Item 1.01
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Entry into a Material Definitive Agreement.
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Investment
Management Agreement
On
November 8, 2019 (the “Closing Date”), Rand Capital Corporation (the “Company”) entered into an Investment
Advisory and Management Agreement (the “Investment Management Agreement”) with Rand Capital Management LLC (the “Adviser”),
an investment adviser registered under the Investment Advisers Act of 1940, as amended. The Company’s Board of Directors
(the “Board”) unanimously approved the Company’s entry into the Investment Management Agreement at an in-person
meeting held on January 24, 2019. The Company’s shareholders approved the Company’s entry into the Investment Management
Agreement at a special meeting of shareholders held on May 16, 2019.
Pursuant
to the terms of the Investment Management Agreement, the Adviser manages the investment and reinvestment of the Company’s
assets. Among other things, the Adviser (i) determines the composition of the Company’s portfolio, the nature and timing
of changes in this portfolio and the manner of implementing these changes; (ii) identifies, evaluates and negotiates the structure
of the investments made by the Company; (iii) executes, closes, services and monitors the investments that the Company makes;
(iv) determines the securities and other assets that the Company will purchase, retain or
sell; (v) performs due diligence on prospective portfolio companies and investments; and (vi) provide the Company with
such other investment advisory, research and related services as the Company may, from time to time, reasonably require for the
investment of its assets. The Adviser’s services under the Investment Management Agreement are not exclusive, and it may
furnish similar services to other entities.
Under
the Investment Management Agreement, the Company will pay the Adviser, as compensation for the investment
advisory and management services, fees consisting of two components: (i) a base management fee (the “Base Management
Fee”) and (ii) an incentive fee (the “Incentive Fee”).
Base
Management Fee
The
Base Management Fee will be 1.50% of per annum of the Company’s total assets (other than cash or cash equivalents but including
assets purchased with borrowed funds). For the first calendar quarter of the Company’s operations after the Closing Date,
the Base Management Fee will be calculated based on the initial value of the Company’s total assets (other than cash or
cash equivalents but including assets purchased with borrowed funds) after giving effect to the contribution of the existing loans
and other securities by East Asset Management, LLC (“East”) as part of the consideration for the Stock Purchase (as
defined below). For each calendar quarter thereafter, the Base Management Fee will be calculated based on the average value of
the Company’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
prorated.
Incentive
Fee
The
Incentive Fee payable under the Investment Management Agreement consists of two parts: (1) a portion based on the Company’s
pre-incentive fee net investment income (the “Income Based Fee”) and (2) a portion based on the net realized capital
gains received on the Company’s portfolio of securities on a cumulative basis for each calendar year, net of all realized
capital losses and all unrealized capital depreciation for that same calendar year (the “Capital Gains Fee”).
Income
Based Fee
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 Company’s financial statements for such quarter. For purposes of the Investment Management Agreement, “Pre-Incentive
Fee Net Investment Income” is defined as 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 Company receives from portfolio companies) accrued by the Company during the relevant calendar quarter,
minus the Company’s operating expenses for such calendar quarter (including the Base Management Fee, expenses payable under
the Administration Agreement (as defined below), and any interest expense and dividends paid on any issued and outstanding preferred
stock, but excluding any portion of the 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 Company and its consolidated subsidiaries have recognized 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 Company’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 Company’s net assets at the end of the most recently completed calendar
quarter, of 1.75% per quarter (7% annualized). The Company will pay the Adviser an Incentive Fee with respect to the Company’s
Pre-Incentive Fee Net Investment Income in each calendar quarter as follows:
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(i)
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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);
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(ii)
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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
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(iii)
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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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For
each calendar quarter that begins more than two years and three months after the Closing Date, the Income Based Fee
paid to the Adviser shall not be in excess of the Incentive Fee Cap. The “Incentive Fee Cap” for any quarter
is an amount equal to (1) 20.0% of the Cumulative Net Return (as defined below) during the relevant Income Based Fee Calculation
Period (as defined below) minus (2) the aggregate Income Based Fee that was paid in respect of the calendar quarters included
in the relevant Income Based Fee Calculation Period.
For
purposes of the calculation of the Income Based Fee, “Income Based Fee Calculation Period” is defined as, 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 Closing Date
or (2) the eleven calendar quarters immediately preceding such calendar quarter.
For
purposes of the calculation of the Income Based Fee, “Cumulative Net Return” is defined as (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 Company will pay 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 Company will pay 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 Company will pay 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.
For
purposes of the calculation of the Income Based Fee, “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 payable under the Investment Management Agreement with respect to Accrued Unpaid Income (such fees being the
“Accrued Unpaid Income Based Fees”) shall be deferred, on a security by security basis, and shall become
payable to the Adviser only if, as, when and to the extent cash is received by the Company or its consolidated subsidiaries
in respect of any Accrued Unpaid Income. Any Accrued Unpaid Income that is subsequently reversed by the Company 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 Based Fees. Subsequent payments of Accrued Unpaid Income Based Fees that are deferred shall not reduce the amounts
otherwise payable for any quarter as an Income Based Fee.
Capital
Gains Fee
The
Capital Gains Fee 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. Under
the terms of the Investment Management Agreement, the Capital Gains Fee is calculated at the end of each applicable year by subtracting
(1) the sum of the Company’s cumulative aggregate realized capital losses and aggregate unrealized capital depreciation
from (2) the Company’s cumulative aggregate realized capital gains, in each case calculated from the Closing Date. If this
amount is positive at the end of any calendar 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 that calendar year. If the Investment Management 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 the Capital Gains Fee.
For
purposes of the Capital Gains Fee:
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 Company’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 Company’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 Company’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 Company as of the Closing
Date, the fair value of that investment as set forth in the Company’s Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2019 and, with respect to an investment acquired by the Company subsequent to the Closing Date, the accreted
or amortized cost basis of such investment as reflected in the Company’s financial statements.
Payment
of Company Expenses
Under
the terms of Investment Management Agreement, all investment professionals of the Adviser and its staff, when and to the extent
engaged in providing investment advisory services for the Company, 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 these services,
will be provided and paid for by the Adviser and not by the Company. The Company will bear all other costs and expenses of its
operations and transactions, including, without limitation, those items listed in the Investment Management Agreement.
Duration
and Termination of the Investment Management Agreement
The
Investment Management Agreement will remain in effect for a period of two years after the Closing Date. Thereafter, the Investment
Management Agreement will continue to renew automatically for successive annual periods so long as such continuance is specifically
approved at least annually by: (i) the vote of the Board, or by the vote of Company’s shareholders holding a majority of
the outstanding voting securities of the Company; and (ii) the vote of a majority of the Company’s independent directors
on the Board, in either case, in accordance with the requirements of the Investment Company Act of 1940, as amended (the “1940
Act”). The Investment Management Agreement may be terminated at any time, without the payment of any penalty, upon 60 days’
written notice, by: (i) by vote of a majority of the Board or by vote of a majority of the outstanding voting securities of the
Company; or (ii) the Adviser. In addition, the Investment Management Agreement will automatically terminate in the event of its
“assignment” (as such term is defined for purposes of Section 15(a)(4) of the 1940 Act).
Administration
Agreement
On
the Closing Date, the Company entered into an Administration Agreement (the “Administration Agreement”) with the Adviser.
Under the terms of the Administration Agreement, the Adviser has agreed to perform (or oversee, or arrange for, the performance
of) the administrative services necessary for the operation of the Company, including, but not limited to, office facilities,
equipment, clerical, bookkeeping, finance, accounting, compliance and record keeping services at such office facilities and such
other services as the Adviser, subject to review by the Board, will from time to time determine to be necessary or useful to perform
its obligations under the Administration Agreement. The Adviser shall also, on behalf of the Company, arrange for the services
of, and oversee, custodians, depositories, transfer agents, dividend disbursing agents, other shareholder 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.
As
consideration for the provision of the services by the Adviser under the Administration Agreement, the Company shall reimburse
the Adviser for the costs and expenses incurred by the Adviser in administering the Company’s business. The Administration
Agreement will remain in effect for two years from the Closing Date, and thereafter will continue automatically for successive
annual periods so long as such continuance is specifically approved at least annually by the Board, including by a majority of
the independent directors. The Administration Agreement may be terminated at any time, without the payment of any penalty, by
vote of the Board, or by the Adviser, upon 60 days’ written notice to the other party. The Administration Agreement may
not be assigned by a party without the consent of the other party.
Shareholder
Agreement
On
the Closing Date, the Company entered into a Shareholder Agreement (the “Shareholder Agreement”) with 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 shares of the Company’s common stock, par value $.10 per share (the “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.
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 Company’s 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.
Under
the terms of the Shareholder Agreement, East has agreed that the rights provided to East thereunder are to 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 of the Company under the Company’s certificate of incorporation, the
Company’s by-laws or applicable law.
The
foregoing descriptions of the Investment Management Agreement, the Administration Agreement and the Shareholder Agreement are
only summaries of certain of the provisions of such agreements and are qualified in their entirety by reference to the underlying
agreements. The Investment Management Agreement, the Administration Agreement and the Shareholder Agreement are attached as Exhibits
10.1, 10.2 and 10.3 this Current Report on Form 8-K, respectively, and are incorporated herein by reference.