with NASDAQ listing rules 5635(a) and 5635(b), the Stock Purchase
by affirmative vote of a majority of the votes cast at the Rand Stockholder Meeting.
(b) In
connection therewith, Rand Board shall be permitted to adjourn, delay or postpone Rand Stockholder Meeting in accordance with
applicable Law (but not beyond the Outside Date) (i) to the extent necessary to allow reasonable additional time for the filing
and mailing of any supplemental or amended disclosure which Rand Board has determined in good faith after consultation with outside
counsel is reasonably likely to be necessary or appropriate under applicable Law and for such supplemental or amended disclosure
to be disseminated and reviewed by Rand Stockholders prior to Rand Stockholder Meeting, (ii) if there are insufficient shares
of Rand Common Stock represented (either in person or by proxy) to constitute a quorum necessary to conduct the business of the
Rand Stockholder Meeting, or (iii) to allow reasonable additional time to solicit additional proxies to the extent Rand Board
or any committee thereof reasonably believes necessary in order to obtain Rand Stockholder Approvals and the Rand Board determines
that such delay or postponement is consistent with its fiduciary duties. Unless the Rand Board has made an Adverse Recommendation
Change, Rand shall, through Rand Board, make the Rand Board Recommendation, and shall include such Rand Board Recommendation in
the Proxy Statement, and use its commercially reasonable efforts to (x) solicit from Rand Stockholders proxies in favor of the
Rand Stockholder Approvals, and (y) take all other action necessary or advisable to secure the Rand Stockholder Approvals.
(c) Except
as expressly permitted in Section 7.7(e), the Rand Board shall not (i) withhold, withdraw or modify or qualify, or propose publicly
to withhold, withdraw or modify or qualify, in a manner adverse to East, the Rand Board Recommendation, (ii) fail to reaffirm
the Rand Board Recommendation or fail to publicly state that the Stock Purchase and this Agreement are in the best interests of
the Rand Stockholders, within fifteen (15) Business Days after East requests in writing that such action be taken, (iii) fail
to publicly announce, within fifteen (15) Business Days after a tender offer or exchange offer relating to the securities of Rand
shall have been commenced, a statement disclosing that the Rand Board recommends rejection of such tender offer or exchange offer,
(iv) take or resolve to take any other action or make any other statement in connection with the Rand Stockholder Meeting inconsistent
with the Rand Board Recommendation or (v) approve, determine to be advisable, or recommend, or propose publicly to approve, determine
to be advisable, or recommend, any Competing Proposal (any of the foregoing (i) through (v) being referred to as an “
Adverse
Recommendation Change
”).
7.4.
Indemnification;
Directors’ and Officers’ Insurance
.
(a) In
the event of any threatened or actual Claim, including any such Claim in which any individual who is now, or has been at any time
prior to the date of this Agreement, or who becomes prior to the Closing, a director or officer of Rand or its Subsidiary or who
is or was serving at the request of Rand or its Subsidiary as a director or officer of another Person (the
“Indemnified
Parties”
), is, or is threatened to be, made a party based in whole or in part on, or arising in whole or in part
out of, or pertaining to (i) the fact that he or she is or was a director or officer of Rand or its Subsidiary prior to the Closing
or (ii) this Agreement or the Stock Purchase, whether asserted or arising before or after the Closing, the Parties shall cooperate
and use their commercially reasonable efforts to defend against and respond thereto. All rights to indemnification and exculpation
from liabilities for acts or omissions occurring at or prior to the Closing now existing in favor of any Indemnified Party as
provided in the Organizational Documents, and any existing indemnification agreements set forth in Section 7.4 of the Rand Disclosure
Schedule, shall survive the Stock Purchase as a contractual obligation of Rand and shall continue in full force and effect in
accordance with their terms following the Closing Date, and shall not be amended, repealed or otherwise modified in any manner
that would adversely affect the rights thereunder of such individuals for acts or omissions occurring at or prior to the Closing.
(b) Rand
shall, to the fullest extent permitted by applicable Law, indemnify, defend and hold harmless, and provide advancement of expenses
(subject to an undertaking, in such form as may be required under applicable Law as in effect at the time of the execution thereof,
to reimburse the portion (if any) of any expenses advanced to the Indemnified Party relating to Claims as to which it shall ultimately
be adjudged that the statutory standard of conduct has not been met by the Indemnified Party for entitlement to such indemnification)
to, each Indemnified Party against all losses, claims, damages, costs, expenses, liabilities or judgments or amounts that are
paid in settlement of or in connection with any Claim based in whole or in part on or arising in whole or in part out of the fact
that such Person is or was a director or officer of Rand or its Subsidiary, and pertaining to any matter existing or occurring,
or any acts or omissions occurring, at or prior to the Closing, whether asserted or claimed prior to, or at or after, the Closing
(including matters, acts or omissions occurring in connection with the approval of this Agreement and the consummation of the
Stock Purchase) or taken at the request of East pursuant to Section 7.5 hereof.
(c) For
a period of not less than six (6) years from the Closing Date, Rand shall, at its sole cost, either (i) maintain officers’
and directors’ liability insurance covering the individuals serving as officers and directors of Rand or its Subsidiary
immediately prior to the Closing in an amount not less than, and on terms no less favorable in the aggregate to, such officers
and directors of Rand or its Subsidiary than under the directors’ and officers’ liability insurance policy maintained
by Rand as of the Closing Date or (ii) cause the individuals serving as officers and directors of Rand or its Subsidiary immediately
prior to the Closing to be covered for a period of six (6) years from the Closing Date by the directors’ and officers’
liability insurance policy maintained by Rand through the purchase of so-called “tail” insurance (provided that Rand
may substitute therefor policies of at least the same coverage and amounts containing terms and conditions that are not less advantageous
than such policy) with respect to acts or omissions occurring prior to the Closing that were committed by such officers and directors
in their capacity as such. In connection with the foregoing subclause (c)(ii), Rand shall not be required to expend in the aggregate
for the entire six (6)-year period referred to above an amount in excess of 300% of the annual premiums currently paid by Rand
for such insurance.
(d) The
provisions of this Section 7.4 shall survive the Closing and are intended to be for the benefit of, and shall be enforceable by,
each Indemnified Party and his or her heirs and representatives.
7.5.
Additional
Agreements
. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of
this Agreement or to vest any Party with full title to all properties, assets, rights, approvals, immunities and franchises of
another Party, the proper officers and directors of each Party and their respective Subsidiaries shall take all such necessary
action as may be reasonably requested by such Party.
7.6.
Advice
of Changes
. Each of East and Rand shall promptly advise the other Party of any change or event (i) having or reasonably likely
to have a Material Adverse Effect on it, or (ii) that it believes would or would be reasonably likely to cause or constitute a
breach of any of its representations, warranties or covenants contained in this Agreement that would result in the conditions
to the Closing set forth in Article IX not being satisfied; provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the Parties (or remedies with respect thereto) or the conditions to the obligations of
the Parties under this Agreement.
7.7.
No
Solicitation
.
(a) Subject
to Section 7.7(d), from and after the date hereof, Rand shall, and shall cause its representatives to, (i) immediately cease and
cause to be terminated any existing solicitation of, or discussions or negotiations relating to any Competing Proposal or any
inquiry, discussion, offer or request that could reasonably be expected to lead to a Competing Proposal and (ii) terminate any
data room access (or other access to diligence) of any Person relating to any Competing Proposal.
(b) Until
the earlier of the Closing or termination of this Agreement, Rand shall, as promptly as reasonably practicable, and in any event
within two (2) Business Days of receipt by Rand or any of its representatives of any Competing Proposal or any inquiry that could
reasonably be expected to lead to a Competing Proposal that was not solicited in breach of Section 7.7(a), deliver to East a written
notice setting forth: (A) the identity of the Person making such Competing Proposal or inquiry (except to the extent prohibited
by the terms of any confidentiality agreement entered into prior to the date of this Agreement) and (B) the material terms and
conditions of any such Competing Proposal or an unredacted copy of any documents in connection with such Competing Proposal. Rand
shall keep East reasonably informed of any amendment or modification of any such Competing Proposal on a prompt basis, and in
any event within two (2) Business Days.
(c) Except
as otherwise provided in this Agreement (including Section 7.7(d)), until the earlier of Closing or termination of this Agreement
in accordance with its terms, Rand and its Subsidiary shall not, and Rand shall cause its representatives not to, directly or
indirectly, (i) initiate, solicit, propose, induce or knowingly encourage, facilitate or assist the making of any proposal or
offer that constitutes, or could reasonably be expected to lead to, a Competing Proposal, (ii) engage in negotiations or substantive
discussions with, or furnish any material nonpublic information to, or enter into any agreement, arrangement or understanding
with, any Person relating to a Competing Proposal or any inquiry or proposal that could reasonably be expected to lead to a Competing
Proposal or (iii) approve, endorse or recommend any proposal that constitutes, or could reasonably be expected to lead to, a Competing
Proposal; provided however, that notwithstanding the foregoing, Rand (A) may inform Persons of the provisions contained in this
Section 7.7 and (B) grant a waiver of, or terminate, any “standstill” or similar obligation of any Person with respect
to Rand in order to allow such Person to confidentially submit a Competing Proposal.
(d) Notwithstanding
anything to the contrary contained in this Agreement, at any time prior to the date that the Rand Stockholder Approval is obtained,
in the event that Rand (or its representatives on Rand’s behalf) receives a Competing Proposal, (i) Rand and its representatives
may contact such Person to clarify the terms and conditions thereof (without the Rand Board being required to make the determination
in clause (ii) of this Section 7.7(d)) and (ii) Rand and the Rand Board and its representatives may engage in negotiations or
substantive discussions with, or furnish any information and other access to, any Person making such Competing Proposal and its
representatives and Affiliates if the Rand Board determines in good faith (after consultation with its outside financial advisors
and legal counsel) that (A) such Competing Proposal either constitutes a Superior Proposal or could reasonably be expected to
lead to a Superior Proposal and (B) failure to consider such Competing Proposal would reasonably be expected to be inconsistent
with the fiduciary duties of the directors of Rand under applicable Law; provided, that (x) such Competing Proposal did not result
from any breach of any of the provisions set forth in this Section 7.7, (y) prior to furnishing any non-public information concerning
Rand, Rand receives from such Person, to the extent such Person is not already subject to a confidentiality agreement with Rand,
a confidentiality agreement containing confidentiality terms that are not less favorable in the aggregate to Rand than those contained
in the Confidentiality Agreement (unless Rand offers to amend the Confidentiality Agreement to reflect such more favorable terms)
(an “
Acceptable Confidentiality Agreement
”) and (z) Rand shall promptly provide or make available to
East any material written non-public information concerning Rand that it provides to such Person given such access that was not
previously made available to East or its representatives concurrently with the delivery of such material non-public information
to such Person.
(e) Except
as otherwise provided in this Agreement, (i) the Rand Board shall not effect an Adverse Recommendation Change, and (ii) the Rand
Board shall not approve or recommend, or allow Rand to execute or enter into, any letter of intent, memorandum of understanding
or definitive stock purchase agreement, merger agreement or similar agreement with respect to any Competing Proposal (other than
an Acceptable Confidentiality Agreement); provided however, that notwithstanding anything in this Agreement to the contrary, at
any time prior to the receipt of the Rand Stockholder Approval, the Rand Board may (x) make an Adverse Recommendation Change solely
as a result of an Intervening Event if the Rand Board determines in good faith (after consultation with its outside financial
advisor and legal counsel) that failure to make an Adverse Recommendation Change would reasonably be expected to be inconsistent
with the fiduciary duties of the Rand Board under applicable Law, or (y) if Rand has received a Competing Proposal that the Rand
Board has determined in good faith (after consultation with its outside financial advisor and legal counsel) constitutes a Superior
Proposal, authorize, adopt or approve such Superior Proposal and cause or permit Rand to enter into a definitive agreement with
respect to such Superior Proposal concurrently with the termination of this Agreement in accordance with Section 9.1(f), but in
each case only after providing the Notice of Adverse Recommendation or Notice of Superior Proposal, as applicable, and entering
into good faith negotiations as required by Section 7.7(f).
(f)
Notwithstanding anything to the contrary in this Agreement, no Adverse Recommendation Change may be made and no termination of
this Agreement pursuant to Section 9.1(f) may be effected, in each case until 5:00 p.m. on fifth (5
th
) calendar day
following receipt of written notice from Rand to East advising East that Rand intends to make an Adverse Recommendation Change
(a “
Notice of Adverse Recommendation
”) or terminate this Agreement pursuant to Section 9.1(f) (a “
Notice
of Superior Proposal
”) and specifying the reasons therefor, including, if the basis of the proposed action is a
Superior Proposal, the material terms and conditions of any such Superior Proposal. At the option of East, the Parties shall negotiate
in good faith during such period to amend this Agreement in such a manner that the offer that was determined to constitute a Superior
Proposal no longer constitutes a Superior Proposal. In determining whether to make an Adverse Recommendation Change or in determining
whether a Competing Proposal constitutes a Superior Proposal, the Rand Board shall take into account any revisions to the terms
of this Agreement proposed in writing by East in response to a Notice of Adverse Recommendation, a Notice of Superior Proposal
or otherwise. Any amendment to such Superior Proposal shall require a new Notice of Superior Proposal and Rand shall be required
to comply again with the requirements of this Section 7.7(f); provided, however, that the five (5) calendar day requirement shall
be changed to three (3) calendar days.
(g)
Notwithstanding the foregoing, nothing in this Agreement shall restrict Rand from taking or disclosing a position contemplated
by Rules 14d-9 or 14e-2(a) under the Exchange Act, or otherwise making disclosure to comply with applicable Law (it being agreed
that a “stop, look and listen” communication by the Rand Board to Rand Stockholders pursuant to Rule 14d-9(f) under
the Exchange Act or a factually accurate public statement by Rand that describes Rand’s receipt, as applicable, of a Competing
Proposal and the operation of this Agreement with respect thereto shall not be deemed to be an Adverse Recommended Change); provided
that the foregoing shall in no way eliminate or modify the effect that any such disclosure or communication would otherwise have
under this Agreement.
7.8.
Takeover Statutes
. The Parties shall use their respective commercially reasonable efforts (a) to take all action necessary
so that no Takeover Statute is or becomes applicable to the Stock Purchase, and (b) if any such Takeover Statute is or becomes
applicable to any of the foregoing, to take all action necessary so that the Stock Purchase may be consummated as promptly as
reasonably practicable on the terms contemplated by this Agreement and otherwise to eliminate or minimize the effect of such Takeover
Statute on the Stock Purchase.
7.9.
Stockholder Litigation
. Between the date of this Agreement and the Closing, Rand shall (a) provide prompt notice to East
of all stockholder litigation relating to this Agreement or the Stock Purchase, and (b) consult with East regarding the defense
and settlement of any litigation outstanding as of the date of this Agreement.
7.10.
NEWCO Registration as an Investment Adviser
. NEWCO shall, and East shall cause NEWCO to, within five (5) Business Days
after receipt of the Rand Stockholder Approvals, file a Form ADV with the SEC and make any other filing with any other Governmental
Entity in order for NEWCO to become registered as an investment adviser under the Investment Advisers Act. NEWCO shall use its
best efforts to, and East cause NEWCO to use its best efforts to, become, and to take any and all actions necessary to avoid or
eliminate each and every impediment or to fulfill each and every requirement under the Investment Advisers Act or other applicable
Law that may be asserted or required by any Governmental Entity so as to become, registered as an investment adviser under the
Investment Advisers Act as promptly as possible after receipt of the Rand Stockholder Approvals.
7.11.
No Material Change to Management Agreements
. Between the date of this Agreement and the Closing Date, Rand shall not, without
the written consent of East, amend, modify or alter, or agree to amend, modify or alter, either or both of the Management Agreements
in any manner that deviates from the forms of Management Agreements attached to this Agreement.
Article
VIII
CONDITIONS PRECEDENT
8.1.
Conditions to Each Party’s Obligation To Effect the Stock Purchase
. The respective obligations of the Parties to
effect the Stock Purchase shall be subject to the satisfaction at or prior to the Closing of the following conditions:
(a)
Stockholder Approvals
. Rand Stockholder Approvals shall have been obtained.
(b)
Externalization
.
(i)
Approval of Investment Advisory Agreement
. The Investment Advisory Agreement shall have been (1) approved and adopted by
the Rand Board in accordance with Section 15 of the Investment Company Act and the Rand Board shall have recommended that the
Rand Stockholders approve the Investment Management Agreement at a meeting of the Rand Stockholders, and (2) approved by the 1940
Act Majority in accordance with Section 15 of the Investment Company Act.
(ii)
Delivery of Management Agreements
. Each of the Management Agreements shall have been duly and validly executed and delivered
by Rand and (assuming due authorization, execution and delivery by NEWCO) shall constitute the valid and binding obligations of
Rand, enforceable against Rand in accordance with their respective terms.
(iii)
Registration of Adviser
. NEWCO shall be registered as an investment adviser under the Investment Advisers Act.
(iv)
Rand Employees
. Rand shall deliver evidence reasonably satisfactory to East that (1) each Employment Agreement has been
terminated effective as of immediately prior to the Externalization and no payments have been or will be made under such Employment
Agreements by Rand or any other party in connection with such termination, and (2) each Rand Employee has been terminated or otherwise
resigned effective as of immediately prior to the Externalization.
(v)
Rand Benefit Plans
. Rand shall have delivered evidence reasonably satisfactory to East that each Rand Benefit Plan has
been terminated effective as of immediately prior to the Externalization and no payments have been or will be made under such
Rand Benefit Plans by Rand or any other party in connection with such termination.
(c)
No Injunctions or Restraints; Illegality
. No order, injunction or decree issued by any court or agency of competent jurisdiction
or other law preventing or making illegal the consummation of the Stock Purchase shall be in effect.
(d)
No Governmental Entity Litigation
. There shall be no pending suit, action or proceeding by any Governmental Entity (i)
challenging the Stock Purchase, seeking to restrain or prohibit the consummation of the Stock Purchase or seeking to obtain from
Rand or East any damages that are material in relation to Rand and its Subsidiary taken as a whole, or (ii) seeking to prohibit
NEWCO or any of its Affiliates from effectively becoming the external investment adviser of Rand and its Subsidiary.
(e)
SBA Matters
. Unless (i) Rand shall have received the SBA Approval or (ii) the SBA has provided confirmation to Rand that
no approval from the SBA is required, in a manner that would allow the SBA Debentures to remain outstanding in accordance with
their respective terms, Rand shall have delivered evidence to East of the payoff of, or the escrowing of funds in an amount sufficient
to payoff, the SBA Debentures in accordance with SBA regulations.
8.2.
Conditions to Obligations of East
. The obligations of East to effect the Stock Purchase is also subject to the satisfaction,
or waiver by East, at or prior to the Closing, of the following conditions:
(a)
Representations and Warranties
. Subject to the standard set forth in Section 8.4, and without giving effect to the impact
of the Closing, the representations and warranties of Rand set forth in this Agreement shall be true and correct as of the date
of this Agreement and as of the Closing as though made on and as of the Closing (except that representations and warranties that
by their terms speak specifically as of the date of this Agreement or another date shall be true and correct as of such date);
and East shall have received a certificate signed on behalf of Rand by the Chief Executive Officer or the Chief Financial Officer
of Rand to the foregoing effect.
(b)
Performance of Obligations of Rand
. Rand shall have performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date; and East shall have received a certificate signed on behalf of Rand
by the Chief Executive Officer or the Chief Financial Officer of Rand to such effect.
(c)
No Material Adverse Effect
. Since the date of this Agreement, no Material Adverse Effect with respect to Rand, or occurrence,
change, event, effect or development that, individually or in combination with any other occurrence, change, event, effect or
development, is or could reasonably be expected to result in, a Material Adverse Effect with respect to Rand, shall have occurred;
and East shall have received a certificate signed on behalf of Rand by the Chief Executive Officer or the Chief Financial Officer
of Rand to such effect.
(d)
Shareholder Agreement
. Rand shall have executed and delivered the Shareholder Agreement.
8.3.
Conditions to Obligations of Rand
. The obligation of Rand to effect the Stock Purchase is also subject to the satisfaction
or waiver by Rand at or prior to the Closing of the following conditions:
(a)
Representations and Warranties of East
. Subject to the standard set forth in Section 8.4, the representations and warranties
of East set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing as though
made on and as of the Closing (except that representations and warranties that by their terms speak specifically as of the date
of this Agreement or another date shall be true and correct as of such date); and Rand shall have received certificates signed
by an officer of East to the foregoing effect.
(b)
Performance of Obligations of East
. East shall have performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing, and Rand shall have received a certificate signed by an officer of East
to such effect.
(c)
Receipt of Consents
. Each Consent set forth on Section 5.13(j) of the East Disclosure Schedule shall have been obtained.
(d)
Delivery of Management Agreements by NEWCO
. Each of the Management Agreements shall have been duly and validly executed
and delivered by NEWCO and (assuming due authorization, execution and delivery by Rand) shall constitute the valid and binding
obligations of NEWCO, enforceable against NEWCO in accordance with their respective terms.
(e)
Shareholder Agreement
. East shall have executed and delivered the Shareholder Agreement.
8.4.
Standard
. No representation or warranty of Rand contained in Article IV or of East contained in Article V shall be deemed
untrue, inaccurate or incorrect for purposes of Section 8.2(a) or 8.3(a), as applicable, under this Agreement, as a consequence
of the existence or absence of any fact, circumstance or event unless such fact, circumstance or event, individually or when taken
together with all other facts, circumstances or events inconsistent with any representations or warranties contained in Article
IV, in the case of Rand, Article V, in the case of East, has had or would reasonably be expected to have a Material Adverse Effect
with respect to Rand or East, as applicable (disregarding for purposes of this Section 8.4, except in the case of Section 4.8,
all qualifications or limitations set forth in any representations or warranties as to “materiality,” “Material
Adverse Effect” and words of similar import). Notwithstanding the immediately preceding sentence, the representations and
warranties contained in (i) Sections 4.2(a) and (b) shall be deemed untrue and incorrect if not true and correct except to a
de
minimis
extent (relative to Section 4.2(a) or (b), respectively, taken as a whole), and (ii) Sections 4.1(a), 4.3(a), 4.3(c)(i),
4.7, and 4.15, in the case of Rand, Sections 5.1(a), 5.2(a), 5.2(b)(i), 5.5 and 5.12, in the case of East, shall be deemed untrue
and incorrect if not true and correct in all respects.
8.5.
Frustration of Closing Conditions
. Neither Rand, on the one hand, nor East, on the other hand, may rely on the failure
of any condition set forth in Section 8.1, Section 8.2 or Section 8.3, as applicable, to be satisfied if such failure was primarily
caused by the Party relying on such failure to perform any of its material obligations under this Agreement.
Article
IX
TERMINATION AND AMENDMENT
9.1.
Termination
. This Agreement may be terminated at any time prior to the Closing, whether before or after receipt of the
Rand Stockholder Approvals:
(a)
by mutual consent of Rand and East, in a written instrument duly authorized by Rand and East;
(b)
by either Rand or East, if the Stock Purchase shall not have been consummated on or before November 30, 2019 (the “
Outside
Date
”), unless the failure of the Closing to occur by such date shall be due to the failure of the Party seeking
to terminate this Agreement to perform or observe the covenants and agreements of such Party set forth in this Agreement;
(c)
by either Rand or East, at any time prior to the Closing, in the event that Rand shall have failed to obtain the Rand Stockholder
Approvals at the Rand Stockholder Meeting or any adjournment thereof;
(d)
by either of Rand or East (provided that the terminating Party is not then in material breach of any representation, warranty,
covenant or other agreement contained herein), if there shall have been a breach of any of the covenants or agreements or any
of the representations or warranties set forth in this Agreement on the part of Rand, in the case of a termination by East, or
of East, in the case of a termination by Rand, which breach, either individually or in the aggregate, would result in, if occurring
or continuing on the Closing Date, the failure of the conditions set forth in Section 8.2 or 8.3, as the case may be, and which
is not cured within 30 days following written notice to the Party committing such breach or by its nature or timing cannot be
cured within such time period;
(e)
by East, (i) within ten (10) Business Days after the Rand Board shall have effected an Adverse Recommendation Change prior to
receipt of the Rand Stockholder Approvals, or (ii) in the event the Rand Board has approved, or authorized Rand or its Subsidiary
to enter into, a merger agreement, letter of intent, acquisition agreement, stock purchase agreement or other similar agreement
with respect to a Competing Proposal; or
(f)
by Rand, in the event that:
(i)
(A) Rand shall have received a Superior Proposal, (B) subject to Rand’s obligations under Section 7.7(f), the Rand Board
shall have authorized Rand to enter into a definitive agreement to consummate the transaction contemplated by such Superior Proposal,
and (C) concurrently with the termination of this Agreement, Rand pays East the Termination Fee contemplated by Section 9.4 and
enters into the definitive agreement to consummate the transaction contemplated by such Superior Proposal; or
(ii)
the Rand Board shall have effected an Adverse Recommendation Change in accordance with the terms of Section 7.7.
The
Party desiring to terminate this Agreement pursuant to clause (b), (c), (d), (e) or (f) of this Section 9.1 shall give written
notice of such termination to the other Party in accordance with Section 10.2, specifying the provision or provisions hereof pursuant
to which such termination is effected.
9.2.
Effect of Termination
. In the event of termination of this Agreement by any of Rand or East, as provided in Section 9.1,
this Agreement shall become void and have no effect, and none of Rand or East, any of their respective Subsidiaries or any of
the officers or directors of any of them shall have any liability of any nature whatsoever under this Agreement, or in connection
with the Stock Purchase, except that (i) Sections 7.2(d), 9.2, 9.3, 9.4 and Article X shall survive any termination of this Agreement,
and (ii) except as provided in Section 10.9(c), neither Rand nor East shall be relieved or released from any liabilities or damages
arising out of its knowing and intentional breach of any provision of this Agreement. For all purposes of this Agreement, “knowing
and intentional breach” means an act or failure to act undertaken by the breaching party who had actual knowledge that,
and intention that, such party’s act or failure to act would result in or constitute a breach of the Agreement.
9.3.
Fees and Expenses
. All fees and expenses incurred in connection with the Stock Purchase shall be paid by the Party incurring
such fees or expenses.
9.4.
Termination Fee
.
(a)
In the event that this Agreement is terminated pursuant to Section 9.1(e) or Section 9.1(f) then, provided that East was not in
material breach of its representations, warranties, covenants or agreements hereunder at the time of termination, Rand will pay
to East, or to its designee within (x) two (2) Business Days in the event of termination pursuant to Section 9.1(e) or (y) immediately
prior to the time of termination by Rand in the event of termination pursuant to Section 9.1(f), a fee in an amount equal to the
East Expenses of up to $750,000 (such amount, the “
Termination Fee
”) to an account or accounts designated
in writing by East. The right of East to receive the Termination Fee under this Section 9.4(a) shall be East’s sole recourse
in connection with termination of this Agreement pursuant Section 9.1(e) or Section 9.1(f), except in the circumstance where,
at the time of termination of this Agreement under Section 9.1(e) or Section 9.1(f), East had the legal right to terminate this
Agreement under Section 9.1(d) as a result of a knowing and intentional breach of this Agreement by Rand.
(b)
In the event that (i) a Competing Proposal shall have been made or proposed to Rand (and publicly disclosed to the Rand Stockholders)
or otherwise publicly announced, (ii) this Agreement is validly terminated by either East or Rand pursuant to Section 9.1(b) or
(c) or is terminated by East pursuant to Section 9.1(d) (as a result of a material breach of any of the representations, warranties,
covenants or other agreements set forth in this Agreement on the part of Rand), and (iii) within twelve (12) months following
the date of such termination, Rand enters into an agreement for or relating to, and consummates, a Competing Proposal, or otherwise
consummates any Competing Proposal (whether or not such Competing Proposal is the same Competing Proposal referred to in clause
(i), but in each case for purposes of this Section 9.4(b), the references to “fifteen percent (15%)” in the definition
of Competing Proposal shall be deemed references to “fifty percent (50%)”), Rand will pay to East, or to East’s
designee, the Termination Fee within three (3) Business Days of the date on which Rand enters into such agreement or consummates
such Competing Proposal. The right of East to receive the Termination Fee under this Section 9.4(b) shall be East’s sole
recourse in connection with termination of this Agreement pursuant to Section 9.1(b), (c) or (d) (as a result of a material breach
of any of the representations, warranties, covenants or other agreements set forth in this Agreement on the part of Rand), except
for termination of this Agreement by East pursuant to Section 9.1(d) as the result of a knowing and intentional breach of this
Agreement by Rand.
(c)
The Parties acknowledge and hereby agree that in no event shall Rand be required to pay a Termination Fee on more than one occasion,
and that only a single Termination Fee, if payable, shall be paid to East.
(d)
Each of the Parties acknowledges that (i) the agreements contained in this Section 9.4 are an integral part of the Stock Purchase,
(ii) the Termination Fee is not a penalty, but is liquidated damages, in a reasonable amount that will compensate East, in the
circumstances in which the Termination Fee is payable, for the efforts and resources expended and opportunities foregone while
negotiating this Agreement and in reliance on this Agreement and on the expectation of the consummation of the Stock Purchase,
which amount would otherwise be impossible to calculate with precision, (iii) without these agreements, the Parties would not
enter into this Agreement, and (iv) in the event that Rand shall fail to pay the Termination Fee pursuant to this Section 9.4,
when due, and, in order to obtain such payment, East commences a suit that results in a final, non-appealable judgment against
Rand, then Rand shall pay to East costs and expenses (including attorneys’ fees) in connection with such suit, together
with interest on the Termination Fee at a rate equal to five percent (5%) per annum commencing on the date such payment was required
to be made through the date of payment.
9.5.
Amendment
. This Agreement may be amended by the Parties at any time before or after receipt of Rand Stockholder Approvals;
provided, however, that after receipt of Rand Stockholder Approvals, there may not be, without further approval of such Rand Stockholders,
any amendment of this Agreement that requires further approval under applicable Law. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the Parties.
9.6.
Extension; Waiver
. At any time prior to the Closing, the Parties, by action taken or authorized by East or the Rand Board,
as applicable, may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other
acts of the other Party, (b) waive any inaccuracies in the representations and warranties contained in this Agreement of the other
Party or (c) waive compliance with any of the agreements or conditions contained in this Agreement in favor of such Party. Any
agreement on the part of a Party to any such extension or waiver shall be valid only if set forth in a written instrument signed
on behalf of such Party, but such extension or waiver or failure to insist on strict compliance with an obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure.
Article
X
GENERAL PROVISIONS
10.1.
Nonsurvival of Representations, Warranties and Agreements
. None of the representations, warranties, covenants and agreements
set forth in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Closing, except for the
matters set forth in Section 7.4 and for those other covenants and agreements contained in this Agreement that by their terms
apply or are to be performed in whole or in part after the Closing.
10.2.
Notices
. All notices and other communications in connection with this Agreement shall be in writing and shall be deemed
given if delivered personally, sent via facsimile (with confirmation), mailed by registered or certified mail (return receipt
requested) or delivered by an express courier (with confirmation) to the Parties at the following addresses (or at such other
address for a Party as shall be specified by like notice):
(a)
if to Rand, to:
2200
Rand Building
Buffalo,
New York 14203
Attention:
Allen F. Grum, Chief Executive Officer
e-mail:
pgrum@randcapital.com
with
a copy (which shall not constitute notice) to:
Hodgson
Russ LLP
The
Guaranty Building
140
Pearl Street, Suite 100
Buffalo, New York 14202
Attention:
John J. Zak. Esq.
e-mail:
jzak@hodgsonruss.com
(b)
if to East or NEWCO, to:
7777
NW Beacon Square Blvd.
Boca
Raton, FL 33487
Attention:
Adam Gusky
e-mail:
agusky@emslp.com
with
a copy (which shall not constitute notice) to:
Eversheds
Sutherland (US) LLP
700
Sixth St., NW, Suite 700
Washington,
DC 20001
Attention:
Cynthia M. Krus, Esq.
e-mail:
cynthiakrus@eversheds-sutherland.com
10.3.
Interpretation
. When a reference is made in this Agreement to Articles, Sections, Exhibits or Schedules, such reference
shall be to an Article or Section of or Exhibit or Schedule to this Agreement unless otherwise indicated. The table of contents
and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation
of this Agreement. Whenever the words “include,” “includes” or “including” are used in this
Agreement, they shall be deemed to be followed by the words “without limitation.” Each of the Rand Disclosure Schedule
and East Disclosure Schedule, as well as all other schedules and all exhibits hereto, shall be deemed part of this Agreement and
included in any reference to this Agreement. This Agreement shall not be interpreted or construed to require any person to take
any action, or fail to take any action, if to do so would violate any applicable Law.
10.4.
Counterparts
. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the
same agreement and shall become effective when counterparts have been signed by each of the Parties and delivered to the other
Parties, it being understood that each Party need not sign the same counterpart. Facsimile and electronic signatures (i.e., PDF)
to this Agreement shall be valid and will be deemed to have the same legal effect as an original signed counterpart of this Agreement.
10.5.
Entire Agreement
. This Agreement (including the documents and the instruments referred to in this Agreement), together
with the Investment Advisory Agreement, the Administration Agreement, the Shareholder Agreement and Confidentiality Agreement,
constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, between the Parties
with respect to the subject matter of this Agreement.
10.6.
Governing Law; Jurisdiction
. This Agreement shall be governed and construed in accordance with the internal laws of the
State of New York applicable to contracts made and wholly-performed within such state, without regard to any applicable conflicts
of law principles. Each of the Parties hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive
jurisdiction of United States District Court for the Western District of New York and, if such court does not have jurisdiction
over such dispute, the Supreme Court of the State of New York located in the County of Erie (including the applicable appellate
courts thereof, collectively, the “
New York Courts
”) in any action or proceeding arising out of or relating
to this Agreement or the agreements delivered in connection herewith or the transactions contemplated hereby or thereby or for
recognition or enforcement of any judgment relating thereto, and each of the Parties hereby irrevocably and unconditionally (i)
agrees not to commence any such action or proceeding except in the applicable New York Court, (ii) agrees that any claim in respect
of any such action or proceeding may be heard and determined in the applicable New York Court, (iii) waives, to the fullest extent
it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any such action
or proceeding in the applicable New York Court, and (iv) waives, to the fullest extent permitted by applicable Law, the defense
of an inconvenient forum to the maintenance of such action or proceeding in the applicable New York Court. Each of the Parties
agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by applicable Law. Each Party irrevocably consents to service of process
in the manner provided for by applicable Law. Nothing in this Agreement will affect the right of any party to serve process in
any other manner permitted by applicable Law.
10.7.
Publicity
. No Party shall, nor shall they permit any of their respective Affiliates to, issue or cause the publication
of any press release or other public announcement with respect to, or otherwise make any public statement concerning, the Stock
Purchase without the prior consent (which consent shall not be unreasonably withheld) of East, in the case of a proposed announcement
or statement by Rand, or Rand, in the case of a proposed announcement or statement by East; provided, however, that any Party
may, without the prior consent of the other Party (but after prior consultation with the other Party to the extent practicable
under the circumstances) issue or cause the publication of any press release or other public announcement to the extent required
by Law or by the rules and regulations of NASDAQ.
10.8.
Assignment; Third Party Beneficiaries
. Neither this Agreement nor any of the rights, interests or obligations under this
Agreement shall be assigned by any Party (whether by operation of law or otherwise) without the prior written consent of the other
Parties. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of and be enforceable by
each of the Parties and their respective successors and assigns. Except as otherwise specifically provided in Section 7.4, this
Agreement (including the documents and instruments referred to in this Agreement) is not intended to and does not confer upon
any person other than the Parties any rights or remedies under this Agreement. Except as provided in Section 7.4 only, the Parties
hereby agree that their respective representations, warranties and covenants set forth herein are solely for the benefit of the
other Parties, in accordance with and subject to the terms of this Agreement, and this Agreement is not intended to, and does
not, confer upon any person other than the Parties any rights or remedies hereunder, including, without limitation, the right
to rely upon such representations and warranties set forth herein. The Parties further agree that the rights of third party beneficiaries
under Section 7.4 shall not arise unless and until the Closing occurs. The representations and warranties in this Agreement are
the product of negotiations among the Parties and are for the sole benefit of the Parties. In some instances, the representations
and warranties in this Agreement may represent an allocation among the Parties of risks associated with particular matters regardless
of the knowledge of any of the Parties. Consequently, Persons other than the Parties may not rely upon the representations and
warranties in this Agreement as characterizations of actual facts or circumstances as of the date of this Agreement or as of any
other date.
10.9.
Remedies
.
(a)
Except as otherwise provided in this Agreement, any and all remedies herein expressly conferred upon a Party will be deemed cumulative
with and not exclusive of any other remedy conferred hereby, or by law or equity upon such Party, and the exercise by a Party
of any one remedy will not preclude the exercise of any other remedy.
(b)
The Parties hereby agree that irreparable damage would occur in the event that any provision of this Agreement was not performed
in accordance with its specific terms or was otherwise breached, and that money damages or other legal remedies would not be an
adequate remedy for any such damages. Accordingly, the Parties acknowledge and hereby agree that in the event of any breach or
threatened breach of any covenants or obligations set forth in this Agreement, Rand shall be entitled to an injunction or injunctions
to prevent or restrain breaches or threatened breaches of this Agreement and to specifically enforce the terms and provisions
of this Agreement to prevent breaches or threatened breaches of, or to enforce compliance with, the covenants and obligations
of the other under this Agreement. Each Party hereby agrees not to raise any objections to the availability of the equitable remedy
of specific performance to prevent or restrain breaches or threatened breaches of this Agreement, and to specifically enforce
the terms and provisions of this Agreement to prevent breaches or threatened breaches of, or to enforce compliance with, the covenants
and obligations under this Agreement. The Parties further agree that (i) by seeking the remedies provided for in this Section
10.9(b), no Party shall in any respect waive its right to seek any other form of relief that may be available to a Party under
this Agreement (including monetary damages) in the event that this Agreement has been terminated or in the event that the remedies
provided for in this Section 10.9(b) are not available or otherwise are not granted, and (ii) nothing set forth in this Section
10.9(b) shall require any Party to institute any proceeding for (or limit such Party’s right to institute any proceeding
for) specific performance under this Section 10.9(b) prior or as a condition to exercising any termination right under Section
9.1 (and pursuing damages after such termination), nor shall the commencement of any legal proceeding pursuant to this Section
10.9(b) or anything set forth in this Section 10.9(b) restrict or limit any Party’s right to terminate this Agreement in
accordance with Section 9.1 or pursue any other remedies under this Agreement that may be available then or thereafter.
(c)
Notwithstanding anything to the contrary set in this Section 10.9, the Parties expressly acknowledge and agree that the remedies
set forth in Section 9.4 shall be the sole and exclusive remedies available to East or Rand in the event this Agreement is terminated
under Section 9.1(e) or (f). To the extent East is entitled to receive the Termination Fee, except as otherwise provided in Section
9.4, the receipt of such amounts shall be deemed to be full and final payment for any and all losses or damages suffered or incurred
by East or any of its Affiliates or any other Person in connection with this Agreement (and the termination hereof), the Stock
Purchase (and the abandonment thereof) or any matter forming the basis for such termination, and none of East or any of its Affiliates
or any other Person shall be entitled to bring or maintain any other claim, action or proceeding against Rand or any of its Affiliates
arising out of this Agreement, the Stock Purchase or any matters forming the basis for such termination.
10.10.
Waiver of Jury Trial
. Each Party acknowledges and agrees that any controversy which may arise under this Agreement is likely
to involve complicated and difficult issues, and therefore each such Party hereby irrevocably and unconditionally waives any right
such Party may have to a trial by jury in respect of any litigation directly or indirectly arising out of or relating to this
Agreement or the Stock Purchase. Each Party certifies and acknowledges that (i) no representative, agent or attorney of any other
Party has represented, expressly or otherwise, that such other Parties would not, in the event of litigation, seek to enforce
the foregoing waiver, (ii) each Party understands and has considered the implications of this waiver, (iii) each Party makes this
waiver voluntarily and (iv) each Party has been induced to enter into this Agreement by, among other things, the mutual waivers
and certifications in this Section 10.10.
[Signature
page follows]
IN
WITNESS WHEREOF, the undersigned Parties have caused this Agreement to be executed by their respective officers thereunto duly
authorized as of the date first above written.
|
RAND CAPITAL CORPORATION
|
|
|
|
|
By:
|
/s/
Allen F. Grum
|
|
Name:
|
Allen
F. Grum
|
|
Title:
|
President
and Chief Executive Officer
|
|
|
|
|
EAST ASSET MANAGEMENT, LLC
|
|
|
|
|
By:
|
/s/
Adam Gusky
|
|
Name:
|
Adam
Gusky
|
|
Title:
|
CIO
|
|
|
|
|
RAND CAPITAL MANAGEMENT LLC
|
|
|
|
(solely for purposes of being bound by Sections 7.10 and 10.9(a) and (b))
|
|
|
|
|
By:
|
/s/
Brian Collins
|
|
Name:
|
Brian
Collins
|
|
Title:
|
Managing
Member
|
Signature
Page
Exhibit
A
ADMINISTRATION
AGREEMENT
AGREEMENT
(this “
Agreement
”) made as of ____________, 2019 (the “
Effective Date
”) by and between Rand
Capital Corporation, a New York corporation (hereinafter referred to as the “
Corporation
”), and Rand Capital
Management LLC, a Delaware limited liability company (hereinafter referred to as the “
Administrator
”).
WITNESSETH:
WHEREAS,
the Corporation is a closed-end investment company that has elected to be treated as a business development company under the
Investment Company Act of 1940, as amended (hereinafter referred to as the “
Investment Company Act
”);
WHEREAS,
the Corporation desires to retain the Administrator to provide administrative services to the Corporation in the manner and on
the terms hereinafter set forth; and
WHEREAS,
the Administrator is willing to provide administrative services to the Corporation on the terms and conditions hereafter set forth.
NOW,
THEREFORE, in consideration of the premises and the covenants hereinafter contained and for other good and valuable consideration,
the receipt and adequacy of which is hereby acknowledged, the Corporation and the Administrator hereby agree as follows:
1.
Duties of the Administrator
.
(a)
Employment of Administrator
. The Corporation hereby employs the Administrator to act as administrator of the Corporation,
and to furnish, or arrange for others to furnish, the administrative services, personnel and facilities described below, subject
to review by and the overall control of the Board of Directors of the Corporation, for the period and on the terms and conditions
set forth in this Agreement. The Administrator hereby accepts such employment and agrees during such period to render, or arrange
for the rendering of, such services and to assume the obligations herein set forth subject to the reimbursement of costs and expenses
as provided for below. The Administrator and any such other persons providing services arranged for by the Administrator shall
for all purposes herein be deemed to be independent contractors and shall, unless otherwise expressly provided or authorized herein,
have no authority to act for or represent the Corporation in any way or otherwise be deemed agents of the Corporation.
(b)
Services
. The Administrator shall perform (or oversee, or arrange for, the performance of) the administrative services
necessary for the operation of the Corporation. Without limiting the generality of the foregoing, the Administrator shall provide
the Corporation with office facilities, equipment, clerical, bookkeeping, finance, accounting, compliance and record keeping services
at such office facilities and such other services as the Administrator, subject to review by the Board of Directors of the Corporation,
shall from time to time determine to be necessary or useful to perform its obligations under this Agreement. The Administrator
shall also, on behalf of the Corporation, arrange for the services of, and oversee, custodians, depositories, transfer agents,
dividend disbursing agents, other stockholder servicing agents, accountants, attorneys, underwriters, brokers and dealers, corporate
fiduciaries, insurers, banks and such other persons in any such other capacity deemed to be necessary or desirable. The Administrator
shall make reports to the Corporation’s Board of Directors of its performance of its obligations hereunder and furnish advice
and recommendations with respect to such other aspects of the business and affairs of the Corporation as it shall determine to
be desirable;
provided
that nothing herein shall be construed to require the Administrator to, and the Administrator shall
not, in its capacity as Administrator, provide any advice or recommendation relating to the securities and other assets that the
Corporation should purchase, retain or sell or any other investment advisory services to the Corporation. The Administrator shall
be responsible for the financial and other records that the Corporation is required to maintain and shall prepare all reports
and other materials required to be filed with the Securities and Exchange Commission (the “
SEC
”) or any other
regulatory authority, including reports to stockholders. The Administrator will provide on the Corporation’s behalf significant
managerial assistance to those portfolio companies to which the Corporation is required to provide such assistance. In addition,
the Administrator will assist the Corporation in determining and publishing the Corporation’s net asset value, overseeing
the preparation and filing of the Corporation’s tax returns, and the printing and dissemination of reports to stockholders
of the Corporation, and generally overseeing the payment of the Corporation’s expenses and the performance of administrative
and professional services rendered to the Corporation by others.
2.
Records
. The Administrator agrees to maintain and keep all books, accounts and other records of the Corporation that relate
to activities performed by the Administrator hereunder and, if required by the Investment Company Act, will maintain and keep
such books, accounts and records in accordance with that act. In compliance with the requirements of Rule 31a-3 under the Investment
Company Act, the Administrator agrees that all records that it maintains for the Corporation shall at all times remain the property
of the Corporation, shall be readily accessible during normal business hours, and shall be promptly surrendered upon the termination
of this Agreement or otherwise on written request. The Administrator further agrees that all records which it maintains for the
Corporation pursuant to Rule 31a-1 under the Investment Company Act will be preserved for the periods prescribed by Rule 31a-2
under the Investment Company Act unless any such records are earlier surrendered as provided above. Records shall be surrendered
in usable machine-readable form. The Administrator shall have the right to retain copies of such records subject to observance
of its confidentiality obligations under this Agreement.
3.
Confidentiality
. The parties hereto agree that each shall treat confidentially all information provided by each party to
the other regarding its business and operations. All confidential information provided by a party hereto, including nonpublic
personal information pursuant to Regulation S-P of the SEC, shall be used by any other party hereto solely for the purpose of
rendering services pursuant to this Agreement and, except as may be required in carrying out this Agreement, shall not be disclosed
to any third party, without the prior consent of such providing party. The foregoing shall not be applicable to any information
that is publicly available when provided or thereafter becomes publicly available other than through a breach of this Agreement,
or that is required to be disclosed by any regulatory authority, any authority or legal counsel of the parties hereto, or by judicial
or administrative process or otherwise by applicable law or regulation.
4.
Compensation; Allocation of Costs and Expenses
.
(a)
In full consideration of the provision of the services of the Administrator, the Corporation shall reimburse the Administrator
for the costs and expenses incurred by the Administrator in performing its obligations and providing personnel and facilities
hereunder.
(b)
The Corporation will bear all costs and expenses that are incurred in its operation and transactions and not specifically assumed
by the Administrator, in its capacity as the Corporation’s investment adviser, pursuant to the Investment Advisory and Management
Agreement, dated as of ____________, 2019, between the Corporation and the Administrator (the “
Advisory Agreement
”).
Costs and expenses to be borne by the Corporation include, but are not limited to, those relating to: organization; calculating
the Corporation’s net asset value (including the cost and expenses of any independent valuation firm); expenses incurred
by the Administrator payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal
affairs for the Corporation and in monitoring the Corporation’s investments and performing due diligence on its prospective
portfolio companies; interest payable on debt, if any, incurred to finance the Corporation’s investments; offerings of the
Corporation’s common stock and other securities; investment advisory and management fees (other than fees (if any) payable
to a sub-advisor retained by the Administrator under the Advisory Agreement); administration fees, if any, payable under this
Agreement; transfer agent and custodial fees; federal and state registration fees; all costs of registration and listing the Corporation’s
shares on any securities exchange; federal, state, local and other taxes; independent directors’ fees and expenses; costs
of preparing and filing reports or other documents required by governmental bodies (including the SEC); costs of any reports,
proxy statements or other notices to stockholders, including printing costs; the Corporation’s allocable portion of the
fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; direct costs
and expenses of administration, including independent auditors and outside legal costs; and all other expenses incurred by the
Corporation or the Administrator in connection with administering the Corporation’s business, including payments under this
Agreement based upon the Corporation’s allocable portion of the Administrator’s overhead in performing its obligations
under this Agreement, including rent (if office space is provided by the Administrator) and the allocable portion of the cost
of the Corporation’s chief financial officer and chief compliance officer and their respective staffs (including travel
expenses).
5.
Limitation of Liability of the Administrator; Indemnification
. The Administrator, its members and their respective officers,
managers, partners, agents, employees, controlling persons, members, and any other person or entity affiliated with any of them
(collectively, the “
Indemnified Parties
”), shall not be liable to the Corporation for any action taken or omitted
to be taken by the Administrator in connection with the performance of any of its duties or obligations under this Agreement or
otherwise as administrator for the Corporation, and the Corporation shall indemnify, defend and protect the Indemnified Parties
(each of whom shall be deemed a third party beneficiary hereof) and hold them harmless from and against all damages, liabilities,
costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) incurred by the Indemnified
Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an
action or suit by or in the right of the Corporation or its security holders) arising out of or otherwise based upon the performance
of any of the Administrator’s duties or obligations under this Agreement or otherwise as administrator for the Corporation.
Notwithstanding the preceding sentence of this Paragraph 5 to the contrary, nothing contained herein shall protect or be deemed
to protect the Indemnified Parties against or entitle or be deemed to entitle the Indemnified Parties to indemnification in respect
of, any liability to the Corporation or its security holders to which the Indemnified Parties would otherwise be subject by reason
of willful misfeasance, bad faith or negligence in the performance of any Indemnified Party’s duties or by reason of the
reckless disregard of the Administrator’s duties and obligations under this Agreement (to the extent applicable, as the
same shall be determined in accordance with the Investment Company Act and any interpretations or guidance by the SEC or its staff
thereunder).
6.
Activities of the Administrator
. The services of the Administrator to the Corporation are not exclusive, and the Administrator
and each other person providing services as arranged by the Administrator is free to render services to others. It is understood
that directors, officers, employees and stockholders of the Corporation are or may become interested in the Administrator and
its affiliates, as directors, officers, members, managers, employees, partners, stockholders or otherwise, and that the Administrator
and directors, officers, members, managers, employees, partners and stockholders of the Administrator and its affiliates are or
may become similarly interested in the Corporation as stockholders or otherwise.
7.
Duration and Termination of this Agreement
.
(a)
This Agreement shall become effective as of the Effective Date, and shall remain in force with respect to the Corporation for
two years from the Effective Date and thereafter continue from year to year, but only so long as such continuance is specifically
approved at least annually by (i) the Board of Directors of the Corporation and (ii) a majority of those members of the Corporation’s
Board of Directors who are not parties to this Agreement or “interested persons” (as defined in the Investment Company
Act) of any such party.
(b)
This Agreement may be terminated at any time, without the payment of any penalty, by vote of the Corporation’s Board of
Directors, or by the Administrator, upon 60 days’ advance written notice to the other party. This Agreement may not be assigned
by a party without the consent of the other party.
8.
Amendments of this Agreement
. This Agreement may not be amended or modified except by an instrument in writing signed by
all parties hereto.
9.
Assignment
. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors
and permitted assigns. Neither party may assign, delegate or otherwise transfer this Agreement or any of its rights or obligations
hereunder without the prior written consent of the other party. No assignment by either party permitted hereunder shall relieve
the applicable party of its obligations under this Agreement. Any assignment by either party in accordance with the terms of this
Agreement shall be pursuant to a written assignment agreement in which the assignee expressly assumes the assigning party’s
rights and obligations hereunder.
10
.
Governing Law
. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York,
including without limitation Sections 5-1401 and 5-1402 of the New York General Obligations Law and New York Civil Practice Law
and Rules, Rule 327(b), and the applicable provisions of the Investment Company Act, if any. To the extent that the applicable
laws of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company
Act, if any, the latter shall control. The parties unconditionally and irrevocably consent to the exclusive jurisdiction of the
courts located in the State of New York and waive any objection with respect thereto, for the purpose of any action, suit or proceeding
arising out of or relating to this Agreement or the transactions contemplated hereby.
11
.
No Waiver
. The failure of either party to enforce at any time for any period the provisions of or any rights deriving from
this Agreement shall not be construed to be a waiver of such provisions or rights or the right of such party thereafter to enforce
such provisions or rights, and no waiver shall be binding unless executed in writing by all parties hereto.
12
.
Severability
. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any
law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long
as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to
any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated
to the greatest extent possible.
13
.
Headings
. The descriptive headings contained in this Agreement are for convenience of reference only and shall not affect
in any way the meaning or interpretation of this Agreement.
14
.
Counterparts
. This Agreement may be executed in one or more counterparts (including by facsimile or pdf transmission),
each of which when executed shall be deemed to be an original instrument and all of which taken together shall constitute one
and the same agreement.
15
.
Notices
. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given
or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by overnight courier service
(with signature required), by facsimile, or by registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at their respective principal executive office addresses.
16
.
Entire Agreement
. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof
and supersedes all prior and contemporaneous agreements and undertakings, both written and oral, between the parties with respect
to such subject matter.
17
.
Certain Matters of Construction
.
(a)
The words “hereof”, “herein”, “hereunder” and words of similar import shall refer to this
Agreement as a whole and not to any particular Section or provision of this Agreement, and reference to a particular Section of
this Agreement shall include all subsections thereof.
(b)
Definitions shall be equally applicable to both the singular and plural forms of the terms defined, and references to the masculine,
feminine or neuter gender shall include each other gender.
(c)
The word “including” shall mean including without limitation.
[REMAINDER
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IN
WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written.
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CORPORATION
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RAND CAPITAL CORPORATION
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By:
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Name:
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Title:
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ADMINISTRATOR
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Rand Capital Management LLC
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By:
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Name:
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Title:
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Exhibit
B
INVESTMENT
ADVISORY AND MANAGEMENT AGREEMENT
BETWEEN
RAND CAPITAL CORPORATION
AND
RAND CAPITAL MANAGEMENT LLC
Agreement
made this ___ day of _____________, 2019 (the “Effective Date”), by and between RAND CAPITAL CORPORATION, a New York
corporation (the “Corporation”), and RAND CAPITAL MANAGEMENT LLC, a Delaware limited liability company (the “Adviser”).
WHEREAS,
the Corporation is a closed-end investment company that has elected to be treated as a business development company under the
Investment Company Act of 1940, as amended (the “Investment Company Act”);
WHEREAS,
the Adviser is an investment adviser that has registered under the Investment Advisers Act of 1940, as amended (the “Advisers
Act”); and
WHEREAS,
the Adviser will provide investment advisory services to the Corporation.
NOW,
THEREFORE, in consideration of the premises and for other good and valuable consideration, the parties hereby agree as follows:
1.
Duties of the Adviser.
(a)
The Corporation hereby employs the Adviser to act as the investment adviser to the Corporation and to manage the investment and
reinvestment of the assets of the Corporation during the term of this Agreement, subject to the supervision of the Board of Directors
of the Corporation (the “Board”), for the period and upon the terms herein set forth,
(i)
in accordance with the investment objectives, policies and restrictions that are determined by the Corporation’s Board of
Directors from time to time and disclosed to the Adviser, including those as set forth in the reports and registration statements
that the Corporation files with the Securities and Exchange Commission (the “SEC”),
(ii)
in accordance with any requirements imposed by the provisions of the Investment Company Act and of any rules or regulations in
force thereunder, subject to the terms of any exemptive order applicable to the Corporation, and
(iii)
in accordance with all other applicable federal and state laws, rules and regulations, and the Corporation’s certificate
of incorporation and by-laws.
(b)
Without limiting the generality of the foregoing, the Adviser shall, during the term and subject to the provisions of this Agreement,
(i)
determine the composition of the portfolio of the Corporation, the nature and timing of the changes therein and the manner of
implementing such changes,
(ii)
identify, evaluate and negotiate the structure of the investments made by the Corporation,
(iii)
execute, close, service and monitor the Corporation’s investments,
(iv)
determine the securities and other assets that the Corporation will purchase, retain, or sell,
(v)
perform due diligence on prospective portfolio companies or investments, and
(vi)
provide the Corporation with such other investment advisory, research and related services as the Corporation may, from time to
time, reasonably require for the investment of its funds.
The
Adviser shall have the power and authority on behalf of the Corporation to effectuate its investment decisions for the Corporation,
including the execution and delivery of all documents relating to the Corporation’s investments and the placing of orders
for other purchase or sale transactions on behalf of the Corporation. In the event that the Corporation determines to incur debt
financing, the Adviser will arrange for such financing on the Corporation’s behalf, subject to the oversight and approval
of the Board. If it is necessary for the Adviser to make investments on behalf of the Corporation through a special purpose vehicle,
the Adviser shall have authority to create or arrange for the creation of such special purpose vehicle and to make such investments
through such special purpose vehicle in accordance with the Investment Company Act.
(c)
The Adviser hereby accepts such employment and agrees during the term hereof to render the services described herein for the compensation
provided herein.
(d)
Subject to the requirements of the Investment Company Act, the Adviser is hereby authorized to enter into one or more sub-advisory
agreements with other investment advisers (each, a “Sub-Adviser”) pursuant to which the Adviser may obtain the services
of the Sub-Adviser(s) to assist the Adviser in providing the investment advisory services required to be provided by the Adviser
under Sections 1(a) and 1(b) of this Agreement. Specifically, the Adviser may retain a Sub-Adviser to recommend specific securities
or other investments based upon the Corporation’s investment objectives and policies, and work, along with the Adviser,
in structuring, negotiating, arranging or effecting the acquisition or disposition of such investments and monitoring investments
on behalf of the Corporation, subject to the oversight of the Adviser and the Corporation. The Adviser, and not the Corporation,
shall be responsible for any compensation payable to any Sub-Adviser. Any sub-advisory agreement entered into by the Adviser shall
be in accordance with the requirements of the Investment Company Act and other applicable federal and state law. Nothing in this
subsection (d) will obligate the Adviser to pay any expenses that are the expenses of the Corporation under Section 2.
(e)
The Adviser, and any Sub-Adviser, shall for all purposes herein provided each be deemed to be an independent contractor and, except
as expressly provided or authorized herein, shall have no authority to act for or represent the Corporation in any way or otherwise
be deemed an agent of the Corporation.
(f)
The Adviser shall keep and preserve for the period required by the Investment Company Act any books and records relevant to the
provision of its investment advisory services to the Corporation and shall specifically maintain all books and records with respect
to the Corporation’s portfolio transactions and shall render to the Board such periodic and special reports as the Board
may reasonably request. The Adviser agrees that all records that it maintains for the Corporation are the property of the Corporation
and will surrender promptly to the Corporation any such records upon the Corporation’s request, provided that the Adviser
may retain a copy of such records.
(g)
The Adviser shall provide to the Board such periodic and special reports as it may request.
2.
Corporation’s Responsibilities and Expenses Payable by the Corporation
. All investment professionals of the Adviser
and its staff, when and to the extent engaged in providing investment advisory services required to be provided by the Adviser
under Sections 1(a) and 1(b), and the compensation of such personnel and the general office and facilities and overhead expenses
incurred by the Adviser in maintaining its place of business allocable to such services, will be provided and paid for by the
Adviser and not by the Corporation. The Corporation will bear all other costs and expenses of its operations and transactions,
including those relating to:
(a)
organization;
(b)
calculating the Corporation’s net asset value (including the cost and expenses of any independent valuation firm);
(c)
expenses incurred by the Adviser payable to third parties, including agents, consultants or other advisors, in monitoring financial
and legal affairs for the Corporation and in monitoring the Corporation’s investments and performing due diligence on its
prospective portfolio companies;
(d)
interest payable on debt, if any, incurred to finance the Corporation’s investments;
(e)
offerings of the Corporation’s common stock and other securities;
(f)
investment advisory and management fees payable under this Agreement, which fees shall not include fees (if any) payable to a
Sub-Adviser retained by the Adviser pursuant to Section 1(d);
(g)
administration fees, if any, payable under the Administration Agreement (the “Administration Agreement”) between the
Corporation and the Adviser or any successor thereto as the Corporation’s administrator;
(h)
transfer agent and custodial fees;
(i)
federal and state registration fees;
(j)
all costs of registration and listing the Corporation’s shares on any securities exchange;
(k)
federal, state and local taxes;
(l)
independent directors’ fees and expenses;
(m)
costs of preparing and filing reports or other documents required by governmental bodies (including the SEC);
(n)
costs of any reports, proxy statements or other notices to stockholders, including printing costs;
(o)
the Corporation’s allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance,
and any other insurance premiums;
(p)
direct costs and expenses of administration, including independent auditors and outside legal costs; and
(q)
all other expenses incurred by the Corporation or the Advisor in connection with administering the Corporation’s business
(including payments under the Administration Agreement based upon the Corporation’s allocable portion of the Advisor’s
overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost
of the Corporation’s chief financial officer and chief compliance officer and their respective staffs (including travel
expenses)).
3.
Compensation of the Adviser
. The Corporation agrees to pay, and the Adviser agrees to accept, as compensation for the services
provided by the Adviser hereunder, a base management fee (“Base Management Fee”) and an incentive fee (“Incentive
Fee”) as hereinafter set forth. The Corporation shall make any payments due hereunder to the Adviser or to the Adviser’s
designee as the Adviser may otherwise direct. To the extent permitted by applicable law, the Adviser may elect, or the Corporation
may adopt a deferred compensation plan pursuant to which the Adviser may elect, to defer all or a portion of its fees hereunder
for a specified period of time.
(a)
The Base Management Fee shall be 1.50% per annum of the Corporation’s total assets (other than cash or cash equivalents
but including assets purchased with borrowed funds), determined according to procedures duly adopted by the Board. For services
rendered during the period commencing from the Effective Date, through and including the end of the first calendar quarter of
the Corporation’s operations after the Effective Date, the Base Management Fee will be payable monthly in arrears. Until
the first calendar quarter of the Corporation’s operations after the Effective Date, the Base Management Fee will be calculated
based on the initial value of the Corporation’s total assets (other than cash or cash equivalents but including assets purchased
with borrowed funds) after giving effect to the contribution of the loan portfolio as contemplated by the Stock Purchase Agreement,
dated as of January ___, 2019 by and among the Corporation, East Asset Management, LLC and, solely for purposes of being bound
by Sections 7.10 and 10.9(a) and (b) thereof, the Adviser. Subsequently, the Base Management Fee will be calculated based on the
average value of the Corporation’s total assets (other than cash or cash equivalents but including assets purchased with
borrowed funds) at the end of the two most recently completed calendar quarters. Base Management Fees for any partial month or
quarter will be appropriately pro-rated.
(b)
The Incentive Fee shall consist of two parts, as follows:
(i)
One part (the “Income Based Fee”) will be calculated and payable quarterly in arrears based on the Pre-Incentive Fee
net investment income for the immediately preceding calendar quarter and shall be payable promptly following the filing of the
Corporation’s financial statements for such quarter. “Pre-Incentive Fee net investment income” means interest
income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance),
such as commitment, origination, structuring, diligence and consulting fees or other fees that the Corporation receives from portfolio
companies) accrued by the Corporation during the relevant calendar quarter, minus the Corporation’s operating expenses for
such calendar quarter (including the Base Management Fee, expenses payable under the Administration Agreement, and any interest
expense and dividends paid on any issued and outstanding preferred stock, but excluding any portion of Incentive Fee).
Pre-Incentive
Fee net investment income includes any accretion of original issue discount, market discount, payment-in-kind interest, payment-in-kind
dividends or other types of deferred or accrued income, including in connection with zero coupon securities, that the Corporation
and its consolidated subsidiaries have recognized in accordance with U.S. Generally Accepted Accounting Principles, but have not
yet received in cash (collectively, “Accrued Unpaid Income”). Pre-Incentive Fee net investment income does not include
any realized capital gains, realized and unrealized capital losses or unrealized capital appreciation or depreciation.
Pre-Incentive
Fee net investment income, expressed as a rate of return on the value of the Corporation’s net assets (defined as total
assets less indebtedness) at the end of the immediately preceding calendar quarter, will be compared to a “hurdle rate”,
expressed as a rate of return on the value of the Corporation’s net assets at the end of the most recently completed calendar
quarter, of 1.75% per quarter (7% annualized). The Corporation will pay the Adviser an Incentive Fee with respect to the Corporation’s
Pre-Incentive Fee net investment income in each calendar quarter as follows:
(A)
no Income Based Fee in any calendar quarter in which the Corporation’s Pre-Incentive Fee net investment income does not
exceed the hurdle rate;
(B)
100.0% of the Corporation’s Pre-Incentive Fee net investment income for any calendar quarter with respect to that portion
of such Pre-Incentive Fee net investment income for such calendar quarter, if any, that exceeds the hurdle rate but is less than
2.1875% (8.75% annualized); and
(C)
20.0% of the amount of the Corporation’s Pre-Incentive Fee net investment income for any calendar quarter with respect to
that portion of such Pre-Incentive Fee Net Investment Income for such calendar quarter, if any, that exceeds 2.1875% (8.75% annualized).
These
calculations will be appropriately pro-rated for any period of less than three months.
Notwithstanding
the foregoing, the Income Based Fee paid to the Adviser for any calendar quarter that begins more than two years and three months
after the Effective Date shall not be in excess of the Incentive Fee Cap. The Incentive Fee Cap for any calendar quarter is an
amount equal to (1) 20.0% of the Cumulative Net Return (as defined below) during the Income Based Fee Calculation Period (as defined
below) minus (2) if applicable, the aggregate Income Based Fee that was paid in respect of the calendar quarters prior to such
quarter included in the relevant Income Based Fee Calculation Period.
“Income
Based Fee Calculation Period” means, with reference to a calendar quarter, the period of time consisting of such calendar
quarter and the additional quarters that comprise the lesser of (1) the number of quarters immediately preceding such calendar
quarter that began more than two years after the Effective Date or (2) the eleven calendar quarters immediately preceding such
calendar quarter.
“Cumulative
Net Return” means (1) the aggregate net investment income in respect of the relevant Income Based Fee Calculation Period
minus (2) any Net Capital Loss, if any, in respect of the relevant Income Based Fee Calculation Period. If, in any quarter, the
Incentive Fee Cap is zero or a negative value, the Corporation pays no Income Based Fee to the Adviser for such quarter. If, in
any quarter, the Incentive Fee Cap for such quarter is a positive value but is less than the Income Based Fee that is payable
to the Adviser for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, the Corporation
pays an Income Based Fee to the Adviser 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 Income Based Fee that is payable to the Adviser for such quarter (before
giving effect to the Incentive Fee Cap) calculated as described above, the Corporation pays an Income Based Fee to the Adviser
equal to the Income Based Fee calculated as described above for such quarter without regard to the Incentive Fee Cap.
“Net
Capital Loss” in respect of a particular period means the difference, if positive, between (1) aggregate capital losses,
whether realized or unrealized, in such period and (2) aggregate capital gains, whether realized or unrealized, in such period.
Any
Income Based Fee otherwise payable under this Section 3(b)(i) with respect to Accrued Unpaid Income (collectively, the “Accrued
Unpaid Income Based Fees”) shall be deferred, on a security by security basis, and shall become payable only if, as, when
and to the extent cash is received by the Corporation or its consolidated subsidiaries in respect thereof. Any Accrued Unpaid
Income that is subsequently reversed in connection with a write-down, write-off, impairment or similar treatment of the investment
giving rise to such Accrued Unpaid Income will, in the applicable period of reversal, (1) reduce Pre-Incentive Fee net investment
income and (2) reduce the amount of Accrued Unpaid Income Incentive Fees deferred under this paragraph. Subsequent payments of
Accrued Unpaid Income Incentive Fees deferred pursuant to this paragraph shall not reduce the amounts otherwise payable for any
quarter pursuant to this Section 3(b)(i).
(ii)
The second part of the Incentive Fee (the “Capital Gains Fee”) will be determined and payable in arrears as of the
end of each calendar year (or upon termination of this Agreement as set forth below), commencing with the calendar year ending
on December 31, 2019, and is calculated at the end of each applicable year by subtracting (1) the sum of the Corporation’s
cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (2) the Corporation’s cumulative
aggregate realized capital gains, in each case calculated from the Effective Date. If such amount is positive at the end of such
year, then the Capital Gains Fee for such year is equal to 20.0% of such amount, less the cumulative aggregate amount of Capital
Gains Fees paid in all prior years. If such amount is negative, then there is no Capital Gains Fee payable for such year. If this
Agreement is terminated as of a date that is not a calendar year end, the termination date shall be treated as though it were
a calendar year end for purposes of calculating and paying a Capital Gains Fee.
For
purposes of this Section 3(b)(ii):
The
cumulative aggregate realized capital gains
are calculated as the sum of the differences, if positive, between (a) the
net sales price of each investment in the Corporation’s portfolio when sold and (b) the accreted or amortized cost basis
of such investment.
The
cumulative aggregate realized capital losses
are calculated as the sum of the amounts by which (a) the net sales price
of each investment in the Corporation’s portfolio when sold is less than (b) the accreted or amortized cost basis of such
investment.
The
aggregate unrealized capital depreciation
is calculated as the sum of the differences, if negative, between (a) the valuation
of each investment in the Corporation’s portfolio as of the applicable Capital Gains Fee calculation date and (b) the accreted
or amortized cost basis of such investment.
The
accreted or amortized cost basis of an investment shall mean, with respect to an investment owned by the Corporation as of the
Effective Date, the fair value of such investment as set forth in the Corporation’s most recently filed Quarterly Report
on Form 10-Q or Annual Report on Form 10-K, as applicable, as filed with the SEC and, with respect to an investment acquired by
the Corporation subsequent to the Effective Date, the accreted or amortized cost basis of such investment as reflected in the
Corporation’s financial statements.
4.
Covenants of the Adviser
. The Adviser covenants that it will remain registered as an investment adviser under the Advisers
Act. The Adviser agrees that its activities will at all times be in compliance in all material respects with all applicable federal
and state laws governing its operations and investments.
5.
Excess Brokerage Commissions
. The Adviser is hereby authorized, to the fullest extent now or hereafter permitted by law,
to cause the Corporation to pay a member of a national securities exchange, broker or dealer an amount of commission for effecting
a securities transaction in excess of the amount of commission another member of such exchange, broker or dealer would have charged
for effecting that transaction, if the Adviser determines in good faith, taking into account such factors as price (including
the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the
firm and the firm’s risk and skill in positioning blocks of securities, that such amount of commission is reasonable in
relation to the value of the brokerage and/or research services provided by such member, broker or dealer, viewed in terms of
either that particular transaction or its overall responsibilities with respect to the Corporation’s portfolio, and constitutes
the best net results for the Corporation.
6.
Limitations on the Employment of the Adviser
. The services of the Adviser to the Corporation are not exclusive, and the
Adviser may engage in any other business or render similar or different services to others including, without limitation, the
direct or indirect sponsorship or management of other investment based accounts or commingled pools of capital, however structured,
having investment objectives similar to those of the Corporation, so long as its services to the Corporation hereunder are not
materially impaired thereby, and nothing in this Agreement shall limit or restrict the right of any member, manager, partner,
officer or employee of the Adviser to engage in any other business or to devote his or her time and attention in part to any other
business, whether of a similar or dissimilar nature, or to receive any fees or compensation in connection therewith (including
fees for serving as a director of, or providing consulting services to, one or more of the Corporation’s portfolio companies,
subject to applicable law). So long as this Agreement or any extension, renewal or amendment remains in effect, the Adviser shall
be the only investment adviser for the Corporation, subject to the Adviser’s right to enter into sub-advisory agreements.
The Adviser assumes no responsibility under this Agreement other than to render the services called for hereunder. It is understood
that directors, officers, employees and stockholders of the Corporation are or may become interested in the Adviser and its affiliates,
as directors, officers, employees, partners, stockholders, members, managers or otherwise, and that the Adviser and directors,
officers, employees, partners, stockholders, members and managers of the Adviser and its affiliates are or may become similarly
interested in the Corporation as stockholders or otherwise.
7.
Responsibility of Dual Directors, Officers and/or Employees
. If any person who is a member, manager, partner, officer or
employee of the Adviser is or becomes a director, officer and/or employee of the Corporation and acts as such in any business
of the Corporation, then such member, manager, partner, officer and/or employee of the Adviser shall be deemed to be acting in
such capacity solely for the Corporation, and not as a member, manager, partner, officer or employee of the Adviser under the
control or direction of the Adviser, even if paid by the Adviser.
8.
Limitation of Liability of the Adviser; Indemnification
. The Adviser, its members and their respective officers, managers,
partners, agents, employees, controlling persons, members and any other person affiliated with any of them (collectively, the
“Indemnified Parties”), shall not be liable to the Corporation for any action taken or omitted to be taken by the
Adviser in connection with the performance of any of its duties or obligations under this Agreement or otherwise as an investment
adviser of the Corporation, except to the extent specified in Section 36(b) of the Investment Company Act concerning loss resulting
from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation
for services. The Corporation shall indemnify, defend and protect the Indemnified Parties (each of whom shall be deemed a third
party beneficiary hereof) and hold them harmless from and against all damages, liabilities, costs and expenses (including reasonable
attorneys’ fees and amounts reasonably paid in settlement) incurred by the Indemnified Parties in or by reason of any pending,
threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the
Corporation or its security holders) arising out of or otherwise based upon the performance of any of the Adviser’s duties
or obligations under this Agreement or as an investment adviser of the Corporation. Notwithstanding the foregoing provisions of
this Section 8 to the contrary, nothing contained herein shall protect or be deemed to protect the Indemnified Parties against
or entitle or be deemed to entitle the Indemnified Parties to indemnification in respect of, any liability to the Corporation
or its security holders to which the Indemnified Parties would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of any Indemnified Party’s duties or by reason of the reckless disregard of the Adviser’s
duties and obligations under this Agreement (as the same shall be determined in accordance with the Investment Company Act and
any interpretations or guidance by the SEC or its staff thereunder).
9.
Confidentiality
. The parties hereto agree that each shall treat confidentially all information provided by each party to
the other regarding its business and operations. All confidential information provided by a party hereto, including all “nonpublic
personal information,” as defined under the Gramm-Leach-Bliley Act of 1999 (Public law 106-102, 113 Stat. 1138), shall be
used by the other party hereto solely for the purpose of rendering services pursuant to this Agreement and, except as may be required
in carrying out this Agreement, shall not be disclosed to any third party, without the prior consent of such providing party,
except that such confidential information may be disclosed to an affiliate or agent of the disclosing party to be used for the
sole purpose of providing the services set forth herein. The foregoing shall not be applicable to any information that is publicly
available or available to the recipient when provided or thereafter becomes publicly available or available to the recipient other
than through a breach of this Agreement, or that is requested by or required to be disclosed to any governmental or regulatory
authority, including in connection with any required regulatory filings or examinations, by judicial or administrative process
or otherwise by applicable law or regulation. Notwithstanding the foregoing, the Corporation hereby consents and authorizes the
Adviser and its affiliates to use and disclose confidential information relating to the Corporation in connection with the preparation
of performance information relating to the Corporation.
10.
Effectiveness, Duration and Termination of Agreement
. This Agreement shall become effective as of the first date above
written. This Agreement shall remain in effect for two years after such date, and thereafter shall continue automatically for
successive annual periods, provided that such continuance is specifically approved at least annually by
(a)
the vote of the Board, or by the vote of stockholders holding a majority of the outstanding voting securities of the Corporation,
and
(b)
the vote of a majority of the Corporation’s Directors who are not parties to this Agreement or “interested persons”
(as such term is defined in Section 2(a)(19) of the Investment Company Act) of any party to this Agreement, in accordance with
the requirements of the Investment Company Act.
This
Agreement may be terminated at any time, without the payment of any penalty, upon 60 days’ written notice, by the vote of
stockholders holding a majority of the outstanding voting securities of the Corporation, or by the vote of the Corporation’s
Directors or by the Adviser.
This
Agreement will automatically terminate in the event of its “assignment” (as such term is defined for purposes of Section
15(a)(4) of the Investment Company Act). The provisions of Section 8 of this Agreement shall remain in full force and effect,
and the Adviser shall remain entitled to the benefits thereof, notwithstanding any termination of this Agreement. Further, notwithstanding
the termination or expiration of this Agreement as aforesaid, (i) the Adviser shall be entitled to any amounts owed under Section
3 through the date of termination or expiration, and (ii) the obligations set forth in Sections 8 and 9 shall survive the termination
of this Agreement.
11.
Amendments of this Agreement
. This Agreement may not be amended or modified except by an instrument in writing signed by
all parties hereto, but the consent of the Corporation must be obtained in conformity with the requirements of the Investment
Company Act.
12.
Governing Law
. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York,
including without limitation Sections 5-1401 and 5-1402 of the New York General Obligations Law and New York Civil Practice Law
and Rules, Rule 327(b), and the applicable provisions of the Investment Company Act, if any. To the extent that the applicable
laws of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company
Act, if any, the latter shall control. The parties unconditionally and irrevocably consent to the exclusive jurisdiction of the
courts located in the State of New York and waive any objection with respect thereto, for the purpose of any action, suit or proceeding
arising out of or relating to this Agreement or the transactions contemplated hereby.
13.
No Waiver
. The failure of either party to enforce at any time for any period the provisions of or any rights deriving from
this Agreement shall not be construed to be a waiver of such provisions or rights or the right of such party thereafter to enforce
such provisions, and no waiver shall be binding unless executed in writing by all parties hereto.
14.
Severability
. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any
law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long
as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to
any party.
15.
Headings
. The descriptive headings contained in this Agreement are for convenience of reference only and shall not affect
in any way the meaning or interpretation of this Agreement.
16.
Counterparts
. This Agreement may be executed in one or more counterparts, each of which when executed shall be deemed to
be an original instrument and all of which taken together shall constitute one and the same agreement.
17.
Notices
. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given
or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by overnight courier service
(with signature required), by facsimile, or by registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at their respective principal executive office addresses.
18.
Entire Agreement
. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof
and supersedes all prior agreements and undertakings, both written and oral, between the parties with respect to such subject
matter.
19.
Certain Matters of Construction.
(a)
The words “hereof”, “herein”, “hereunder” and words of similar import shall refer to this
Agreement as a whole and not to any particular Section or provision of this Agreement, and reference to a particular Section of
this Agreement shall include all subsections thereof.
(b)
Definitions shall be equally applicable to both the singular and plural forms of the terms defined, and references to the masculine,
feminine or neuter gender shall include each other gender.
(c)
The word “including” shall mean including without limitation.
[THE
REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date above written.
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RAND CAPITAL CORPORATION
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By:
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Name:
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Title:
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RAND CAPITAL MANAGEMENT LLC
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By:
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Name:
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Title:
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Exhibit
C
Contributed
Loan Schedule v.1.23.19
Borrower
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Contributed
Loans to be delivered to Rand
(including
interest rate and maturity date for each)
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Original
Cost Basis
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Contributed
Investment Assets Fair Value
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Outstanding
unpaid principal amount
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Closing
Date of Financing
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Describe
PIK, if any
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PIK
or interest receivable balance at 1/23/19 if not capitalized loan
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Accrued
unpaid fees or other amounts for each Contributed Loan
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Funding
Commitment going forward?
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Frequency
on interest payment and Date of last interest payment received
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AIKG
LLC
“Andretti”
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$2,250,000
Term Note at 12% due 12/28/2023
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$2,250,000
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$2,250,000
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$2,250,000
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12/28/2018
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4%
PIK to be issued quarterly in the form of PIK note
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$19,500.00
interest rec
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To
be added prior to Closing
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Yes,
up to $1,128,000 thru 12/28/2019
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Monthly,
(First
payment due 2/1/ 2019).
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4%
PIK, first PIK Note to be added on 3/31/2019, including 3-day stub period of 2018.
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$6,500.00
PIK
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At
discretion of lender.
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First
payment due 2/1/2019.
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Filterworks
Acquisition USA, LLC
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$1,605,000
Subordinated Note at 12% due 12/4/2023
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$1,605,000
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$1,607,497
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$1,607,497
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11/30/2018
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2%
PIK Note to be added to Note balance
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$12,324.14
interest rec
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To
be added prior to Closing
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No
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Monthly,
(First
payment due 1/1/2019)
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“Filterworks”
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2%
PIK to be added to balance of Note quarterly
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quarterly.
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$2,054.02
PIK
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Last
payment received 12/28/2018. No missed interest payments.
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562.5
Class A Units
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$562,500
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$562,500
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HDI
Acquisition LLC
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$1,200,000
Term Loan at 12% Due 6/20/2023
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$1,200,000
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$1,224,519
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$1,224,519
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12/21/2017
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2%
PIK Note to be added to Note balance quarterly.
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$9,387.98
interest rec
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To
be added prior to Closing
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No
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Monthly,
(First
payment due 1/1/2018).
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“Hilton
Displays”
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2%
PIK added to balance of Note quarterly.
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Equity
value of $300,000 at 12/31/2017 per FY2017 audit.
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$1,564.66
PIK
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Last
payment received on 1/2/2019. No missed interest payments.
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30,000
Class A Units
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$300,000
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Mattison
Avenue Holdings LLC
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$1,000,000
Promissory Note at 12% due 6/9/2022
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$1,000,000
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$1,015,920
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$1,015,920
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3/21/2018
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2%
PIK added to loan balance quarterly.
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$7,788.72
interest rec
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To
be added prior to Closing
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No
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Monthly,
(First
payment due 5/1/2018).
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“Mattison”
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2%
PIK added to balance of Note quarterly.
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Warrant
value of $45,817 per 12/31/2017
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$1,298.12
PIK
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Last
payment received 1/3/2019. No missed
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Warrant
representing 1.43% of the company
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$0
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interest
payments.
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Spinesmith
Holdings LLC
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$1,500,000
Term Note at 12.5% due March 15, 2022
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$1,500,000
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Est.
$1,527,155
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Est.
$1,527,155
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3/15/2017
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2.5%
PIK added to loan balance quarterly.
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$12,196.03
interest rec
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To
be added prior to Closing
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No
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Monthly,
(First
payment due 4/15/2017).
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“Celling
Bio”
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2.5%
PIK added to balance of Note quarterly.
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$2,439.21
PIK
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Last
payment received on 1/14/2019. No missed interest payments, amended facility in Q3 2018.
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MidGuard
Self Storage Greenville LLC
“MidGuard”
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$3,400,000
Promissory Note with 11% IRR due April 21, 2020
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$3,400,000
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$3,010,082
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$3,010,082
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7/21/2015
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NA
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$1,321,337
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To
be added prior to Closing
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No
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Monthly,
(Interest
pay is 7/1/2017 thru 12/1/2019)
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Exhibit
D
SHAREHOLDER
AGREEMENT
THIS
SHAREHOLDER AGREEMENT is entered into as of ____________, 2019 (this “
Agreement
”), by and between Rand Capital
Corporation, a New York corporation (the “
Company
”), and East Asset Management, LLC, a Delaware limited liability
company (“
East
”) and is effective as of the closing of the transactions contemplated in the Stock Purchase
Agreement (as defined below) (the “
Contemplated Transactions
”).
WHEREAS,
the Company has entered into a stock purchase agreement with East and, solely for purposes of being bound by Sections 7.10 and
10.9(a) and (b) thereof, Rand Capital Management LLC, dated January 24, 2019 (the “
Stock Purchase Agreement
”)
whereby East will contribute cash and assets to the Company in exchange for shares of common stock, par value $0.10 per share,
of the Company (the “
Common Stock
”);
WHEREAS,
in connection with the Stock Purchase Agreement, the Company and East desire to enter into this Agreement setting forth certain
rights and obligations with respect to the nomination of directors to the Board of Directors of the Company (the “
Board
”)
from and after the closing of the Contemplated Transactions.
NOW,
THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
Section
1.
Definitions
. As used in this Agreement, the following terms shall have the meanings ascribed to them below:
“
Bylaws
”
means the By-laws of the Company, as may be amended from time to time.
“
Certificate
of Incorporation
” means the Certificate of Incorporation of the Company, as may be amended from time to time.
“
Interested
Person
” has the meaning set forth in Section 2(a)(19) of the Investment Company Act.
“
Investment
Company Act
” means the Investment Company Act of 1940, as amended.
“
Person
”
means any individual, corporation, firm, partnership, joint venture, limited liability company, estate, trust, business association,
organization, governmental entity or other entity.
“
Shareholders
”
means holders of shares of Common Stock.
Section
2.
Board Nomination Rights
.
(a)
Upon completion of the Contemplated Transactions, in connection with any annual or special meeting of Shareholders at which directors
shall be elected, until the date on which East ceases to beneficially own more than fifteen percent (15%) of the outstanding Common
Stock, East shall have the right to designate (i) up to two (2) persons, of which at least one (1) of such person is not an Interested
Person of the Company, for nomination by the Board for election to the Board if the Board is composed of fewer than seven (7)
directors or (ii) up to three (3) persons, of which at least one (1) of such person is not an Interested Person of the Company,
for nomination by the Board for election to the Board if the Board is composed of seven (7) or more directors (each person so
designated an “
East Nominee
”, and such period during which East is permitted to designate an East Nominee pursuant
to this Section 2(a) being the “
East Nomination Period
”). East shall not designate any person to be an East
Nominee who it reasonably believes does not meet the requirements for director nominees as set forth in any applicable policies
of the Company relating to director qualification from time to time.
(b)
The Board or, if then constituted, the nominating committee of the Board or any committee performing similar functions (the “
Nominating
Committee
”), as applicable, shall promptly and in good faith consider each East Nominee designated pursuant to Section
2(a), applying the same standards as shall be applied for the consideration of other proposed nominees of the Board. If the Board
or the Nominating Committee, as applicable, reasonably determines in writing (which determination shall set forth the reasonable
grounds for such determination) that any East Nominee would not be qualified under any applicable law, rule or regulation to serve
as a director of the Company and fails to approve the nomination of such East Nominee, then East shall be entitled to designate
another person as an East Nominee and the provisions of Section 2 shall apply to such alternate person.
(c)
Subject to the requirements of the Certificate of Incorporation, Bylaws, rules of the stock exchange on which the Common Stock
is then listed or applicable law, vacancies arising through the death, resignation or removal of any East Nominee who was elected
or appointed to the Board pursuant to this Section 2, may be filled by the Board only with a substitute East Nominee designated
by East (which East Nominee shall be subject to review by the Board or Nominating Committee, as applicable, under the standards
set forth in Section 2(b)), and the director so chosen shall hold office until the next election or until his or her successor
is duly elected and qualified, or until his or her earlier death, resignation or removal.
(d)
During the East Nomination Period, the Company shall, at least 45 days prior to the expected mailing date, (i) notify East in
writing of the date on which the proxy statement in connection with an election of directors at an annual or special meeting of
Shareholders is expected to be first mailed by the Company and (ii) provide a form of prospective director questionnaire eliciting
information of a type customarily provided by directors or prospective directors in connection with the director nomination process
(each a “
D&O Questionnaire
”) to be completed by each East Nominee. Following receipt of such Company notice,
East shall, within 15 days after the date of the Company’s notice, (i) deliver a written notice to the Company setting forth
the name and address of each East Nominee and (ii) provide a completed and signed D&O Questionnaire from each East Nominee.
The Company shall provide each East Nominee with a reasonable opportunity to review and provide comments on any portion of the
proxy materials relating to such East Nominee. The Company shall incorporate reasonable comments from each such East Nominee in
the proxy materials relating to such matters.
(e)
In the event the Shareholders fail to elect an East Nominee to the Board at any annual or special meeting of Shareholders at which
directors are elected, (i) East shall designate another person as an East Nominee and the provisions of Section 2 shall apply
to such alternate person and (ii) subject to the requirements of Certificate of Incorporation, Bylaws, rules of the stock exchange
on which the Common Stock is then listed or applicable law, the Board shall reasonably promptly elect such alternate East Nominee
to any such vacancy on the Board resulting from the Shareholders failure to elect an East Nominee to the Board at any annual or
special meeting of Shareholders at which directors shall be elected. For the avoidance of doubt, in no event shall the Board be
required to appoint or elect an East Nominee to the Board if the Shareholders fail to elect to such East Nominee to the Board
at such annual or special meeting of Shareholders at which directors are elected.
(f)
The Company agrees that at all times during the East Nomination Period (i) subject to rules of the stock exchange on which the
Common Stock is then listed or applicable law, the Bylaws and the Certificate of Incorporation shall accommodate, be subject to,
and shall not in any way conflict with, East’s rights and obligations set forth herein and (ii) the Company shall not enter
into any other agreements or understandings that in any way conflict with East’s rights and obligations set forth herein.
The Company further agrees that it shall not enter into any agreements or understandings with any Shareholder (other than any
agreement equally applicable to all Shareholders) without prior notice to East; provided, that the Company shall provide to East
(x) a substantially final copy of any such agreements or understandings no later than five (5) business days prior to the signing
of such agreements or understandings and (y) a fully executed copy of such agreement promptly following its execution (unless
such executed agreement is available on the Securities and Exchange Commission’s EDGAR filing system).
(g)
During the East Nomination Period, in the event that (i) the Board has increased the size of the Board to seven (7) or more directors
from the current size of six (6) directors and (ii) East subsequently provides a written notice to the Company setting forth the
name and address of an East Nominee and a completed and signed D&O Questionnaire from such East Nominee, not later than the
90th day after the date of the Company’s receipt of such written notice, the Board shall, subject to (i) the requirements
of Certificate of Incorporation, Bylaws, rules of the stock exchange on which the Common Stock is then listed or applicable law
and (ii) review by the Board or Nominating Committee, as applicable, of such East Nominee under the standards set forth in Section
2(b), elect such East Nominee to the Board to fill the vacancy created by the increased Board size such that there will be three
(3) East Nominees on the Board.
(h)
During the East Nomination Period, East hereby agrees that (i) the method set forth in this Section 2 shall be the exclusive means
for East to designate, nominate, seek to designate or seek to nominate, as applicable, any person for election as a director to
the Board and (ii) it shall not, directly or indirectly, make use of, or otherwise seek to avail itself of, any other rights or
means to designate, nominate, seek to designate or seek to nominate, as applicable, any person for election as a director to the
Board, including pursuant to any rights available to any Shareholder under the Certificate of Incorporation, Bylaws or applicable
law.
(i)
The East Nomination Period shall be adjusted to the extent East’s ownership of the outstanding Common Stock falls below
15% solely as a result of a sale or other issuance of Common Stock by the Company. In the event of any sale or issuance by the
Company that would have the effect of causing East’s beneficial ownership of the outstanding Common Stock to fall below
15%, the 15% threshold set forth in Section 2(a) above shall be reduced by a percentage equal to the percentage by which East’s
ownership of the Common Stock was reduced as a result of such sale or issuance by the Company.
Section
3.
Miscellaneous
.
(a)
Effective Date
. This Agreement shall become effective upon the closing date of the Contemplated Transactions.
(b)
Applicable Law
. This Agreement shall be construed in accordance with and governed by the laws of the State of New York
without regard to principles of conflict of laws.
(c)
Certain Adjustments
. The provisions of this Agreement shall apply to the full extent set forth herein with respect to any
and all shares of capital stock of the Company or any successor or assign of the Company (whether by merger, consolidation, sale
of assets or otherwise) which may be issued in respect of, in exchange for, or in substitution for the shares of Common Stock,
by combination, recapitalization, reclassification, merger, consolidation or otherwise and the term “Common Stock”
shall include all such other securities.
(d)
Enforcement
. Each of the parties hereto acknowledges and agrees that irreparable injury to the other party hereto would
occur in the event any of the provisions of this Agreement were not performed in accordance with its specific terms or were otherwise
breached, and that such injury would not be adequately compensable in damages. It is accordingly agreed that East, on the one
hand, and the Company, on the other hand, shall each be entitled to specific enforcement of, and injunctive relief to prevent
any violation of, the terms hereof and the other party hereto will not take any action, directly or indirectly, in opposition
to the party seeking relief on the grounds that any other remedy is available at law or in equity, and each party further agrees
to waive any requirement for the security or posting of any bond in connection with such remedy. Such remedies, shall be cumulative
and not exclusive, and shall be in addition to any other remedy which any party hereto may have.
(e)
Successors and Assigns
. This Agreement may not be assigned, whether outright or by operation of law, by any party hereto
without the prior written consent of the non-assigning party. Subject to the foregoing, this Agreement shall be binding upon the
parties hereto, their heirs, executors, personal representatives, successors, and assigns.
(f)
Entire Agreement; Termination
. This Agreement contains the entire understanding among the parties hereto and supersedes
all prior written or oral agreements among them respecting the within subject matter, unless otherwise provided herein. There
are no representations, agreements, arrangements or understandings, oral or written, among the parties hereto relating to the
subject matter of this Agreement that are not fully expressed herein. This Agreement may be terminated at any time by written
consent of all of the parties hereto.
(g)
Dispute Resolution
. Any dispute, controversy or claim arising out of, or in connection with, this Agreement, or the breach
thereof, shall be settled by binding arbitration administered by the American Arbitration Association in accordance with its commercial
arbitration rules then in effect. Claims shall be heard by a single arbitrator selected by the American Arbitration Association.
The arbitration shall be conducted on an expedited basis and the place of arbitration shall be Buffalo, New York. The arbitration
shall be subject to, and the arbitrator shall have the powers and rights afforded by, the rules of the American Arbitration Association.
The arbitration shall be governed by the laws of the State of New York. The decision of such arbitrator, including any award of
attorneys’ fees and costs, if any, may be entered in any court having thereof.
(h)
Notices
. All notices and demands under this Agreement and other communications required to be delivered pursuant to this
Agreement, shall be in writing or by facsimile, with a copy via email (which shall not constitute notice hereunder), and shall
be deemed to have been duly given if delivered personally or by overnight courier or if mailed by certified mail, return receipt
requested, postage prepaid, or sent by facsimile, to the following addresses (or to such other address as the party entitled to
notice shall hereafter designate in accordance with the terms hereof):
If
to the Company:
Rand
Capital Corporation
2200
Rand Building
Buffalo,
New York 14203
Attn:
Allen F. Grum, Chief Executive Officer
e-mail:
pgrum@randcapital.com
with
a copy (which shall not constitute notice) to:
Hodgson
Russ LLP
The
Guaranty Building
140
Pearl Street, Suite 100
Buffalo,
New York 14202
Attention:
John J. Zak. Esq.
e-mail:
jzak@hodgsonruss.com
If
to East:
East
Asset Management, LLC
7777
NW Beacon Square Blvd.
Boca
Raton, FL 33487
Attention:
Adam Gusky
e-mail:
agusky@emslp.com
with
a copy (which shall not constitute notice) to:
Eversheds
Sutherland (US) LLP
700
Sixth St., NW, Suite 700
Washington,
DC 20001
Attention:
Cynthia M. Krus, Esq.
e-mail:
cynthiakrus@eversheds-sutherland.com
All
such notices shall be effective: (i) if delivered personally, when received (with written confirmation of receipt), (ii) if sent
by overnight courier, when receipted for, (iii) if mailed by registered or certified mail (return receipt requested), three (3)
days after being mailed as described above, (iv) upon transmission by facsimile if a customary confirmation of delivery is received
during normal business hours and, if not, the next business day after confirmation of delivery is received and (v) if sent by
electronic mail transmission, at the time of confirmation of transmission if received during normal business hours and, if not,
the next business day after confirmation of transmission.
(i)
Waiver
. No consent or waiver, express or implied, by any party to, or of any breach or default by another party in the
performance of, this Agreement shall be construed as a consent to or waiver of any subsequent breach or default in the performance
by such other party of the same or any other obligations hereunder.
(j)
Counterparts
. This Agreement may be executed in several counterparts, which shall be treated as originals for all purposes,
and all counterparts so executed shall constitute one agreement, binding on all the parties hereto, notwithstanding that not all
the parties are signatory to the original or the same counterpart. Any such counterpart shall be admissible into evidence as an
original hereof against the Person who executed it. Facsimile and electronic signatures (i.e., PDF) to this Agreement shall be
valid and will be deemed to have the same legal effect as an original signed counterpart of this Agreement.
(k)
Headings
. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect
the meaning of terms contained herein.
(l)
Invalidity of Provision
. The invalidity or unenforceability of any provision of this Agreement in any jurisdiction shall
not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability
of this Agreement, including that provision, in any other jurisdiction.
(m)
Amendments and Waivers
. The provisions of this Agreement may be modified or amended at any time and from time to time,
and particular provisions of this Agreement may be waived or modified, with and only with an agreement or consent in writing signed
by each of the parties hereto.
(n)
Further Assistance
. The parties hereto shall execute and deliver all documents, provide all information and take or refrain
from all such action as may be necessary or appropriate to achieve the purposes of this Agreement.
(o)
No Third-Party Beneficiaries
. This Agreement is not intended to, and does not, confer upon any Person other than the parties
hereto any rights or remedies.
[
Remainder
of Page Intentionally Left Blank
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IN
WITNESS WHEREOF this Agreement has been signed by each of the parties hereto, and shall be effective as of the date first above
written.
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RAND CAPITAL CORPORATION
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By:
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Name:
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Title:
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EAST ASSET MANAGEMENT, LLC
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Name:
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Title:
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Appendix
B
INVESTMENT
ADVISORY AND MANAGEMENT AGREEMENT
BETWEEN
RAND
CAPITAL CORPORATION
AND
RAND
CAPITAL MANAGEMENT LLC
Agreement
made this ___ day of _____________, 2019 (the “Effective Date”), by and between RAND CAPITAL CORPORATION, a New York
corporation (the “Corporation”), and RAND CAPITAL MANAGEMENT LLC, a Delaware limited liability company (the “Adviser”).
WHEREAS,
the Corporation is a closed-end investment company that has elected to be treated as a business development company under the
Investment Company Act of 1940, as amended (the “Investment Company Act”);
WHEREAS,
the Adviser is an investment adviser that has registered under the Investment Advisers Act of 1940, as amended (the “Advisers
Act”); and
WHEREAS,
the Adviser will provide investment advisory services to the Corporation.
NOW,
THEREFORE, in consideration of the premises and for other good and valuable consideration, the parties hereby agree as follows:
1.
Duties of the Adviser.
(a)
The Corporation hereby employs the Adviser to act as the investment adviser to the Corporation and to manage the investment and
reinvestment of the assets of the Corporation during the term of this Agreement, subject to the supervision of the Board of Directors
of the Corporation (the “Board”), for the period and upon the terms herein set forth,
(i)
in accordance with the investment objectives, policies and restrictions that are determined by the Corporation’s Board of
Directors from time to time and disclosed to the Adviser, including those as set forth in the reports and registration statements
that the Corporation files with the Securities and Exchange Commission (the “SEC”),
(ii)
in accordance with any requirements imposed by the provisions of the Investment Company Act and of any rules or regulations in
force thereunder, subject to the terms of any exemptive order applicable to the Corporation, and
(iii)
in accordance with all other applicable federal and state laws, rules and regulations, and the Corporation’s certificate
of incorporation and by-laws.
(b)
Without limiting the generality of the foregoing, the Adviser shall, during the term and subject to the provisions of this Agreement,
(i)
determine the composition of the portfolio of the Corporation, the nature and timing of the changes therein and the manner of
implementing such changes,
(ii)
identify, evaluate and negotiate the structure of the investments made by the Corporation,
(iii)
execute, close, service and monitor the Corporation’s investments,
(iv)
determine the securities and other assets that the Corporation will purchase, retain, or sell,
(v)
perform due diligence on prospective portfolio companies or investments, and
(vi)
provide the Corporation with such other investment advisory, research and related services as the Corporation may, from time to
time, reasonably require for the investment of its funds.
The
Adviser shall have the power and authority on behalf of the Corporation to effectuate its investment decisions for the Corporation,
including the execution and delivery of all documents relating to the Corporation’s investments and the placing of orders
for other purchase or sale transactions on behalf of the Corporation. In the event that the Corporation determines to incur debt
financing, the Adviser will arrange for such financing on the Corporation’s behalf, subject to the oversight and approval
of the Board. If it is necessary for the Adviser to make investments on behalf of the Corporation through a special purpose vehicle,
the Adviser shall have authority to create or arrange for the creation of such special purpose vehicle and to make such investments
through such special purpose vehicle in accordance with the Investment Company Act.
(c)
The Adviser hereby accepts such employment and agrees during the term hereof to render the services described herein for the compensation
provided herein.
(d)
Subject to the requirements of the Investment Company Act, the Adviser is hereby authorized to enter into one or more sub-advisory
agreements with other investment advisers (each, a “Sub-Adviser”) pursuant to which the Adviser may obtain the services
of the Sub-Adviser(s) to assist the Adviser in providing the investment advisory services required to be provided by the Adviser
under Sections 1(a) and 1(b) of this Agreement. Specifically, the Adviser may retain a Sub-Adviser to recommend specific securities
or other investments based upon the Corporation’s investment objectives and policies, and work, along with the Adviser,
in structuring, negotiating, arranging or effecting the acquisition or disposition of such investments and monitoring investments
on behalf of the Corporation, subject to the oversight of the Adviser and the Corporation. The Adviser, and not the Corporation,
shall be responsible for any compensation payable to any Sub-Adviser. Any sub-advisory agreement entered into by the Adviser shall
be in accordance with the requirements of the Investment Company Act and other applicable federal and state law. Nothing in this
subsection (d) will obligate the Adviser to pay any expenses that are the expenses of the Corporation under Section 2.
(e)
The Adviser, and any Sub-Adviser, shall for all purposes herein provided each be deemed to be an independent contractor and, except
as expressly provided or authorized herein, shall have no authority to act for or represent the Corporation in any way or otherwise
be deemed an agent of the Corporation.
(f)
The Adviser shall keep and preserve for the period required by the Investment Company Act any books and records relevant to the
provision of its investment advisory services to the Corporation and shall specifically maintain all books and records with respect
to the Corporation’s portfolio transactions and shall render to the Board such periodic and special reports as the Board
may reasonably request. The Adviser agrees that all records that it maintains for the Corporation are the property of the Corporation
and will surrender promptly to the Corporation any such records upon the Corporation’s request, provided that the Adviser
may retain a copy of such records.
(g)
The Adviser shall provide to the Board such periodic and special reports as it may request.
2.
Corporation’s Responsibilities and Expenses Payable by the Corporation
. All investment professionals of the Adviser
and its staff, when and to the extent engaged in providing investment advisory services required to be provided by the Adviser
under Sections 1(a) and 1(b), and the compensation of such personnel and the general office and facilities and overhead expenses
incurred by the Adviser in maintaining its place of business allocable to such services, will be provided and paid for by the
Adviser and not by the Corporation. The Corporation will bear all other costs and expenses of its operations and transactions,
including those relating to:
(a)
organization;
(b)
calculating the Corporation’s net asset value (including the cost and expenses of any independent valuation firm);
(c)
expenses incurred by the Adviser payable to third parties, including agents, consultants or other advisors, in monitoring financial
and legal affairs for the Corporation and in monitoring the Corporation’s investments and performing due diligence on its
prospective portfolio companies;
(d)
interest payable on debt, if any, incurred to finance the Corporation’s investments;
(e)
offerings of the Corporation’s common stock and other securities;
(f)
investment advisory and management fees payable under this Agreement, which fees shall not include fees (if any) payable to a
Sub-Adviser retained by the Adviser pursuant to Section 1(d);
(g)
administration fees, if any, payable under the Administration Agreement (the “Administration Agreement”) between the
Corporation and the Adviser or any successor thereto as the Corporation’s administrator;
(h)
transfer agent and custodial fees;
(i)
federal and state registration fees;
(j)
all costs of registration and listing the Corporation’s shares on any securities exchange;
(k)
federal, state and local taxes;
(l)
independent directors’ fees and expenses;
(m)
costs of preparing and filing reports or other documents required by governmental bodies (including the SEC);
(n)
costs of any reports, proxy statements or other notices to stockholders, including printing costs;
(o)
the Corporation’s allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance,
and any other insurance premiums;
(p)
direct costs and expenses of administration, including independent auditors and outside legal costs; and
(q)
all other expenses incurred by the Corporation or the Advisor in connection with administering the Corporation’s business
(including payments under the Administration Agreement based upon the Corporation’s allocable portion of the Advisor’s
overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost
of the Corporation’s chief financial officer and chief compliance officer and their respective staffs (including travel
expenses)).
3.
Compensation of the Adviser
. The Corporation agrees to pay, and the Adviser agrees to accept, as compensation for the services
provided by the Adviser hereunder, a base management fee (“Base Management Fee”) and an incentive fee (“Incentive
Fee”) as hereinafter set forth. The Corporation shall make any payments due hereunder to the Adviser or to the Adviser’s
designee as the Adviser may otherwise direct. To the extent permitted by applicable law, the Adviser may elect, or the Corporation
may adopt a deferred compensation plan pursuant to which the Adviser may elect, to defer all or a portion of its fees hereunder
for a specified period of time.
(a)
The Base Management Fee shall be 1.50% per annum of the Corporation’s total assets (other than cash or cash equivalents
but including assets purchased with borrowed funds), determined according to procedures duly adopted by the Board. For services
rendered during the period commencing from the Effective Date, through and including the end of the first calendar quarter of
the Corporation’s operations after the Effective Date, the Base Management Fee will be payable monthly in arrears. Until
the first calendar quarter of the Corporation’s operations after the Effective Date, the Base Management Fee will be calculated
based on the initial value of the Corporation’s total assets (other than cash or cash equivalents but including assets purchased
with borrowed funds) after giving effect to the contribution of the loan portfolio as contemplated by the Stock Purchase Agreement,
dated as of January ___, 2019 by and among the Corporation, East Asset Management, LLC and, solely for purposes of being bound
by Sections 7.10 and 10.9(a) and (b) thereof, the Adviser. Subsequently, the Base Management Fee will be calculated based on the
average value of the Corporation’s total assets (other than cash or cash equivalents but including assets purchased with
borrowed funds) at the end of the two most recently completed calendar quarters. Base Management Fees for any partial month or
quarter will be appropriately pro-rated.
(b)
The Incentive Fee shall consist of two parts, as follows:
(i)
One part (the “Income Based Fee”) will be calculated and payable quarterly in arrears based on the Pre-Incentive Fee
net investment income for the immediately preceding calendar quarter and shall be payable promptly following the filing of the
Corporation’s financial statements for such quarter. “Pre-Incentive Fee net investment income” means interest
income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance),
such as commitment, origination, structuring, diligence and consulting fees or other fees that the Corporation receives from portfolio
companies) accrued by the Corporation during the relevant calendar quarter, minus the Corporation’s operating expenses for
such calendar quarter (including the Base Management Fee, expenses payable under the Administration Agreement, and any interest
expense and dividends paid on any issued and outstanding preferred stock, but excluding any portion of Incentive Fee).
Pre-Incentive
Fee net investment income includes any accretion of original issue discount, market discount, payment-in-kind interest, payment-in-kind
dividends or other types of deferred or accrued income, including in connection with zero coupon securities, that the Corporation
and its consolidated subsidiaries have recognized in accordance with U.S. Generally Accepted Accounting Principles, but have not
yet received in cash (collectively, “Accrued Unpaid Income”). Pre-Incentive Fee net investment income does not include
any realized capital gains, realized and unrealized capital losses or unrealized capital appreciation or depreciation.
Pre-Incentive
Fee net investment income, expressed as a rate of return on the value of the Corporation’s net assets (defined as total
assets less indebtedness) at the end of the immediately preceding calendar quarter, will be compared to a “hurdle rate”,
expressed as a rate of return on the value of the Corporation’s net assets at the end of the most recently completed calendar
quarter, of 1.75% per quarter (7% annualized). The Corporation will pay the Adviser an Incentive Fee with respect to the Corporation’s
Pre-Incentive Fee net investment income in each calendar quarter as follows:
(A)
no Income Based Fee in any calendar quarter in which the Corporation’s Pre-Incentive Fee net investment income does not
exceed the hurdle rate;
(B)
100.0% of the Corporation’s Pre-Incentive Fee net investment income for any calendar quarter with respect to that portion
of such Pre-Incentive Fee net investment income for such calendar quarter, if any, that exceeds the hurdle rate but is less than
2.1875% (8.75% annualized); and
(C)
20.0% of the amount of the Corporation’s Pre-Incentive Fee net investment income for any calendar quarter with respect to
that portion of such Pre-Incentive Fee Net Investment Income for such calendar quarter, if any, that exceeds 2.1875% (8.75% annualized).
These
calculations will be appropriately pro-rated for any period of less than three months.
Notwithstanding
the foregoing, the Income Based Fee paid to the Adviser for any calendar quarter that begins more than two years and three months
after the Effective Date shall not be in excess of the Incentive Fee Cap. The Incentive Fee Cap for any calendar quarter is an
amount equal to (1) 20.0% of the Cumulative Net Return (as defined below) during the Income Based Fee Calculation Period (as defined
below) minus (2) if applicable, the aggregate Income Based Fee that was paid in respect of the calendar quarters prior to such
quarter included in the relevant Income Based Fee Calculation Period.
“Income
Based Fee Calculation Period” means, with reference to a calendar quarter, the period of time consisting of such calendar
quarter and the additional quarters that comprise the lesser of (1) the number of quarters immediately preceding such calendar
quarter that began more than two years after the Effective Date or (2) the eleven calendar quarters immediately preceding such
calendar quarter.
“Cumulative
Net Return” means (1) the aggregate net investment income in respect of the relevant Income Based Fee Calculation Period
minus (2) any Net Capital Loss, if any, in respect of the relevant Income Based Fee Calculation Period. If, in any quarter, the
Incentive Fee Cap is zero or a negative value, the Corporation pays no Income Based Fee to the Adviser for such quarter. If, in
any quarter, the Incentive Fee Cap for such quarter is a positive value but is less than the Income Based Fee that is payable
to the Adviser for such quarter (before giving effect to the Incentive Fee Cap) calculated as described above, the Corporation
pays an Income Based Fee to the Adviser 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 Income Based Fee that is payable to the Adviser for such quarter (before
giving effect to the Incentive Fee Cap) calculated as described above, the Corporation pays an Income Based Fee to the Adviser
equal to the Income Based Fee calculated as described above for such quarter without regard to the Incentive Fee Cap.
“Net
Capital Loss” in respect of a particular period means the difference, if positive, between (1) aggregate capital losses,
whether realized or unrealized, in such period and (2) aggregate capital gains, whether realized or unrealized, in such period.
Any
Income Based Fee otherwise payable under this Section 3(b)(i) with respect to Accrued Unpaid Income (collectively, the “Accrued
Unpaid Income Based Fees”) shall be deferred, on a security by security basis, and shall become payable only if, as, when
and to the extent cash is received by the Corporation or its consolidated subsidiaries in respect thereof. Any Accrued Unpaid
Income that is subsequently reversed in connection with a write-down, write-off, impairment or similar treatment of the investment
giving rise to such Accrued Unpaid Income will, in the applicable period of reversal, (1) reduce Pre-Incentive Fee net investment
income and (2) reduce the amount of Accrued Unpaid Income Incentive Fees deferred under this paragraph. Subsequent payments of
Accrued Unpaid Income Incentive Fees deferred pursuant to this paragraph shall not reduce the amounts otherwise payable for any
quarter pursuant to this Section 3(b)(i).
(ii)
The second part of the Incentive Fee (the “Capital Gains Fee”) will be determined and payable in arrears as of the
end of each calendar year (or upon termination of this Agreement as set forth below), commencing with the calendar year ending
on December 31, 2019, and is calculated at the end of each applicable year by subtracting (1) the sum of the Corporation’s
cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (2) the Corporation’s cumulative
aggregate realized capital gains, in each case calculated from the Effective Date. If such amount is positive at the end of such
year, then the Capital Gains Fee for such year is equal to 20.0% of such amount, less the cumulative aggregate amount of Capital
Gains Fees paid in all prior years. If such amount is negative, then there is no Capital Gains Fee payable for such year. If this
Agreement is terminated as of a date that is not a calendar year end, the termination date shall be treated as though it were
a calendar year end for purposes of calculating and paying a Capital Gains Fee.
For
purposes of this Section 3(b)(ii):
The
cumulative aggregate realized capital gains
are calculated as the sum of the differences, if positive, between (a) the
net sales price of each investment in the Corporation’s portfolio when sold and (b) the accreted or amortized cost basis
of such investment.
The
cumulative aggregate realized capital losses
are calculated as the sum of the amounts by which (a) the net sales price
of each investment in the Corporation’s portfolio when sold is less than (b) the accreted or amortized cost basis of such
investment.
The
aggregate unrealized capital depreciation
is calculated as the sum of the differences, if negative, between (a) the valuation
of each investment in the Corporation’s portfolio as of the applicable Capital Gains Fee calculation date and (b) the accreted
or amortized cost basis of such investment.
The
accreted or amortized cost basis of an investment shall mean, with respect to an investment owned by the Corporation as of the
Effective Date, the fair value of such investment as set forth in the Corporation’s most recently filed Quarterly Report
on Form 10-Q or Annual Report on Form 10-K, as applicable, as filed with the SEC and, with respect to an investment acquired by
the Corporation subsequent to the Effective Date, the accreted or amortized cost basis of such investment as reflected in the
Corporation’s financial statements.
4.
Covenants of the Adviser
. The Adviser covenants that it will remain registered as an investment adviser under the Advisers
Act. The Adviser agrees that its activities will at all times be in compliance in all material respects with all applicable federal
and state laws governing its operations and investments.
5.
Excess Brokerage Commissions
. The Adviser is hereby authorized, to the fullest extent now or hereafter permitted by law,
to cause the Corporation to pay a member of a national securities exchange, broker or dealer an amount of commission for effecting
a securities transaction in excess of the amount of commission another member of such exchange, broker or dealer would have charged
for effecting that transaction, if the Adviser determines in good faith, taking into account such factors as price (including
the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the
firm and the firm’s risk and skill in positioning blocks of securities, that such amount of commission is reasonable in
relation to the value of the brokerage and/or research services provided by such member, broker or dealer, viewed in terms of
either that particular transaction or its overall responsibilities with respect to the Corporation’s portfolio, and constitutes
the best net results for the Corporation.
6.
Limitations on the Employment of the Adviser
. The services of the Adviser to the Corporation are not exclusive, and the
Adviser may engage in any other business or render similar or different services to others including, without limitation, the
direct or indirect sponsorship or management of other investment based accounts or commingled pools of capital, however structured,
having investment objectives similar to those of the Corporation, so long as its services to the Corporation hereunder are not
materially impaired thereby, and nothing in this Agreement shall limit or restrict the right of any member, manager, partner,
officer or employee of the Adviser to engage in any other business or to devote his or her time and attention in part to any other
business, whether of a similar or dissimilar nature, or to receive any fees or compensation in connection therewith (including
fees for serving as a director of, or providing consulting services to, one or more of the Corporation’s portfolio companies,
subject to applicable law). So long as this Agreement or any extension, renewal or amendment remains in effect, the Adviser shall
be the only investment adviser for the Corporation, subject to the Adviser’s right to enter into sub-advisory agreements.
The Adviser assumes no responsibility under this Agreement other than to render the services called for hereunder. It is understood
that directors, officers, employees and stockholders of the Corporation are or may become interested in the Adviser and its affiliates,
as directors, officers, employees, partners, stockholders, members, managers or otherwise, and that the Adviser and directors,
officers, employees, partners, stockholders, members and managers of the Adviser and its affiliates are or may become similarly
interested in the Corporation as stockholders or otherwise.
7.
Responsibility of Dual Directors, Officers and/or Employees
. If any person who is a member, manager, partner, officer or
employee of the Adviser is or becomes a director, officer and/or employee of the Corporation and acts as such in any business
of the Corporation, then such member, manager, partner, officer and/or employee of the Adviser shall be deemed to be acting in
such capacity solely for the Corporation, and not as a member, manager, partner, officer or employee of the Adviser under the
control or direction of the Adviser, even if paid by the Adviser.
8.
Limitation of Liability of the Adviser; Indemnification
. The Adviser, its members and their respective officers, managers,
partners, agents, employees, controlling persons, members and any other person affiliated with any of them (collectively, the
“Indemnified Parties”), shall not be liable to the Corporation for any action taken or omitted to be taken by the
Adviser in connection with the performance of any of its duties or obligations under this Agreement or otherwise as an investment
adviser of the Corporation, except to the extent specified in Section 36(b) of the Investment Company Act concerning loss resulting
from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation
for services. The Corporation shall indemnify, defend and protect the Indemnified Parties (each of whom shall be deemed a third
party beneficiary hereof) and hold them harmless from and against all damages, liabilities, costs and expenses (including reasonable
attorneys’ fees and amounts reasonably paid in settlement) incurred by the Indemnified Parties in or by reason of any pending,
threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the
Corporation or its security holders) arising out of or otherwise based upon the performance of any of the Adviser’s duties
or obligations under this Agreement or as an investment adviser of the Corporation. Notwithstanding the foregoing provisions of
this Section 8 to the contrary, nothing contained herein shall protect or be deemed to protect the Indemnified Parties against
or entitle or be deemed to entitle the Indemnified Parties to indemnification in respect of, any liability to the Corporation
or its security holders to which the Indemnified Parties would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of any Indemnified Party’s duties or by reason of the reckless disregard of the Adviser’s
duties and obligations under this Agreement (as the same shall be determined in accordance with the Investment Company Act and
any interpretations or guidance by the SEC or its staff thereunder).
9.
Confidentiality
. The parties hereto agree that each shall treat confidentially all information provided by each party to
the other regarding its business and operations. All confidential information provided by a party hereto, including all “nonpublic
personal information,” as defined under the Gramm-Leach-Bliley Act of 1999 (Public law 106-102, 113 Stat. 1138), shall be
used by the other party hereto solely for the purpose of rendering services pursuant to this Agreement and, except as may be required
in carrying out this Agreement, shall not be disclosed to any third party, without the prior consent of such providing party,
except that such confidential information may be disclosed to an affiliate or agent of the disclosing party to be used for the
sole purpose of providing the services set forth herein. The foregoing shall not be applicable to any information that is publicly
available or available to the recipient when provided or thereafter becomes publicly available or available to the recipient other
than through a breach of this Agreement, or that is requested by or required to be disclosed to any governmental or regulatory
authority, including in connection with any required regulatory filings or examinations, by judicial or administrative process
or otherwise by applicable law or regulation. Notwithstanding the foregoing, the Corporation hereby consents and authorizes the
Adviser and its affiliates to use and disclose confidential information relating to the Corporation in connection with the preparation
of performance information relating to the Corporation.
10.
Effectiveness, Duration and Termination of Agreement
. This Agreement shall become effective as of the first date above
written. This Agreement shall remain in effect for two years after such date, and thereafter shall continue automatically for
successive annual periods, provided that such continuance is specifically approved at least annually by
(a)
the vote of the Board, or by the vote of stockholders holding a majority of the outstanding voting securities of the Corporation,
and
(b)
the vote of a majority of the Corporation’s Directors who are not parties to this Agreement or “interested persons”
(as such term is defined in Section 2(a)(19) of the Investment Company Act) of any party to this Agreement, in accordance with
the requirements of the Investment Company Act.
This
Agreement may be terminated at any time, without the payment of any penalty, upon 60 days’ written notice, by the vote of
stockholders holding a majority of the outstanding voting securities of the Corporation, or by the vote of the Corporation’s
Directors or by the Adviser.
This
Agreement will automatically terminate in the event of its “assignment” (as such term is defined for purposes of Section
15(a)(4) of the Investment Company Act). The provisions of Section 8 of this Agreement shall remain in full force and effect,
and the Adviser shall remain entitled to the benefits thereof, notwithstanding any termination of this Agreement. Further, notwithstanding
the termination or expiration of this Agreement as aforesaid, (i) the Adviser shall be entitled to any amounts owed under Section
3 through the date of termination or expiration, and (ii) the obligations set forth in Sections 8 and 9 shall survive the termination
of this Agreement.
11.
Amendments of this Agreement
. This Agreement may not be amended or modified except by an instrument in writing signed by
all parties hereto, but the consent of the Corporation must be obtained in conformity with the requirements of the Investment
Company Act.
12.
Governing Law
. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York,
including without limitation Sections 5-1401 and 5-1402 of the New York General Obligations Law and New York Civil Practice Law
and Rules, Rule 327(b), and the applicable provisions of the Investment Company Act, if any. To the extent that the applicable
laws of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company
Act, if any, the latter shall control. The parties unconditionally and irrevocably consent to the exclusive jurisdiction of the
courts located in the State of New York and waive any objection with respect thereto, for the purpose of any action, suit or proceeding
arising out of or relating to this Agreement or the transactions contemplated hereby.
13.
No Waiver
. The failure of either party to enforce at any time for any period the provisions of or any rights deriving from
this Agreement shall not be construed to be a waiver of such provisions or rights or the right of such party thereafter to enforce
such provisions, and no waiver shall be binding unless executed in writing by all parties hereto.
14.
Severability
. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any
law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long
as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to
any party.
15.
Headings
. The descriptive headings contained in this Agreement are for convenience of reference only and shall not affect
in any way the meaning or interpretation of this Agreement.
16.
Counterparts
. This Agreement may be executed in one or more counterparts, each of which when executed shall be deemed to
be an original instrument and all of which taken together shall constitute one and the same agreement.
17.
Notices
. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given
or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by overnight courier service
(with signature required), by facsimile, or by registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at their respective principal executive office addresses.
18.
Entire Agreement
. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof
and supersedes all prior agreements and undertakings, both written and oral, between the parties with respect to such subject
matter.
19.
Certain Matters of Construction.
(a)
The words “hereof”, “herein”, “hereunder” and words of similar import shall refer to this
Agreement as a whole and not to any particular Section or provision of this Agreement, and reference to a particular Section of
this Agreement shall include all subsections thereof.
(b)
Definitions shall be equally applicable to both the singular and plural forms of the terms defined, and references to the masculine,
feminine or neuter gender shall include each other gender.
(c)
The word “including” shall mean including without limitation.
[THE
REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date above written.
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RAND
CAPITAL CORPORATION
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Name:
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RAND
CAPITAL MANAGEMENT LLC
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Appendix
C
ADMINISTRATION
AGREEMENT
AGREEMENT
(this “
Agreement
”) made as of ____________, 2019 (the “
Effective Date
”) by and between Rand
Capital Corporation, a New York corporation (hereinafter referred to as the “
Corporation
”), and Rand Capital
Management LLC, a Delaware limited liability company (hereinafter referred to as the “
Administrator
”).
WITNESSETH:
WHEREAS,
the Corporation is a closed-end investment company that has elected to be treated as a business development company under the
Investment Company Act of 1940, as amended (hereinafter referred to as the “
Investment Company Act
”);
WHEREAS,
the Corporation desires to retain the Administrator to provide administrative services to the Corporation in the manner and on
the terms hereinafter set forth; and
WHEREAS,
the Administrator is willing to provide administrative services to the Corporation on the terms and conditions hereafter set forth.
NOW,
THEREFORE, in consideration of the premises and the covenants hereinafter contained and for other good and valuable consideration,
the receipt and adequacy of which is hereby acknowledged, the Corporation and the Administrator hereby agree as follows:
1.
Duties of the Administrator
.
(a)
Employment of Administrator
. The Corporation hereby employs the Administrator to act as administrator of the Corporation,
and to furnish, or arrange for others to furnish, the administrative services, personnel and facilities described below, subject
to review by and the overall control of the Board of Directors of the Corporation, for the period and on the terms and conditions
set forth in this Agreement. The Administrator hereby accepts such employment and agrees during such period to render, or arrange
for the rendering of, such services and to assume the obligations herein set forth subject to the reimbursement of costs and expenses
as provided for below. The Administrator and any such other persons providing services arranged for by the Administrator shall
for all purposes herein be deemed to be independent contractors and shall, unless otherwise expressly provided or authorized herein,
have no authority to act for or represent the Corporation in any way or otherwise be deemed agents of the Corporation.
(b)
Services
. The Administrator shall perform (or oversee, or arrange for, the performance of) the administrative services
necessary for the operation of the Corporation. Without limiting the generality of the foregoing, the Administrator shall provide
the Corporation with office facilities, equipment, clerical, bookkeeping, finance, accounting, compliance and record keeping services
at such office facilities and such other services as the Administrator, subject to review by the Board of Directors of the Corporation,
shall from time to time determine to be necessary or useful to perform its obligations under this Agreement. The Administrator
shall also, on behalf of the Corporation, arrange for the services of, and oversee, custodians, depositories, transfer agents,
dividend disbursing agents, other stockholder servicing agents, accountants, attorneys, underwriters, brokers and dealers, corporate
fiduciaries, insurers, banks and such other persons in any such other capacity deemed to be necessary or desirable. The Administrator
shall make reports to the Corporation’s Board of Directors of its performance of its obligations hereunder and furnish advice
and recommendations with respect to such other aspects of the business and affairs of the Corporation as it shall determine to
be desirable;
provided
that nothing herein shall be construed to require the Administrator to, and the Administrator shall
not, in its capacity as Administrator, provide any advice or recommendation relating to the securities and other assets that the
Corporation should purchase, retain or sell or any other investment advisory services to the Corporation. The Administrator shall
be responsible for the financial and other records that the Corporation is required to maintain and shall prepare all reports
and other materials required to be filed with the Securities and Exchange Commission (the “
SEC
”) or any other
regulatory authority, including reports to stockholders. The Administrator will provide on the Corporation’s behalf significant
managerial assistance to those portfolio companies to which the Corporation is required to provide such assistance. In addition,
the Administrator will assist the Corporation in determining and publishing the Corporation’s net asset value, overseeing
the preparation and filing of the Corporation’s tax returns, and the printing and dissemination of reports to stockholders
of the Corporation, and generally overseeing the payment of the Corporation’s expenses and the performance of administrative
and professional services rendered to the Corporation by others.
2.
Records
. The Administrator agrees to maintain and keep all books, accounts and other records of the Corporation that relate
to activities performed by the Administrator hereunder and, if required by the Investment Company Act, will maintain and keep
such books, accounts and records in accordance with that act. In compliance with the requirements of Rule 31a-3 under the Investment
Company Act, the Administrator agrees that all records that it maintains for the Corporation shall at all times remain the property
of the Corporation, shall be readily accessible during normal business hours, and shall be promptly surrendered upon the termination
of this Agreement or otherwise on written request. The Administrator further agrees that all records which it maintains for the
Corporation pursuant to Rule 31a-1 under the Investment Company Act will be preserved for the periods prescribed by Rule 31a-2
under the Investment Company Act unless any such records are earlier surrendered as provided above. Records shall be surrendered
in usable machine-readable form. The Administrator shall have the right to retain copies of such records subject to observance
of its confidentiality obligations under this Agreement.
3.
Confidentiality
. The parties hereto agree that each shall treat confidentially all information provided by each party to
the other regarding its business and operations. All confidential information provided by a party hereto, including nonpublic
personal information pursuant to Regulation S-P of the SEC, shall be used by any other party hereto solely for the purpose of
rendering services pursuant to this Agreement and, except as may be required in carrying out this Agreement, shall not be disclosed
to any third party, without the prior consent of such providing party. The foregoing shall not be applicable to any information
that is publicly available when provided or thereafter becomes publicly available other than through a breach of this Agreement,
or that is required to be disclosed by any regulatory authority, any authority or legal counsel of the parties hereto, or by judicial
or administrative process or otherwise by applicable law or regulation.
4.
Compensation; Allocation of Costs and Expenses
.
(a)
In full consideration of the provision of the services of the Administrator, the Corporation shall reimburse the Administrator
for the costs and expenses incurred by the Administrator in performing its obligations and providing personnel and facilities
hereunder.
(b)
The Corporation will bear all costs and expenses that are incurred in its operation and transactions and not specifically assumed
by the Administrator, in its capacity as the Corporation’s investment adviser, pursuant to the Investment Advisory and Management
Agreement, dated as of ____________, 2019, between the Corporation and the Administrator (the “
Advisory Agreement
”).
Costs and expenses to be borne by the Corporation include, but are not limited to, those relating to: organization; calculating
the Corporation’s net asset value (including the cost and expenses of any independent valuation firm); expenses incurred
by the Administrator payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal
affairs for the Corporation and in monitoring the Corporation’s investments and performing due diligence on its prospective
portfolio companies; interest payable on debt, if any, incurred to finance the Corporation’s investments; offerings of the
Corporation’s common stock and other securities; investment advisory and management fees (other than fees (if any) payable
to a sub-advisor retained by the Administrator under the Advisory Agreement); administration fees, if any, payable under this
Agreement; transfer agent and custodial fees; federal and state registration fees; all costs of registration and listing the Corporation’s
shares on any securities exchange; federal, state, local and other taxes; independent directors’ fees and expenses; costs
of preparing and filing reports or other documents required by governmental bodies (including the SEC); costs of any reports,
proxy statements or other notices to stockholders, including printing costs; the Corporation’s allocable portion of the
fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; direct costs
and expenses of administration, including independent auditors and outside legal costs; and all other expenses incurred by the
Corporation or the Administrator in connection with administering the Corporation’s business, including payments under this
Agreement based upon the Corporation’s allocable portion of the Administrator’s overhead in performing its obligations
under this Agreement, including rent (if office space is provided by the Administrator) and the allocable portion of the cost
of the Corporation’s chief financial officer and chief compliance officer and their respective staffs (including travel
expenses).
5.
Limitation of Liability of the Administrator; Indemnification
. The Administrator, its members and their respective officers,
managers, partners, agents, employees, controlling persons, members, and any other person or entity affiliated with any of them
(collectively, the “
Indemnified Parties
”), shall not be liable to the Corporation for any action taken or omitted
to be taken by the Administrator in connection with the performance of any of its duties or obligations under this Agreement or
otherwise as administrator for the Corporation, and the Corporation shall indemnify, defend and protect the Indemnified Parties
(each of whom shall be deemed a third party beneficiary hereof) and hold them harmless from and against all damages, liabilities,
costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) incurred by the Indemnified
Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an
action or suit by or in the right of the Corporation or its security holders) arising out of or otherwise based upon the performance
of any of the Administrator’s duties or obligations under this Agreement or otherwise as administrator for the Corporation.
Notwithstanding the preceding sentence of this Paragraph 5 to the contrary, nothing contained herein shall protect or be deemed
to protect the Indemnified Parties against or entitle or be deemed to entitle the Indemnified Parties to indemnification in respect
of, any liability to the Corporation or its security holders to which the Indemnified Parties would otherwise be subject by reason
of willful misfeasance, bad faith or negligence in the performance of any Indemnified Party’s duties or by reason of the
reckless disregard of the Administrator’s duties and obligations under this Agreement (to the extent applicable, as the
same shall be determined in accordance with the Investment Company Act and any interpretations or guidance by the SEC or its staff
thereunder).
6.
Activities of the Administrator
. The services of the Administrator to the Corporation are not exclusive, and the Administrator
and each other person providing services as arranged by the Administrator is free to render services to others. It is understood
that directors, officers, employees and stockholders of the Corporation are or may become interested in the Administrator and
its affiliates, as directors, officers, members, managers, employees, partners, stockholders or otherwise, and that the Administrator
and directors, officers, members, managers, employees, partners and stockholders of the Administrator and its affiliates are or
may become similarly interested in the Corporation as stockholders or otherwise.
7.
Duration and Termination of this Agreement
.
(a)
This Agreement shall become effective as of the Effective Date, and shall remain in force with respect to the Corporation for
two years from the Effective Date and thereafter continue from year to year, but only so long as such continuance is specifically
approved at least annually by (i) the Board of Directors of the Corporation and (ii) a majority of those members of the Corporation’s
Board of Directors who are not parties to this Agreement or “interested persons” (as defined in the Investment Company
Act) of any such party.
(b)
This Agreement may be terminated at any time, without the payment of any penalty, by vote of the Corporation’s Board of
Directors, or by the Administrator, upon 60 days’ advance written notice to the other party. This Agreement may not be assigned
by a party without the consent of the other party.
8.
Amendments of this Agreement
. This Agreement may not be amended or modified except by an instrument in writing signed by
all parties hereto.
9.
Assignment
. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors
and permitted assigns. Neither party may assign, delegate or otherwise transfer this Agreement or any of its rights or obligations
hereunder without the prior written consent of the other party. No assignment by either party permitted hereunder shall relieve
the applicable party of its obligations under this Agreement. Any assignment by either party in accordance with the terms of this
Agreement shall be pursuant to a written assignment agreement in which the assignee expressly assumes the assigning party’s
rights and obligations hereunder.
10
.
Governing Law
. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York,
including without limitation Sections 5-1401 and 5-1402 of the New York General Obligations Law and New York Civil Practice Law
and Rules, Rule 327(b), and the applicable provisions of the Investment Company Act, if any. To the extent that the applicable
laws of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company
Act, if any, the latter shall control. The parties unconditionally and irrevocably consent to the exclusive jurisdiction of the
courts located in the State of New York and waive any objection with respect thereto, for the purpose of any action, suit or proceeding
arising out of or relating to this Agreement or the transactions contemplated hereby.
11.
No Waiver
. The failure of either party to enforce at
any time for any period the provisions of or any rights deriving from this Agreement shall not be construed to be a waiver of
such provisions or rights or the right of such party thereafter to enforce such provisions or rights, and no waiver shall be binding
unless executed in writing by all parties hereto.
12
.
Severability
. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any
law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long
as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to
any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated
to the greatest extent possible.
13
.
Headings
. The descriptive headings contained in this Agreement are for convenience of reference only and shall not affect
in any way the meaning or interpretation of this Agreement.
14
.
Counterparts
. This Agreement may be executed in one or more counterparts (including by facsimile or pdf transmission),
each of which when executed shall be deemed to be an original instrument and all of which taken together shall constitute one
and the same agreement.
15
.
Notices
. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given
or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by overnight courier service
(with signature required), by facsimile, or by registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at their respective principal executive office addresses.
16
.
Entire Agreement
. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof
and supersedes all prior and contemporaneous agreements and undertakings, both written and oral, between the parties with respect
to such subject matter.
17
.
Certain Matters of Construction
.
(a)
The words “hereof”, “herein”, “hereunder” and words of similar import shall refer to this
Agreement as a whole and not to any particular Section or provision of this Agreement, and reference to a particular Section of
this Agreement shall include all subsections thereof.
(b)
Definitions shall be equally applicable to both the singular and plural forms of the terms defined, and references to the masculine,
feminine or neuter gender shall include each other gender.
(c)
The word “including” shall mean including without limitation.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
IN
WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written.
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CORPORATION
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RAND
CAPITAL CORPORATION
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By:
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Name:
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Title:
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ADMINISTRATOR
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Rand
Capital Management LLC
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By:
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Name:
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Title:
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Appendix
D
SHAREHOLDER
AGREEMENT
THIS
SHAREHOLDER AGREEMENT is entered into as of ____________, 2019 (this “
Agreement
”), by and between Rand Capital
Corporation, a New York corporation (the “
Company
”), and East Asset Management, LLC, a Delaware limited liability
company (“
East
”) and is effective as of the closing of the transactions contemplated in the Stock Purchase
Agreement (as defined below) (the “
Contemplated Transactions
”).
WHEREAS,
the Company has entered into a stock purchase agreement with East and, solely for purposes of being bound by Sections 7.10 and
10.9(a) and (b) thereof, Rand Capital Management LLC, dated January 24, 2019 (the “
Stock Purchase Agreement
”)
whereby East will contribute cash and assets to the Company in exchange for shares of common stock, par value $0.10 per share,
of the Company (the “
Common Stock
”);
WHEREAS,
in connection with the Stock Purchase Agreement, the Company and East desire to enter into this Agreement setting forth certain
rights and obligations with respect to the nomination of directors to the Board of Directors of the Company (the “
Board
”)
from and after the closing of the Contemplated Transactions.
NOW,
THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
Section
1.
Definitions
. As used in this Agreement, the following terms shall have the meanings ascribed to them below:
“
Bylaws
”
means the By-laws of the Company, as may be amended from time to time.
“
Certificate
of Incorporation
” means the Certificate of Incorporation of the Company, as may be amended from time to time.
“
Interested
Person
” has the meaning set forth in Section 2(a)(19) of the Investment Company Act.
“
Investment
Company Act
” means the Investment Company Act of 1940, as amended.
“
Person
”
means any individual, corporation, firm, partnership, joint venture, limited liability company, estate, trust, business association,
organization, governmental entity or other entity.
“
Shareholders
”
means holders of shares of Common Stock.
Section
2.
Board Nomination Rights
.
(a)
Upon completion of the Contemplated Transactions, in connection with any annual or special meeting of Shareholders at which directors
shall be elected, until the date on which East ceases to beneficially own more than fifteen percent (15%) of the outstanding Common
Stock, East shall have the right to designate (i) up to two (2) persons, of which at least one (1) of such person is not an Interested
Person of the Company, for nomination by the Board for election to the Board if the Board is composed of fewer than seven (7)
directors or (ii) up to three (3) persons, of which at least one (1) of such person is not an Interested Person of the Company,
for nomination by the Board for election to the Board if the Board is composed of seven (7) or more directors (each person so
designated an “
East Nominee
”, and such period during which East is permitted to designate an East Nominee pursuant
to this Section 2(a) being the “
East Nomination Period
”). East shall not designate any person to be an East
Nominee who it reasonably believes does not meet the requirements for director nominees as set forth in any applicable policies
of the Company relating to director qualification from time to time.
(b)
The Board or, if then constituted, the nominating committee of the Board or any committee performing similar functions (the “
Nominating
Committee
”), as applicable, shall promptly and in good faith consider each East Nominee designated pursuant to Section
2(a), applying the same standards as shall be applied for the consideration of other proposed nominees of the Board. If the Board
or the Nominating Committee, as applicable, reasonably determines in writing (which determination shall set forth the reasonable
grounds for such determination) that any East Nominee would not be qualified under any applicable law, rule or regulation to serve
as a director of the Company and fails to approve the nomination of such East Nominee, then East shall be entitled to designate
another person as an East Nominee and the provisions of Section 2 shall apply to such alternate person.
(c)
Subject to the requirements of the Certificate of Incorporation, Bylaws, rules of the stock exchange on which the Common Stock
is then listed or applicable law, vacancies arising through the death, resignation or removal of any East Nominee who was elected
or appointed to the Board pursuant to this Section 2, may be filled by the Board only with a substitute East Nominee designated
by East (which East Nominee shall be subject to review by the Board or Nominating Committee, as applicable, under the standards
set forth in Section 2(b)), and the director so chosen shall hold office until the next election or until his or her successor
is duly elected and qualified, or until his or her earlier death, resignation or removal.
(d)
During the East Nomination Period, the Company shall, at least 45 days prior to the expected mailing date, (i) notify East in
writing of the date on which the proxy statement in connection with an election of directors at an annual or special meeting of
Shareholders is expected to be first mailed by the Company and (ii) provide a form of prospective director questionnaire eliciting
information of a type customarily provided by directors or prospective directors in connection with the director nomination process
(each a “
D&O Questionnaire
”) to be completed by each East Nominee. Following receipt of such Company notice,
East shall, within 15 days after the date of the Company’s notice, (i) deliver a written notice to the Company setting forth
the name and address of each East Nominee and (ii) provide a completed and signed D&O Questionnaire from each East Nominee.
The Company shall provide each East Nominee with a reasonable opportunity to review and provide comments on any portion of the
proxy materials relating to such East Nominee. The Company shall incorporate reasonable comments from each such East Nominee in
the proxy materials relating to such matters.
(e)
In the event the Shareholders fail to elect an East Nominee to the Board at any annual or special meeting of Shareholders at which
directors are elected, (i) East shall designate another person as an East Nominee and the provisions of Section 2 shall apply
to such alternate person and (ii) subject to the requirements of Certificate of Incorporation, Bylaws, rules of the stock exchange
on which the Common Stock is then listed or applicable law, the Board shall reasonably promptly elect such alternate East Nominee
to any such vacancy on the Board resulting from the Shareholders failure to elect an East Nominee to the Board at any annual or
special meeting of Shareholders at which directors shall be elected. For the avoidance of doubt, in no event shall the Board be
required to appoint or elect an East Nominee to the Board if the Shareholders fail to elect to such East Nominee to the Board
at such annual or special meeting of Shareholders at which directors are elected.
(f)
The Company agrees that at all times during the East Nomination Period (i) subject to rules of the stock exchange on which the
Common Stock is then listed or applicable law, the Bylaws and the Certificate of Incorporation shall accommodate, be subject to,
and shall not in any way conflict with, East’s rights and obligations set forth herein and (ii) the Company shall not enter
into any other agreements or understandings that in any way conflict with East’s rights and obligations set forth herein.
The Company further agrees that it shall not enter into any agreements or understandings with any Shareholder (other than any
agreement equally applicable to all Shareholders) without prior notice to East; provided, that the Company shall provide to East
(x) a substantially final copy of any such agreements or understandings no later than five (5) business days prior to the signing
of such agreements or understandings and (y) a fully executed copy of such agreement promptly following its execution (unless
such executed agreement is available on the Securities and Exchange Commission’s EDGAR filing system).
(g)
During the East Nomination Period, in the event that (i) the Board has increased the size of the Board to seven (7) or more directors
from the current size of six (6) directors and (ii) East subsequently provides a written notice to the Company setting forth the
name and address of an East Nominee and a completed and signed D&O Questionnaire from such East Nominee, not later than the
90th day after the date of the Company’s receipt of such written notice, the Board shall, subject to (i) the requirements
of Certificate of Incorporation, Bylaws, rules of the stock exchange on which the Common Stock is then listed or applicable law
and (ii) review by the Board or Nominating Committee, as applicable, of such East Nominee under the standards set forth in Section
2(b), elect such East Nominee to the Board to fill the vacancy created by the increased Board size such that there will be three
(3) East Nominees on the Board.
(h)
During the East Nomination Period, East hereby agrees that (i) the method set forth in this Section 2 shall be the exclusive means
for East to designate, nominate, seek to designate or seek to nominate, as applicable, any person for election as a director to
the Board and (ii) it shall not, directly or indirectly, make use of, or otherwise seek to avail itself of, any other rights or
means to designate, nominate, seek to designate or seek to nominate, as applicable, any person for election as a director to the
Board, including pursuant to any rights available to any Shareholder under the Certificate of Incorporation, Bylaws or applicable
law.
(i)
The East Nomination Period shall be adjusted to the extent East’s ownership of the outstanding Common Stock falls below
15% solely as a result of a sale or other issuance of Common Stock by the Company. In the event of any sale or issuance by the
Company that would have the effect of causing East’s beneficial ownership of the outstanding Common Stock to fall below
15%, the 15% threshold set forth in Section 2(a) above shall be reduced by a percentage equal to the percentage by which East’s
ownership of the Common Stock was reduced as a result of such sale or issuance by the Company.
Section
3.
Miscellaneous
.
(a)
Effective Date
. This Agreement shall become effective upon the closing date of the Contemplated Transactions.
(b)
Applicable Law
. This Agreement shall be construed in accordance with and governed by the laws of the State of New York
without regard to principles of conflict of laws.
(c)
Certain Adjustments
. The provisions of this Agreement shall apply to the full extent set forth herein with respect to any
and all shares of capital stock of the Company or any successor or assign of the Company (whether by merger, consolidation, sale
of assets or otherwise) which may be issued in respect of, in exchange for, or in substitution for the shares of Common Stock,
by combination, recapitalization, reclassification, merger, consolidation or otherwise and the term “Common Stock”
shall include all such other securities.
(d)
Enforcement
. Each of the parties hereto acknowledges and agrees that irreparable injury to the other party hereto would
occur in the event any of the provisions of this Agreement were not performed in accordance with its specific terms or were otherwise
breached, and that such injury would not be adequately compensable in damages. It is accordingly agreed that East, on the one
hand, and the Company, on the other hand, shall each be entitled to specific enforcement of, and injunctive relief to prevent
any violation of, the terms hereof and the other party hereto will not take any action, directly or indirectly, in opposition
to the party seeking relief on the grounds that any other remedy is available at law or in equity, and each party further agrees
to waive any requirement for the security or posting of any bond in connection with such remedy. Such remedies, shall be cumulative
and not exclusive, and shall be in addition to any other remedy which any party hereto may have.
(e)
Successors and Assigns
. This Agreement may not be assigned, whether outright or by operation of law, by any party hereto
without the prior written consent of the non-assigning party. Subject to the foregoing, this Agreement shall be binding upon the
parties hereto, their heirs, executors, personal representatives, successors, and assigns.
(f)
Entire Agreement; Termination
. This Agreement contains the entire understanding among the parties hereto and supersedes
all prior written or oral agreements among them respecting the within subject matter, unless otherwise provided herein. There
are no representations, agreements, arrangements or understandings, oral or written, among the parties hereto relating to the
subject matter of this Agreement that are not fully expressed herein. This Agreement may be terminated at any time by written
consent of all of the parties hereto.
(g)
Dispute Resolution
. Any dispute, controversy or claim arising out of, or in connection with, this Agreement, or the breach
thereof, shall be settled by binding arbitration administered by the American Arbitration Association in accordance with its commercial
arbitration rules then in effect. Claims shall be heard by a single arbitrator selected by the American Arbitration Association.
The arbitration shall be conducted on an expedited basis and the place of arbitration shall be Buffalo, New York. The arbitration
shall be subject to, and the arbitrator shall have the powers and rights afforded by, the rules of the American Arbitration Association.
The arbitration shall be governed by the laws of the State of New York. The decision of such arbitrator, including any award of
attorneys’ fees and costs, if any, may be entered in any court having thereof.
(h)
Notices
. All notices and demands under this Agreement and other communications required to be delivered pursuant to this
Agreement, shall be in writing or by facsimile, with a copy via email (which shall not constitute notice hereunder), and shall
be deemed to have been duly given if delivered personally or by overnight courier or if mailed by certified mail, return receipt
requested, postage prepaid, or sent by facsimile, to the following addresses (or to such other address as the party entitled to
notice shall hereafter designate in accordance with the terms hereof):
If
to the Company:
Rand
Capital Corporation
2200
Rand Building
Buffalo,
New York 14203
Attn:
Allen F. Grum, Chief Executive Officer
e-mail:
pgrum@randcapital.com
with
a copy (which shall not constitute notice) to:
Hodgson
Russ LLP
The
Guaranty Building
140
Pearl Street, Suite 100
Buffalo,
New York 14202
Attention:
John J. Zak. Esq.
e-mail:
jzak@hodgsonruss.com
If
to East:
East
Asset Management, LLC
7777
NW Beacon Square Blvd.
Boca
Raton, FL 33487
Attention:
Adam Gusky
e-mail:
agusky@emslp.com
with
a copy (which shall not constitute notice) to:
Eversheds
Sutherland (US) LLP
700
Sixth St., NW, Suite 700
Washington,
DC 20001
Attention:
Cynthia M. Krus, Esq.
e-mail:
cynthiakrus@eversheds-sutherland.com
All
such notices shall be effective: (i) if delivered personally, when received (with written confirmation of receipt), (ii) if sent
by overnight courier, when receipted for, (iii) if mailed by registered or certified mail (return receipt requested), three (3)
days after being mailed as described above, (iv) upon transmission by facsimile if a customary confirmation of delivery is received
during normal business hours and, if not, the next business day after confirmation of delivery is received and (v) if sent by
electronic mail transmission, at the time of confirmation of transmission if received during normal business hours and, if not,
the next business day after confirmation of transmission.
(i)
Waiver
. No consent or waiver, express or implied, by any party to, or of any breach or default by another party in the
performance of, this Agreement shall be construed as a consent to or waiver of any subsequent breach or default in the performance
by such other party of the same or any other obligations hereunder.
(j)
Counterparts
. This Agreement may be executed in several counterparts, which shall be treated as originals for all purposes,
and all counterparts so executed shall constitute one agreement, binding on all the parties hereto, notwithstanding that not all
the parties are signatory to the original or the same counterpart. Any such counterpart shall be admissible into evidence as an
original hereof against the Person who executed it. Facsimile and electronic signatures (i.e., PDF) to this Agreement shall be
valid and will be deemed to have the same legal effect as an original signed counterpart of this Agreement.
(k)
Headings
. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect
the meaning of terms contained herein.
(l)
Invalidity of Provision
. The invalidity or unenforceability of any provision of this Agreement in any jurisdiction shall
not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability
of this Agreement, including that provision, in any other jurisdiction.
(m)
Amendments and Waivers
. The provisions of this Agreement may be modified or amended at any time and from time to time,
and particular provisions of this Agreement may be waived or modified, with and only with an agreement or consent in writing signed
by each of the parties hereto.
(n)
Further Assistance
. The parties hereto shall execute and deliver all documents, provide all information and take or refrain
from all such action as may be necessary or appropriate to achieve the purposes of this Agreement.
(o)
No Third-Party Beneficiaries
. This Agreement is not intended to, and does not, confer upon any Person other than the parties
hereto any rights or remedies.
[
Remainder
of Page Intentionally Left Blank
]
IN
WITNESS WHEREOF this Agreement has been signed by each of the parties hereto, and shall be effective as of the date first above
written.
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RAND CAPITAL CORPORATION
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By:
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Name:
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Title:
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EAST ASSET MANAGEMENT, LLC
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By:
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Name:
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Title:
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[
Signature
Page – Shareholder Agreement
]
Appendix
E
CERTIFICATE
OF AMENDMENT
OF
CERTIFICATE
OF INCORPORATION
OF
RAND
CAPITAL CORPORATION
Under
Section 805 of the
Business
Corporation Law
Rand
Capital Corporation, a corporation organized and existing under and by virtue of the Business Corporation Law of the State of
New York,
DOES
HEREBY CERTIFY:
1.
The current name of the corporation is Rand Capital Corporation (the “corporation”).
2.
The Certificate of Incorporation of the corporation was filed by the Department of State of the State of New York on February
24, 1969.
3.
The Certificate of Incorporation of the corporation is hereby amended to increase the authorized shares of the corporation from
10,500,000 shares, of which 500,000 shares are preferred shares, par value $10.00 per share, and 10,000,000 shares are common
shares, par value $.10 per share, into 100,500,000 shares, of which 500,000 shares shall be preferred shares, par value $10.00
per share, and 100,000,000 shares shall be common shares, par value $.10 per share.
To
effectuate such amendment, Paragraph 4.(a). of the Certificate of Incorporation of the corporation is hereby amended to read in
its entirety as follows:
“4.(a).
The aggregate number of shares which the corporation shall have the authority to issue is ONE HUNDRED MILLION FIVE HUNDRED THOUSAND
(100,500,000) shares, of which FIVE HUNDRED THOUSAND (500,000) shares shall be Preferred Shares, par value $10.00 per share, and
ONE HUNDRED MILLION (100,000,000) shares shall be Common Shares, par value $.10 per share.”
4.
The certificate of amendment was authorized by the vote of the board of directors of the corporation followed by a vote of a majority
of all outstanding shares entitled to vote thereon at a meeting of shareholders.
[SIGNATURE
PAGE FOLLOWS]
IN
WITNESS WHEREOF
, the undersigned has signed this certificate and affirmed it as true under penalties of perjury this ____
day of _____, 2019.
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RAND CAPITAL CORPORATION
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By:
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Name:
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Title:
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CERTIFICATE
OF AMENDMENT
OF
THE
CERTIFICATE
OF INCORPORATION
OF
RAND
CAPITAL CORPORATION
Under
Section 805 of the
Business
Corporation Law
Appendix
F
January
24, 2019
The
Board of Directors
Rand
Capital Corporation
2200
Rand Building
Buffalo,
NY 14203
Members
of the Board:
You
have requested the opinion of Keefe, Bruyette & Woods, Inc. (“KBW” or “we”) as investment
bankers as to the fairness, from a financial point of view, to Rand Capital Corporation (“Rand”) of the
Consideration (as defined below) in the proposed Transaction (as defined below) pursuant to the Stock Purchase Agreement (the
“Agreement”) to be entered into by and among Rand, East Asset Management, LLC (“EAM”), and solely for
purposes of Sections 7.10 and 10.9(a) and (b) thereof, Rand Capital Management, LLC (“NEWCO”). Pursuant to the
Agreement and subject to the terms, conditions and limitations set forth therein, Rand will issue and sell to EAM a number of
newly-issued shares of the common stock, par value $0.10 per share, of Rand (“Rand Common Stock”) equal to
$25,000,000 divided by a per share price of $3.00 (such per share price, the “Consideration” and, such
transaction, the “Transaction”). The Agreement provides that the aggregate Consideration will be paid to Rand in
the form of specified loan assets to be contributed to Rand by EAM (the “Contributed Investment Assets”) and an
aggregate cash amount, which when added to the fair value (as determined pursuant to the Agreement) of the Contributed
Investment Assets as of the Closing Cut-off Time (as such term is defined in the Agreement) plus accrued but unpaid
interests, penalties, fees, charges and other amounts applicable to the Contributed Investment Assets as set forth in the
Agreement, is equal to $25,000,000. The terms and conditions of the Transaction are more fully set forth in the
Agreement.
In
addition, representatives of Rand have advised us that (a) in connection with the consummation of the Transaction, NEWCO, and
Rand will enter into an investment advisory and management agreement and administration agreement pursuant to which NEWCO will
serve as investment adviser and administrator to Rand (the “Externalization”), and (b) following the Transaction,
Rand intends to declare and make a special dividend of additional shares of Rand Common Stock and cash (the “Special Dividend”).
However, for purposes hereof, no effect has been given to the Externalization, the Special Dividend or any aspect, implication
or effect thereof, including the planned conversion of Rand into a regulated investment company.
The Board of Directors
Rand Capital Corporation
January 24, 2019
Page
2
of 5
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KBW
has acted as financial advisor to Rand and not as an advisor to or agent of any other person. As part of our investment banking
business, we are regularly engaged in the valuation of business development company (“BDC”) securities in connection
with acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and
valuations for various other purposes. In the ordinary course of KBW and its affiliates’ broker-dealer businesses, KBW and
its affiliates may from time to time purchase securities from, and sell securities to, Rand and EAM. In addition, as a market
maker in securities, KBW and its affiliates may from time to time have a long or short position in, and buy or sell, debt or equity
securities of Rand for its and their own respective accounts and for the accounts of its and their respective customers and clients.
We have acted exclusively for the board of directors of Rand (the “Board”) in rendering this opinion and will receive
a fee from Rand for our services. A portion of our fee is payable upon the rendering of this opinion, and a significant portion
is contingent upon the successful completion of the Transaction. In addition, Rand has agreed to indemnify us for certain liabilities
arising out of our engagement.
Other
than in connection with this present engagement, in the past two years KBW has not provided investment banking and financial advisory
services to Rand. In the past two years, KBW has not provided investment banking and financial advisory services to EAM. We may
in the future provide investment banking and financial advisory services to Rand, EAM or NEWCO and receive compensation for such
services.
In
connection with this opinion, we have reviewed, analyzed and relied upon material bearing upon the financial and operating condition
of Rand and bearing upon the Transaction, including among other things, the following: (i) a draft of the Agreement dated January
23, 2019 (the most recent draft made available to us); (ii) the audited financial statements and the Annual Reports on Form 10-K
for the three fiscal years ended December 31, 2017 of Rand; (iii) the unaudited quarterly financial statements and the Quarterly
Reports on Form 10-Q for the fiscal quarters ended March 31, 2018, June 30, 2018 and September 30, 2018 of Rand; (iv) certain
other interim reports and other communications of Rand to its shareholders; and (v) other financial information concerning the
business and operations of Rand that were furnished to us by Rand or that we were otherwise directed to use for purposes of our
analysis. Our consideration of financial information and other factors that we deemed appropriate under the circumstances or relevant
to our analyses included, among others, the following: (i) the historical and current financial position and results of operations
of Rand; (ii) the assets and liabilities of Rand; (iii) the nature and terms of certain merger transactions and business combinations
in the BDC industry; and (iv) a comparison of certain financial and stock market information of Rand with similar information
for certain other companies, the securities of which are publicly traded. We have also performed such other studies and analyses
as we considered appropriate and have taken into account our assessment of general economic, market and financial conditions and
our experience in other transactions, as well as our experience in securities valuation and knowledge of the BDC industry generally.
We have also participated in discussions with Rand management regarding the past and current business operations, financial condition
and future prospects of Rand and such other matters as we have deemed relevant to our inquiry. We have not been requested to,
and have not, assisted Rand with soliciting indications of interest from third parties other than EAM and another party regarding
a potential transaction with Rand.
The Board of Directors
Rand Capital Corporation
January 24, 2019
Page
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of 5
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In
conducting our review and arriving at our opinion, we have relied upon and assumed the accuracy and completeness of all of the
financial and other information provided to us or that was publicly available and we have not independently verified the accuracy
or completeness of any such information or assumed any responsibility or liability for such verification, accuracy or completeness.
In connection with this opinion, we have not performed any financial analyses to estimate the value of Rand’s existing investment
assets or the Contributed Investment Assets, and we express no opinion as to the stated fair value of Rand’s existing investment
assets as determined by Rand management as of September 30, 2018 or the fair value of the Contributed Investment Assets as will
be determined pursuant to the Agreement. We have not relied upon a liquidation analysis for purposes of our opinion. Rand has
advised us that the fair value of its existing investment assets (Rand has advised us that “fair value” is defined
under the applicable accounting rules as the price that would be received to sell an asset in an orderly transaction between market
participants on the measurement date) is not the same as the likely realizable value of those investment assets in a liquidation
scenario where those assets would not be held to maturity or otherwise but would be sold immediately or over a relatively short
period of time. Specifically, Rand has advised us that: (i) all of Rand’s investment assets as of September 30, 2018 consist
of private securities of small or development stage companies that are not publicly traded and for which no orderly market exists;
(ii) there is necessarily significant subjectivity and uncertainty involved in determining the fair value of investments for which
there is no orderly market; (iii) in a liquidation scenario, there may be few or no independent, willing and able buyers for Rand’s
investment assets; and (iv) as a result, the likely realizable value of Rand’s investment assets in a liquidation scenario
at any measurement date, including giving effect to estimated costs to be incurred by Rand in connection with a liquidation and
applying a reasonable discount rate to present value sale proceeds assumed to be received in the future, could be significantly
below the value of those investment assets determined on a fair value basis at that same measurement date. Given this, Rand has
advised us that at September 30, 2018, the likely realizable value of its investment assets in a liquidation scenario, if determined
and given effect as of that date, could reasonably be expected to result in a net asset value of Rand of less than $3.00 per share.
In addition, at the direction of Rand management and with the consent of the Board, we have not relied upon a dividend discount
analysis for purposes of our opinion given that Rand management has not furnished to us financial and operating forecasts and
projections of Rand that provide a reasonable basis upon which we can perform such analysis.
We
have assumed that there have been no material changes in the assets, liabilities, financial condition, results of operations,
business or prospects of Rand since the date of the last financial statements of Rand that were made available to us and that
we were directed to use. In rendering our opinion, we have not made or obtained any evaluations or appraisals or physical inspection
of the property, assets or liabilities (contingent or otherwise) of Rand or of or relating to any of the Contributed Investment
Assets, the collateral securing any of such assets or liabilities, or the collectability of any such assets, nor have we examined
any individual loan or credit files, nor did we evaluate the solvency, financial capability or fair value of Rand under any state
or federal laws, including those relating to bankruptcy, insolvency or other matters. Estimates of values of companies and assets
do not purport to be appraisals or necessarily reflect the prices at which companies or assets may actually be sold. Because such
estimates are inherently subject to uncertainty, we assume no responsibility or liability for their accuracy.
The Board of Directors
Rand Capital Corporation
January 24, 2019
Page
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of 5
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We
have assumed, in all respects material to our analyses, the following: (i) that the Transaction will be completed substantially
in accordance with the terms set forth in the Agreement (the final terms of which we have assumed will not differ in any respect
material to our analyses from the draft version reviewed by us and referred to above) with no adjustments to the Consideration
(including the allocation thereof between the Contributed Investment Assets and cash); (ii) that the representations and warranties
of each party in the Agreement and in all related documents and instruments referred to in the Agreement are true and correct;
(iii) that each party to the Agreement or any of the related documents will perform all of the covenants and agreements required
to be performed by such party under such documents; (iv) that there are no factors that would delay or subject to any adverse
conditions, any necessary regulatory or governmental approval for the Transaction and that all conditions to the completion of
the Transaction will be satisfied without any waivers or modifications to the Agreement or any of the related documents; and (v)
that in the course of obtaining the necessary regulatory, contractual, or other consents or approvals for the Transaction, no
restrictions, including any divestiture requirements, termination or other payments or amendments or modifications, will be imposed
that will have a material adverse effect on the future results of operations or financial condition of Rand or the contemplated
benefits of the Transaction. We have assumed that the Transaction will be consummated in a manner that complies with the applicable
provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and all other applicable
federal and state statutes, rules and regulations and the governing organizational documents of Rand. We have further been advised
by representatives of Rand that Rand has relied upon advice from its advisors (other than KBW) or other appropriate sources as
to all legal, financial reporting, tax, accounting and regulatory matters with respect to Rand, the Transaction and any related
transactions (including the Externalization and the Special Dividend), and the Agreement. KBW has not provided advice with respect
to any such matters.
This
opinion addresses only the fairness, from a financial point of view, as of the date hereof, to Rand of the Consideration in the
Transaction. We express no view or opinion as to any other terms or aspects of the Transaction or any term or aspect of any related
transaction (including the Externalization or the Special Dividend), including without limitation, the form or structure of the
Transaction (including the form of the Consideration or the allocation thereof between the Contributed Investment Assets and cash)
or any such related transaction, any consequences of the Transaction to Rand, its shareholders, creditors or otherwise (including
the ownership dilution to existing holders of Rand Common Stock), or any terms, aspects, merits or implications of any agreements,
arrangements or understandings contemplated or entered into in connection with the Transaction, any such related transaction,
or otherwise. Our opinion is necessarily based upon conditions as they exist and can be evaluated on the date hereof and the information
made available to us through the date hereof. It is understood that subsequent developments may affect the conclusion reached
in this opinion and that KBW does not have an obligation to update, revise or reaffirm this opinion. Our opinion does not address,
and we express no view or opinion with respect to, (i) the underlying business decision of Rand to engage in the Transaction or
any related transaction or enter into the Agreement, (ii) the relative merits of the Transaction or any related transaction as
compared to any strategic alternatives that are, have been or may be available to or contemplated by Rand or the Board, (iii)
any business, operational or other plans with respect to Rand that may be currently contemplated by Rand or the Board or that
may be implemented by Rand or the Board subsequent to the closing of the Transaction (including, without limitation, the Externalization
or the planned conversion of Rand into a regulated investment company), (iv) the fairness of the amount or nature of any compensation
to any of Rand’s officers, directors or employees, or any class of such persons, relative to any compensation to the holders
of Rand Common Stock or relative to the Consideration, (v) the effect of the Transaction or any related transaction on, or the
fairness of the consideration to be received by, holders of any class of securities of Rand or any other party to any transaction
contemplated by the Agreement, (vi) any election by holders of Rand Common Stock to receive Rand Common Stock and/or cash in the
Special Dividend, if it occurs, or the actual allocation among such holders between Rand Common Stock and cash, (vii) the actual
value of Rand Common Stock to be issued in connection with the Transaction or, if it occurs, the Special Dividend, (viii) the
prices, trading range or volume at which Rand Common Stock will trade following the public announcement of the Transaction or
following the consummation of the Transaction or the prices at which any of the Contributed Investment Assets may be sold at any
time, (ix) any fee or other terms of the investment advisory and management agreement to be entered into as part of the Externalization,
(x) any advice or opinions provided by any other advisor to any of the parties to the Transaction or any other transaction contemplated
by the Agreement, or (xi) any legal, regulatory, accounting, tax or similar matters relating to Rand, any of its shareholders,
or relating to or arising out of or as a consequence of the Transaction or any related transaction, including whether or not Rand
will qualify as a regulated investment company for United States federal income tax purposes following the Transaction, the Special
Dividend and the Externalization.
The Board of Directors
Rand Capital Corporation
January 24, 2019
Page
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of 5
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This
opinion is for the information of, and is directed to, the Board (in its capacity as such) in connection with its consideration
of the financial terms of the Transaction. This opinion does not constitute a recommendation to the Board as to how it should
vote on the Transaction or to any holder of Rand Common Stock or any shareholder of any other entity as to how to vote or act
in connection with the Transaction, any related transaction or any other matter (including what election any holder of Rand Common
Stock should make in the Special Dividend, if it occurs, with respect to Rand Common Stock or cash).
This
opinion has been reviewed and approved by our Fairness Opinion Committee in conformity with our policies and procedures established
under the requirements of Rule 5150 of the Financial Industry Regulatory Authority.
Based
upon and subject to the foregoing, it is our opinion that, as of the date hereof, the Consideration in the Transaction is fair,
from a financial point of view, to Rand.
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Very
truly yours,
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Keefe,
Bruyette & Woods, Inc.
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