As filed with the Securities and Exchange
Commission on September 29, 2016
Securities Act File No. 812-14653
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO THE
APPLICATION FOR AN ORDER PURSUANT TO SECTION 6(c) OF THE
INVESTMENT COMPANY ACT OF 1940 (the “1940 ACT” ) GRANTING AN EXEMPTION FROM SECTIONS 23(a), 23(b) AND 63 OF THE 1940
ACT, PURSUANT TO SECTION 61(a)(3)(B) OF THE 1940 ACT PERMITTING AWARDS OF COMMON STOCK PURCHASE OPTIONS TO NON-EMPLOYEE DIRECTORS,
PURSUANT TO SECTION 57(i) OF THE 1940 ACT AND RULE 17d-1 UNDER THE 1940 ACT AUTHORIZING CERTAIN JOINT TRANSACTIONS OTHERWISE PROHIBITED
BY SECTION 57(a)(4) OF THE 1940 ACT, AND PURSUANT TO SECTION 23(c)(3) OF THE 1940 ACT GRANTING AN EXEMPTION FROM SECTION 23(c)
EQUUS TOTAL RETURN, INC.
700 Louisiana Street, 48
th
Floor
Houston, Texas 77002
(713) 529-0900
All Communications, Notices and
Orders to:
Mr. Kenneth I. Denos
Secretary and Chief Compliance Officer
Equus Total Return, Inc.
700 Louisiana Street, 48
th
Floor
Houston, Texas 77002
Telephone: (713) 529-0900
Facsimile (212) 671-1534
Copies to:
Martin C. Glass, Esq.
Jenner & Block LLP
919 Third Avenue
New York, NY 10022
Telephone: (212) 891-1600
Facsimile: (212) 891-1699
September 29, 2016
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UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
In the Matter of:
EQUUS TOTAL RETURN, INC.
700 Louisiana Street, 48
th
Floor
Houston, Texas 77002
(713) 529-0900
File No. 812-14653
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AMENDMENT NO. 2 TO THE APPLICATION FOR AN ORDER PURSUANT TO SECTION 6(c) OF THE INVESTMENT COMPANY ACT OF 1940 (the “1940 ACT” ) GRANTING AN EXEMPTION FROM SECTIONS 23(a), 23(b) AND 63 OF THE 1940 ACT, PURSUANT TO SECTION 61(a)(3)(B) OF THE 1940 ACT PERMITTING AWARDS OF COMMON STOCK PURCHASE OPTIONS TO NON-EMPLOYEE DIRECTORS, PURSUANT TO SECTION 57(i) OF THE 1940 ACT AND RULE 17d-1 UNDER THE 1940 ACT AUTHORIZING CERTAIN JOINT TRANSACTIONS OTHERWISE PROHIBITED BY SECTION 57(a)(4) OF THE 1940 ACT, AND PURSUANT TO SECTION 23(c)(3) OF THE 1940 ACT GRANTING AN EXEMPTION FROM SECTION 23(c)
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Equus Total Return, Inc. (hereafter,
“Equus”
or the
“Fund”
) is an internally managed closed-end, non-diversified
investment company that has elected to be regulated as a business development company (
“BDC”
)
[1]
under the Investment Company Act of 1940 (the
“1940 Act”
) and also qualifies as a regulated investment
company pursuant to Subchapter M of the Internal Revenue Code of 1986 (the
“Code”
). On June 13, 2016,
the Equus shareholders adopted the Fund’s 2016 Equity Incentive Plan (the
“Plan”
). Equus hereby
applies for an order (the
“Order”
) of the U.S. Securities and Exchange Commission (the
“Commission”
)
as follows:
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(i)
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pursuant to Section 6(c) of the 1940 Act, granting the Fund an exemption from Sections 23(a),
23(b), and 63 to issue restricted shares of its common stock from treasury (
“Restricted Stock”
) pursuant
to the Plan;
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(ii)
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pursuant to Section 61(a)(3)(B) of the 1940 Act, enabling the Fund to grant common stock purchase
options under the Plan (
“Options”
) to its non-employee directors;
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(iii)
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pursuant to Section 57(i) and Rule 17d-1 of the 1940 Act, authorizing the Fund to engage in certain
joint transactions otherwise prohibited by Section 57(a)(4); and
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(iv)
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pursuant to Section 23(c)(3) of the 1940 Act, granting the Fund an exemption from Section 23(c).
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The Order would permit the Fund to:
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(i)
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issue Restricted Stock or Options as part of the compensation package for participants in the
Plan, which participants would include all directors, officers, or employees of Equus (collectively,
“Participants”
and each a
“Participant”
);
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(ii)
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withhold shares of the Fund’s common stock or purchase shares of the Fund’s common
stock from Participants to satisfy tax withholding obligations relating to the vesting of Restricted Stock or the exercise of Options
that will be granted pursuant to the Plan; and
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(iii)
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permit Participants to pay the exercise price of Options that will be granted to them pursuant
to the Plan with shares of the Fund’s common stock.
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[1]
Section 2(a)(48)
defines a BDC to be any closed-end investment company that operates for the purpose of making investments in securities described
in sections 55(a)(1) through 55(a)(3) of the 1940 Act and makes available significant managerial assistance with respect to the
issuers of such securities.
About Equus
Equus was formed as a Delaware corporation
by Equus Investments II, L.P. (the
“Partnership”
) on August 16, 1991. On July 1, 1992, the Partnership
was reorganized and all of the assets and liabilities of the Partnership were transferred to the Fund in exchange for shares of
common stock of the Fund. On August 11, 2006, the Equus shareholders approved the change of the Fund’s investment strategy
to a total return investment objective. This strategy seeks to provide the highest total return, consisting of capital appreciation
and current income. In connection with this strategic investment change, the shareholders also approved the change of name from
Equus II Incorporated to Equus Total Return, Inc. Shares of the Fund’s common stock are traded on the New York Stock Exchange
under the symbol “EQS.” As of September 29, 2016, Equus had 12,673,646 shares of common stock outstanding.
Equus is governed by a seven-member Board
of Directors (sometimes referred to herein as the
“Board”
), five of whom are (i) not considered “interested
persons” of the Fund as defined in Section 2(a)(19) of the 1940 Act, and (ii) considered independent within the meaning of
the rules of the New York Stock Exchange. The Fund attempts to maximize the return to shareholders in the form of current investment
income and long-term capital gains by investing in the debt and equity securities of companies with a total enterprise value of
between $5.0 million and $75.0 million, although the Fund may engage in transactions with smaller or larger investee companies
from time to time. Equus seeks to invest primarily in companies pursuing growth either through acquisition or organically, leveraged
buyouts, management buyouts and recapitalizations of existing businesses or special situations. The Fund’s income-producing
investments consist principally of debt securities, which may include bonds, subordinated debt, debt convertible into common or
preferred stock, or debt combined with warrants and common and preferred stock. Debt and preferred equity financing may also be
used to create long-term capital appreciation through the exercise and sale of warrants received in connection with the financing.
Equus also seeks to achieve capital appreciation by making investments in equity and equity-oriented securities issued by privately-owned
companies or smaller public companies in transactions negotiated directly with such companies.
The Plan
On April 15, 2016, by unanimous vote,
the Equus Board adopted the Plan and recommended the same for approval by the Fund’s shareholders, which approval was granted
at the annual meeting of Equus shareholders held on June 13, 2016. A copy of the Plan is attached to this Application as Exhibit
“A”. The Plan became effective as of the date of such approval.
The Plan is intended to promote the interests
of the Fund by encouraging officers, employees, and directors of the Fund and its affiliates to acquire or increase their equity
interest in the Fund and to provide a means whereby they may develop a proprietary interest in the development and financial success
of the Fund, to encourage them to remain with and devote their best efforts to the business of the Fund, thereby advancing the
interests of the Fund and our shareholders. The Plan is also intended to enhance the ability of the Fund and its affiliates to
attract and retain the services of individuals who are essential for the growth and profitability of the Fund.
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III.
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EXEMPTION APPLICATION TO ISSUE RESTRICTED STOCK AND OPTIONS
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The Fund is applying for an Order of
the Commission: (i) pursuant to Section 6(c), granting an exemption from Sections 23(a), 23(b), and 63, (ii) pursuant to Section
63(a)(3)(B), (iii) from Section 57(a)(4) pursuant to Section 57(i) and Rule 17d-1 authorizing certain joint transactions that would
otherwise be prohibited under the 1940 Act, and (iv) pursuant to Section 23(c)(3) granting an exemption from Section 23(c). The
Order, if granted, would enable Equus to issue Restricted Stock and Options under the Plan to its officers, employees, including
any employees who are members of the Board of Equus (
“Employee Directors”
), and to directors of Equus
who are not officers or employees of Equus (
“Non-Employee Directors”
).
Reason for Application
Compensation Practices Generally
and in the Asset Management Industry
The market for talented directors, officers,
and employees is highly competitive and, consequently, compensation arrangements with such persons are necessarily geared toward
providing performance and longevity incentives that may enhance organizational effectiveness and build shareholder value. Equus
believes this principle also holds true for investment professionals and the individuals who provide the governance functions for
the investment organizations, and seeks to offer fair compensation packages to these individuals that are competitive with those
offered by other investment management businesses. While the Fund recognizes that director, officer, and employee retention is
critical for all companies, Equus also believes that the highly specialized nature of its business, the competitiveness of its
market and the small size of its potential Participant base relative to its assets
and revenue make retention of these individuals even more
critical for the Fund. In this regard, the ability of the Fund to offer equity-based compensation to directors, officers, and employees
of Equus aligns their interests with those of the Equus shareholders and provides an incentivization and retention tool that is
vital to the Fund’s future growth and success.
The Plan would enable Equus to offer
its directors, officers, and employees compensation packages that are competitive with those offered by other funds and operating
businesses, which would enhance the ability of Equus to hire and retain superior senior management and other key personnel. Equus
believes that offering competitive compensation packages is critical to the Fund’s ability to generate the best possible
risk-adjusted returns for its shareholders.
Use of Restricted Stock and Options
Equus strongly believes that Restricted
Stock and Options offer an attractive form of equity-based compensation for all Plan Participants, whether in their capacity as
a director, officer, or employee of the Fund. Relative to other forms of compensation, the award of Restricted Stock and Options
will allow Equus to (1) compete more successfully with commercial banks, investment banks, other publicly traded companies, and
private equity funds for skilled employees, officers, and directors; (2) develop superior alignment of the Fund’s business
strategy, shareholder interests and employee interests; (3) manage dilution and cash expenses associated with equity-based compensation
and salaries and bonuses; and (4) match the return expectations of the business more closely with its equity based compensation.
The Fund believes the award of Restricted Stock and Options will have a clear and meaningful benefit to its shareholders and its
business prospects that supports approval of this Application.
Successfully Competing with Private
Equity Firms
In order to compete successfully with
private equity funds for talented portfolio and business management personnel, Equus ideally would be able to pass through to its
employees, in the form of long-term capital gain payments, at least 20 percent of the net realized income of Equus over time. Inasmuch
as Equus, as a publicly traded corporation, cannot provide a carried interest to its management team that is customarily available
to the general partners of partnerships, the Plan represents the mechanism closest to replicating the fund structure.
Aligning the Business Plan with
Shareholder Interests and the Interests of Employees and Principals
Equus has reserved 2,534,728 shares for
issuance under the Plan, whether as awards of Restricted Stock or as Options. If all of the shares of Restricted Stock under the
Plan were issued and all Options issued under the Plan were issued and subsequently exercised, the total amount of additional Equus
common stock issued from treasury would equal 20% of the Fund’s shares of common stock presently outstanding. The Order requested
hereunder is subject to the condition that the amount of voting securities that would result from the exercise of all of the Fund’s
outstanding warrants, Options and rights, together with any Restricted Stock issued pursuant to the Plan, at the time of issuance
shall not exceed 25% of the outstanding voting securities of the Fund, except that if the amount of voting securities that would
result from the exercise of all of the Fund’s outstanding warrants, Options and rights issued to the Fund’s directors,
officers and employees, together with any Restricted Stock issued pursuant to the Plan, would exceed 15% of the outstanding voting
securities of the Fund, then the total amount of voting securities that would result from the exercise of all outstanding warrants,
Options and rights, together with any Restricted Stock issued pursuant to the Plan, at the time of issuance shall not exceed 20%
of the outstanding voting securities of the Fund.
Alignment of a company’s business
plans, its shareholder expectations and its employee compensation is an essential component of long-term business success. Long-term
business success is in the interest of the Fund’s shareholders, directors, officers, and employees. Equus typically makes
longer term investments primarily in privately held businesses that typically stay in its portfolio for the long term. The Fund’s
business plan involves taking on investment risk over an extended period of time, and a premium is placed on the Fund’s ability
to maintain stability of net asset values. The Fund’s strategy is to generate capital appreciation and income from its portfolio
of investments in the debt and equity securities. As a taxpayer that elects to be regulated as a RIC, Equus is required to pay
out 90% of its annual taxable income to maintain its tax advantaged status and 98% of its annual taxable income to avoid non-deductible
excise taxes. Equus shareholders can benefit from the Fund’s income through the payment of dividends and capital appreciation
through a rising stock price. The preservation of asset values, the monetization of portfolio holdings, and generation of income
from existing investments remain a principal focus of Fund management, its employees, and Non-Employee Directors.
The implications of the Fund’s
business model, as described above, on the attractiveness of using Restricted Stock and Options are relatively clear. Holders of
Restricted Stock and Options, over time, become owners of the stock with a vested interest in value maintenance and stock appreciation.
These interests are completely aligned with those of the Fund’s shareholders. Moreover, the private equity funds with which
Equus competes are able to pay higher total cash compensation, composed of salaries and bonuses than the Fund is able to pay because
of the expenses that the Fund must
pay that are related to the maintenance of its status as
a publicly held company and to maintain compliance with the 1940 Act. In addition, the private firms with which Equus must compete
for personnel typically permit their employees to co-invest with them, which Equus is not permitted to do under the 1940 Act.
Matching Return Expectations
Awards of Restricted Stock and Options
motivate behavior that is consistent with the type of return expectations that Equus has established for its shareholders. The
Fund’s strategy is to originate high quality, long-term assets and to support the risk management activity of its portfolio
companies over a long period of time. Further, the Fund’s business plan is to execute a methodical and conservative accumulation
of assets that have a risk-based pricing premium relative to similar securities. To this end, equity-based incentives such as Restricted
Stock and Options place more value on the quality of originated assets over the quantity of originated assets, and thus, these
types of incentives are an attractive compensation tool for Equus to align employee interests with shareholder interests. Awards
of Restricted Stock and Options that vest over time or that are based upon performance targets will allow the Fund to set objectives
and provide meaningful rewards over time to Participants who effectuate the targeted outcome of income and principal stability.
Equus management and the Board, including
the Compensation Committee of the Board, have considered each of the factors discussed above and believe that the issuance of Restricted
Stock as a form of equity-based compensation is in the best interest of the Equus shareholders.
Summary of the Plan
Plan Administration
The Plan will be administered by the
Board or the Compensation Committee of the Board (the Board or the Compensation Committee discharged to administer the Plan is
hereafter referred to as the
“Plan Administrator”
). The Plan Administrator has full power to select,
from among the individuals eligible for awards, the individuals to whom awards will be granted, to make any combination of awards
to participants, and to determine the specific terms and conditions of each award, subject to the provisions of the Plan. Each
issuance of Restricted Stock under the Plan will be approved by the required majority, as defined in section 57(o) of the 1940
Act, of the Fund’s directors (the
“Required Majority”
)
[2]
on the basis that the issuance is in the best interests of the Fund and its shareholders. The date on which the Required Majority
approves an issuance of Restricted Stock will be deemed the date on which the subject Restricted Stock is granted.
Eligibility
If this Application is approved, persons
eligible to participate in the Plan will be those full or part-time officers, employees, and Non-Employee Directors of the Fund
and its subsidiaries as selected from time to time by the Plan Administrator in its discretion. Approximately 9 individuals at
Equus are currently eligible to participate in the Plan, which includes 3 officers, one employee who is not an officer, and 5 non-employee
directors.
Aggregate Plan Limits
Equus has reserved 2,534,728 shares for
issuance under the Plan. The amount of voting securities that would result from the exercise of all Options, together with any
Restricted Stock issued pursuant to the Plan, at the time of issuance shall not exceed 25% of the Fund’s outstanding voting
securities, except that if the amount of voting securities that would result from such exercise of all outstanding Options, together
with any Restricted Stock issued pursuant to the Plan, would exceed 15% of the Fund’s outstanding voting securities, then
the total amount of voting securities that would result from the exercise of all outstanding Options, together with any Restricted
Stock issued pursuant to the Plan, at the time of issuance shall not exceed 20% of the Fund’s outstanding voting securities.
Any shares withheld from an award, either to satisfy tax withholding requirements, or pursuant to the delivery of shares of common
stock or Restricted Stock upon the exercise of Options, will not be returned to the Plan reserve. The combined maximum amount of
Restricted Stock that may be issued under the Plan to all Participants will be 10% of the outstanding common shares of the Fund
on the effective date of the Plan, plus 10% of the number of shares issued or delivered by the Fund (other than pursuant to compensation
plans) during the term of the Plan.
[3]
[2]
Section 57(o) provides that the term “required majority,” when used with respect to the
approval of a proposed transaction, plan, or arrangement, means both a majority of a BDC’s directors or general partners
who have no financial interest in such transaction, plan or arrangement and a majority of such directors or general partners who
are not interested persons of such company.
[3]
For purposes
of calculating compliance with this limit, the Fund will count as Restricted Stock all shares of the Fund’s common stock
that are issued pursuant to the Plan less any shares that are forfeited back to the Fund and cancelled as a result of forfeiture
restrictions not lapsing.
Individual Plan Limits
The maximum award of stock Options granted
to any one individual will not exceed 1,000,000 shares of common stock (subject to adjustment for stock splits and similar events)
for any calendar year period, net of any shares canceled or redeemed in connection with any tax withholding. The maximum award
of shares of Restricted Stock issued to any one individual will not exceed 500,000 shares of common stock (subject to adjustment
for stock splits and similar events) for any calendar year period, net of any shares canceled or redeemed in connection with any
tax withholding.
Amendment and Termination
The Board may, without shareholder approval,
modify, revise or terminate the Plan at any time and from time to time, subject to the terms of (a) the Order requested from the
Commission pursuant to this Application, (b) the Fund’s Certificate of Incorporation and Bylaws, and (c) applicable law.
The Board will seek shareholder approval of any action modifying a provision the Plan if it is determined that such shareholder
approval is appropriate under the provisions of applicable law, the Fund’s Certificate of Incorporation or Bylaws, or pursuant
to the Order. The Plan will terminate when all shares of the Fund’s common stock reserved for issuance thereunder have been
issued and the forfeiture provisions on all Restricted Stock awards have lapsed, or otherwise by action of the Board. The Board
will not make any material amendment to the Plan unless the Fund receives an order from the Commission approving the terms of such
amendment.
Stock Options
The Plan permits the granting of (1)
Options to purchase common stock intended to qualify as incentive stock options under Section 422 of the Code and (2) Options that
do not so qualify. Options granted under the Plan will be non-qualified options if they fail to qualify as incentive options or
exceed the annual limit on incentive stock options. Incentive stock options may only be granted to employees of the Fund and its
subsidiaries. Non-qualified options may be granted to any persons eligible to receive incentive options, officers of the Fund and,
subject to the Order requested hereby, to non-employee directors. The option exercise price of each Option will be determined by
the Plan Administrator but may not be less than 100% of the fair market value of the common stock on the date of grant, or if required
under the 1940 Act, not less than the net asset value of the common stock on the date of grant. Fair market value for this purpose
will be the last reported sale price of the shares of common stock on the New York Stock Exchange on the date of grant.
The term of each option will be fixed
by the Plan Administrator and may not exceed ten years from the date of grant. The Plan Administrator will determine at what time
or times each option may be exercised. Options may be made exercisable in installments and the exercisability of Options may be
accelerated by the Plan Administrator. In general, unless otherwise permitted by the Plan Administrator, no option granted under
the Plan is transferable by the optionee other than by will or by the laws of descent and distribution, and Options may be exercised
during the optionee’s lifetime only by the optionee, or by the optionee’s legal representative or guardian in the case
of the optionee’s incapacity.
Upon exercise of Options, the Option
exercise price must be paid in full either in cash, by certified or bank check or other instrument acceptable to the Plan Administrator
or by delivery (or attestation to the ownership) of shares of common stock that are beneficially owned by the optionee for at least
six months or were purchased in the open market. Subject to applicable law, the exercise price may also be delivered to the Fund
by a broker pursuant to irrevocable instructions to the broker from the optionee. In addition, the Plan Administrator may permit
non-qualified options to be exercised using a net exercise feature which reduces the number of shares issued to the optionee by
the number of shares with a fair market value equal to the exercise price.
To qualify as incentive options, Options
must meet additional federal tax requirements, including a $100,000 limit on the value of shares subject to incentive options that
first become exercisable by a Participant in any one calendar year.
Restricted Stock
Subject to the Order requested hereby,
the Plan Administrator will be authorized to grant Restricted Stock awards. A grant of Restricted Stock is a grant of shares of
the Fund’s common stock that, at the time of issuance, are subject to certain forfeiture provisions, and thus are restricted
as to transferability until such forfeiture restrictions have lapsed. The Restricted Stock will be subject to restrictions on transferability
and other restrictions as required by the Plan Administrator from time to time. Except to the extent restricted by the Plan Administrator,
a Participant granted an award of Restricted Stock will have all the rights of any other shareholder, including the right to vote
the Restricted Stock and the right to receive dividends. During the restriction period (i.e., prior to the lapse of applicable
forfeiture provisions), the Restricted Stock generally may not be sold, transferred, pledged, hypothecated, margined, or otherwise
encumbered by the Participant. Except as the Plan Administrator otherwise determines, upon termination of a Participant’s
service as a director, officer, and employee of the Fund during the applicable restriction period, Restricted Stock, for which
forfeiture provisions have not lapsed at the time of such termination, shall be forfeited.
Performance Goals
The Plan Administrator may determine,
in its discretion, that an award of Restricted Stock to the Chief Executive Officer or certain of the Fund’s other most highly
compensated officers will be designed to comply with the performance-based exception under Section 162(m) of the Code. In such
case, the level of vesting of the award will depend on the attainment of any of the following performance criteria, either alone
or in any combination, which may be expressed with respect to the Fund or one or more operating units or groups, as the Plan Administrator
may determine: (a) cash flow; (b) cash flow from operations; (c) total earnings; (d) earnings per share, diluted or basic; (e)
earnings per share from continuing operations, diluted or basic; (f) earnings before interest and taxes; (g) earnings before interest,
taxes, depreciation, and amortization; (h) earnings from operations; (i) net asset turnover; (j) inventory turnover; (k) capital
expenditures; (l) net earnings; (m) operating earnings; (n) gross or operating margin; (o) debt; (p) working capital; (q) return
on equity; (r) return on net assets; (s) return on total assets; (t) return on capital; (u) return on investment; (v) return on
sales; (w) net or gross sales; (x) market share; (y) economic value added; (z) cost of capital; (aa) change in assets; (bb) expense
reduction levels; (cc) debt reduction; (dd) productivity; (ee) delivery performance; (ff) safety record; (gg) stock price; and
(hh) total shareholder return. Performance goals may be determined on an absolute basis or relative to internal goals or relative
to levels attained in prior years or related to other companies or indices or as ratios expressing relationships between two or
more performance goals. Performance goals may but need not be determinable in conformance with generally accepted accounting principles.
Change of Control Provisions
The Plan provides that, upon the effectiveness
of a “change of control” as defined in the Plan, unless otherwise determined by the Plan Administrator at the time
an award is made under the Plan, all stock Options and shares of Restricted Stock may vest upon and subject to the closing of the
change of control and all outstanding Options will be assumed or continued by the successor entity. In addition, in the event an
optionee’s employment or other service terminates upon or following a change of control, any then outstanding Options (or
other award continued or substituted therefor) shall remain exercisable for a period of 6 months following such termination, or,
if earlier, the expiration date of such option.
Adjustments for Stock Dividends,
Stock Splits, Etc.
The Plan requires the Plan Administrator
to make appropriate adjustments to the number of shares of common stock that are subject to the Plan, to certain limits in the
Plan, and to any outstanding awards to reflect stock dividends, stock splits, extraordinary cash dividends and similar events.
Tax Withholding
Participants in the Plan are responsible
for the payment of any federal, state or local taxes that the Fund is required by law to withhold upon the exercise of Options
or stock appreciation rights or vesting of other awards. Subject to approval by the Plan Administrator, Participants may elect
to have the minimum tax withholding obligations satisfied by authorizing the Fund to withhold shares of common stock to be issued
pursuant to the exercise or vesting. Any such shares, however, will not be added back to the number of shares reserved or otherwise
available for issuance under the Plan.
Amendments and Termination
The Board may at any time amend or discontinue
the Plan and the Plan Administrator may at any time amend or cancel any outstanding award for the purpose of satisfying changes
in the law or for any other lawful purpose. However, no such action may adversely affect any rights under any outstanding award
without the holder’s consent. To the extent required under the rules of the New York Stock Exchange, or by the 1940 Act,
any amendments that materially change the terms of the Plan will be subject to approval by the Equus shareholders. Amendments shall
also be subject to approval by the Equus shareholders if and to the extent determined by the Plan Administrator to be required
by the Code to preserve the qualified status of incentive options.
Compliance
Equus will comply with all disclosure
requirements applicable to BDCs, including the amended disclosure requirements for executive officer and director compensation,
related party transactions, director independence and other corporate governance matters, and security ownership of officers and
directors to the extent adopted and applicable to BDCs and the Fund in particular.
[4]
Applicable Law and Need for Relief
Restrictions of Section 23(b)
Section 63 of the 1940 Act makes applicable
to BDCs the provisions of: (i) Section 23(a), which generally prohibits a registered closed-end investment company from issuing
securities for services or for property other than cash or securities, and (ii) Section 23(b), which generally prohibits a registered
closed-end investment company from selling any common stock of which it is the issuer at a price below the stock’s current
net asset value, except with the consent of a majority of the company’s common shareholders or under certain other enumerated
circumstances not applicable to the Plan. Section 63(2) provides that, notwithstanding Section 23(b), a BDC may sell any common
stock of which it is the issuer at a price below the current net asset value of such stock and may sell warrants, options, or rights
to acquire any such common stock at a price below the current net asset value of such stock if, (1) the holders of a majority of
the BDC’s outstanding voting securities, and the holders of a majority of the BDC’s voting securities who are not affiliated
persons of the BDC, approved the BDC’s policy and practice of making such sales of securities at the last annual meeting
of shareholders within one year immediately prior to any such sale; (2) a required majority, as defined in Section 57(o) of the
1940 Act, of the BDC’s directors have determined that such sale would be in the best interests of the BDC and its shareholders;
and (3) a required majority, as defined in Section 57(o) of the 1940 Act, of the BDC’s directors, have determined immediately
prior to the issuance of such securities that the price at which such securities are to be sold is not less than a price which
closely approximates the market value of those securities. Because awards of Restricted Stock that would be granted under the Plan
would not meet the first prong of Section 63(2)(A) described in the preceding sentence (i.e., the Plan will not be approved by
the holders of a majority of the Fund’s outstanding voting securities that are not affiliated persons of Equus), Sections
23(b) and 63 would operate to prevent the issuance of Restricted Stock.
Restrictions on Joint Transactions
Section 57(a) proscribes certain transactions
between a BDC and persons related to the BDC in the manner described in Section 57(b) (
“57(b) persons”
),
absent a Commission order. Section 57(a)(4) generally prohibits a 57(b) person from effecting a transaction in which the BDC is
a joint participant absent such order. Rule l7d-1, made applicable to transactions subject to Sections 57(a)(4) by Section 57(i)
to the extent the Commission has not adopted a rule under Section 57(a)(4), generally proscribes participation in a “joint
enterprise or other joint arrangement or profit-sharing plan,” which includes, pursuant to paragraph 17d-1(c), a stock option
or purchase plan. Officers, employees and directors of a BDC are 57(b) persons. Thus, although a compensation plan involving grants
of restricted stock or options is not specifically referred to by Section 57(a)(4) or Rule 17d-1, the issuance of Restricted Stock
or Options as contemplated under the Plan could be deemed to involve a joint transaction involving a BDC and a 57(b) person in
contravention of Section 57(a)(4).
Standards for Relief
Section 6(c) provides, in part, that
the Commission may, by order upon application, conditionally or unconditionally exempt any person, security, or transaction, or
any class or classes thereof, from any provision of the 1940 Act, if and to the extent that the exemption is necessary or appropriate,
in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions
of the 1940 Act.
[4]
See Executive
Compensation and Related Party Disclosure, Securities Act Release No. 8655 (Jan. 27, 2006) (proposed rule); Executive Compensation
and Related Party Disclosure, Securities Act Release No. 8732A (Aug. 29, 2006) (final rule and proposed rule), as amended by Executive
Compensation Disclosure, Securities Act Release No. 8756 (Dec. 22, 2006) (adopted as interim final rules with request for comments).
Section 61(a)(3)(B) provides that the
Commission may, by order upon application, permit a BDC to issue common stock purchase options to non-employee directors pursuant
to an executive compensation plan if (i) the options expire by their terms within ten years, (ii) the exercise price of such options
is not less than the current market value at the date of issuance, (iii) the plan is approved by the shareholders of the BDC, (iv)
the terms of the plan are fair and reasonable and do not involve overreaching of the BDC or its shareholders or partners, and (v)
the options are not transferable except for disposition by gift, will, or intestacy.
Section 57(a)(4) and Rule 17d-l provides
that the Commission may, by order upon application, grant relief under Section 57(a)(4) and Rule 17d-1 permitting certain joint
enterprises or arrangements and profit-sharing plans. Rule 17d-1(b) further provides that in passing upon such an application,
the Commission will consider (i) whether the participation of the BDC in such enterprise, arrangement, or plan is consistent with
the policies and purposes of the 1940 Act and (ii) the extent to which such participation is on a basis different from or less
advantageous than that of other participants.
Argument
The Standard of Section 6(c)
Section 6(c) of the 1940 Act, which governs
the Fund’s request for exemptive relief from Section 23 provides, in part, that the Commission may, by order upon application,
conditionally or unconditionally exempt any person, security, or transaction, or any class or classes thereof, from any provisions
of the 1940 Act, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with
the protection of investors and the purposes fairly intended by the 1940 Act’s policy and provisions.
Necessary or Appropriate in the
Public Interest
Both the Commission and Congress have
long recognized the importance of equity-based compensation in attracting and retaining qualified personnel. In particular, Section
61 of the Small Business Investment Act of 1980 amended the 1940 Act to permit BDCs to issue their directors, officers, and employees
warrants, options, and voting securities of the BDC pursuant to compensation plans in compliance with certain conditions. The Fund’s
desire to attract and retain highly qualified personnel to further its objective of developing growth-oriented small and medium-sized
companies is in the public interest, including the interests of the Fund’s shareholders. Equus competes for talent with commercial
banks, investment banks, and other publicly traded companies that also are not investment companies registered under the 1940 Act
and are not subject to the limitations of the 1940 Act. These organizations are able to offer all types of equity-based compensation
to their employees and directors, including restricted stock and options, and, therefore, have an advantage over Equus in attracting
and retaining highly qualified personnel. For Equus to compete on a more equal basis with such organizations, it must be able to
attract and retain talented personnel and offer them comparable compensation packages.
With respect to the Fund’s primary
competition, private equity funds, Equus has proportionately greater overhead unrelated to its investment personnel and therefore
cannot pay total salaries and bonuses as high as those of its competition without increasing its total overhead. Availability of
Restricted Stock and Options would enable Equus to substitute or augment the overall cash compensation to directors, officers,
and employees, and compensate its management for the loss of the carried interest that the Fund’s investment professionals
would receive at a private equity firm, among other things. The Plan will enhance the Fund’s ability to compensate its personnel
competitively, while also aligning the interests of its personnel with the success of Equus and the interests of its shareholders
and preserving cash for further investment.
Consistency with the Protection
of Investors
Investors will be protected to at least
the same extent that they are currently protected under Section 61(a)(3) of the 1940 Act. The Plan has been approved by Equus shareholders
in accordance with Section 61(a)(3)(A)(iv). The proxy statement submitted to the Equus shareholders in connection with the meeting
wherein the Plan was approved contained a concise “plain English” description of the Plan and its potential dilutive
effect. Furthermore, each award of Restricted Stock or Options must be approved by the Required Majority on the basis that the
issuance is in the best interests of the Fund and its shareholders. For purposes of disclosure to shareholders, Equus is subject
to the standards and guidelines adopted by the Financial Accounting Standards Board for operating companies relating to the accounting
for and disclosure of Restricted Stock and Options, and the Securities Exchange Act of 1934 (
“Exchange Act”
) requirements relating to executive compensation disclosure.
Section 61(a)(3) provides that the amount
of voting securities that would result from the exercise of all of a BDC’s outstanding warrants, options, or rights, at the
time of issuance, may not exceed 25 percent of the outstanding voting securities of such BDC, except that if the amount of voting
securities that would result from the exercise of all outstanding warrants, options, and rights issued to such BDC’s directors,
officers, and employees, would exceed 15 percent of the outstanding voting securities of such BDC, then the total amount of voting
securities that would result from the exercise of all outstanding warrants, options, and rights, at the time of issuance shall
not exceed 20 percent of the outstanding voting securities of such BDC. Pursuant to the Plan a maximum of 20 percent of the Fund’s
total voting securities will be available for awards under the Plan. Under the Plan, the maximum amount of Restricted Stock that
may be outstanding at any particular time will be ten percent of the Fund’s voting securities. No Restricted Stock has been
issued to date; therefore, any specified maximums under the Plan do not include outstanding Restricted Stock. For purposes of determining
the Fund’s compliance with the limits in Section 61(a)(3), Equus will treat Restricted Stock issued under the Plan as voting
securities that would result from the exercise of all outstanding warrants, options and rights issued to directors, officers and
employees.
In addition to aggregate limitations
on awards of Restricted Stock and Options, the Plan also contains individual limitations concerning such awards that may not be
exceeded in any calendar year. Moreover, any awards of Restricted Stock or Options that lapse or become forfeited by a Participant
will not be added back into the number of shares reserved for issuance under the Plan. Equus acknowledges that awards granted under
the Plan may have a dilutive effect on the shareholders’ equity per share in Equus, but believes that effect would be outweighed
by the anticipated benefits of the Plan to Equus and its shareholders.
Consistency with the Purposes of
the 1940 Act
As described above, Equus is at a disadvantage
in competing with other publicly-traded companies and financial services companies, particularly private equity firms, in attracting
and retaining management personnel because it cannot offer equity incentives to its personnel as part of a compensation plan that
would have a long-term capital gain component, and the Fund’s overhead associated with being a reporting issuer under the
Exchange Act and subject to compliance with the 1940 Act reduces the cash compensation it can pay to such personnel. In addition,
Equus believes it also competes directly for experienced executives and other professionals with other public companies and non-public
companies, many of which offer restricted stock and options as part of their equity incentive plans.
The Commission previously recognized
the problem of restricting equity compensation in the context of small business investment companies in 1971 and granted a limited
exemption from the 1940 Act’s provisions to permit them to issue qualified stock options. Congress amended the 1940 Act in
1980 to permit BDCs also to issue warrants, options, and rights subject to certain conditions and limitations. The Commission again
recognized these problems in the context of closed-end investment companies in 1985 and granted a limited exemption from the 1940
Act’s provisions to permit certain internally managed closed-end investment companies to issue incentive stock options. In
1998, the Commission issued the
Baker Fentress
Order and subsequently issued additional orders, some of which are summarized
below, which permitted numerous types of equity compensation. In each of these instances, it was found that equity compensation
would not offend the 1940 Act’s policies and purposes.
Equus further submits that the Plan would
not violate the purposes behind Sections 23(a) and (b). The concerns underlying the enactment of those provisions included (i)
preferential treatment of investment company insiders and the use of options and other rights by insiders to obtain control of
the investment company; (ii) complication of the investment company’s structure that made it difficult to determine the value
of the company’s shares; and (iii) dilution of shareholders’ equity in the investment company.
The Plan does not raise concerns about
preferential treatment of the Fund’s insiders because, among other reasons: (i) the Plan is a bona fide compensation plan
of the type that is common among corporations generally and contemplated by Section 61 of the 1940 Act, (ii) is substantially similar
to other equity compensation plans previously approved by the Commission as discussed below, and (iii) in addition to limitations
on individual awards that may be made in a calendar year, the Plan is subject to percentage limitations regarding the aggregate
awards that would be available for issuance to all Participants, which could therefore not, in and of itself, become a means for
insiders to obtain control of Equus.
Further, the Plan would not unduly complicate
the Fund’s capital structure because equity-based incentive compensation arrangements are widely used among corporations
and commonly known to investors. Equus also states that on an ongoing basis it will comply with the proxy disclosure requirements
in Item 10 of Schedule 14A under the Exchange Act. Equus further notes that the Plan will be disclosed to investors in accordance
with the requirements of the Form N-2 registration statement for closed-end investment companies and the standards and guidelines
adopted by the Financial Accounting Standards Board for operating companies. Equus thus concludes that the Plan will be adequately
disclosed to investors and appropriately reflected in the market value of the Fund’s shares. Equus also states that its shareholders
will be further protected by the conditions to this Application and requested Order that assure continuing oversight of the operation
of the Plan by the Plan Administrator.
Analysis of Section 61(a)(3)
Section 61(a)(3)(B) of the 1940 Act provides
that the Commission may, by order upon application, grant relief thereunder and permit a BDC to issue common stock purchase options
to non-employee directors if the issuance of such securities meets the requirements of Section 61(a)(3) as described above.
The Plan has been designed to meet all
of the requirements of Section 61(a)(3), inasmuch as any Options granted to Non-Employee Directors thereunder:
|
1.
|
will have been approved by Order of the Commission prior to the issuance
thereof;
|
|
2.
|
will expire by their terms within ten years from the date of grant;
|
|
3.
|
will have an exercise price not less than the fair market value of
the Fund’s shares at the date of grant;
|
|
4.
|
will have been issued pursuant to the Plan, which was approved by
the Fund’s stockholders on June 13, 2016; and
|
|
5.
|
will not be transferable except for disposition by will or the laws
of descent or distribution.
|
The final requirement under Section 61(a)(3)
limits to 25% the amount of the Fund’s outstanding voting securities that can be issued upon the exercise of all outstanding
warrants, Options and rights; provided, however, that this limitation is reduced to 20% if the amount of voting securities issuable
to directors, officers and employees exceeds 15% of the Fund’s outstanding voting securities. The number of shares issuable
under the Plan is within these thresholds. Further, since there are presently no other awards of Restricted Stock, warrants, Options,
or rights presently outstanding, the maximum aggregate number of shares of the Fund that may be issued under the Plan will not
exceed the limitations in Section 61(a)(3) of the 1940 Act.
In addition, should the Order requested
hereunder be granted (the date such Order is granted is hereinafter referred to as the
“Order Date”
),
the maximum number of voting securities of the Fund that would result from the award of all Restricted Stock issuable under the
Plan is not more than 10% of the Fund’s outstanding shares of common stock as of the Order Date, or 1,267,365 shares. Similarly,
on the Order Date, the maximum number of voting securities of the Fund that would result from the exercise of all Options issuable
under the Plan is, combined with all shares of Restricted Stock that would be possible to award under the Plan is not more than
20% of the Fund’s outstanding shares of common stock as of the Order Date, or 2,534,728 shares, which amount is below the
percentage limitations in the 1940 Act.
Given the small number of Restricted
Shares and Options that are proposed to be issued to Non-Employee Directors as set forth in the tables below, even if all Options
granted thereunder were to vest and become immediately exercisable, the issuance of these securities under the Plan should not
have a substantial dilutive effect on the net asset value of the common stock of the Fund. Additionally, only one-fourth of the
shares of Restricted Stock and Options granted under the Plan to Non-Employee Directors will be immediately vested. The remainder
of the unvested shares of Restricted Stock and Options are not vested and, in the case of Options, will not be exercisable at the
date of grant, absent extraordinary circumstances. The unvested portion of such awards vest in three annual installments on each
of the first three anniversaries of the date of grant. The absence of a substantial dilutive effect along with compliance with
each of the conditions of Section 61(a)(3) indicates that the terms of the Plan are fair and reasonable and do not involve overreaching
of Equus or its stockholders.
Finally, the Non-Employee Directors of
Equus have no opportunity to exercise discretion to benefit themselves. No additional awards of Restricted Stock or Options will
be made and the amounts presently proposed to be issued to such Non-Employee Directors as set forth in the tables below cannot
be changed without Commission approval. Consequently, no discretionary Board level functions exist that could present a conflict.
Equus submits, therefore, that its proposal to award Restricted Stock and Options to its Non-Employee Directors pursuant to the
Plan meets all requirements of Section 61(a)(3) of the 1940 Act and are fair and reasonable and do not involve any overreaching
of the Fund or its stockholders.
Equus believes that the options to be
granted to Non-Employee Directors under the Plan will provide significant at-risk incentives to the Fund’s Non-Employee Directors
to remain on the Board and to devote their best efforts to the success of the Fund’s business and the enhancement of stockholder
value in the future. The Options will also provide a means for Non-Employee Directors to increase their ownership interests in
the Fund, thereby ensuring close alignment of their interests with those of the Fund and its stockholders. The Options granted
pursuant to the Plan will have no value unless the price of the Fund’s common stock exceeds the exercise price of such Options.
Thus, Non-Employee Directors will benefit from them only to the extent that the Fund’s business succeeds and the market value
of its common stock increases and remains above the exercise price of the Options. By providing incentives in the form of such
Options to its
Non-Employee Directors, the Fund will be better able to maintain
continuity in the membership of its Board and to attract, when necessary, and to retain as Non-Employee Directors the highly experienced,
successful and motivated business and professional people that are critical to the Fund’s success as a business development
company.
Accordingly, Equus respectfully requests
that the Commission issue an order under Section 61(a)(3) of the 1940 Act:
(i) approving the Plan on the basis that the terms thereof are fair and reasonable and do not involve
overreaching of the Fund or its stockholders; and
(ii) approving
the grant of Options to Non-Employee Directors pursuant to the Plan on the terms described below, on the basis that the terms are
fair and reasonable and do not involve overreaching of the Fund or its stockholders.
Proposed Awards of Restricted Stock
to Non-Employee Directors
The following schedule summarizes the
proposed awards of Restricted Stock and associated vesting terms, that are intended to be issued to Non-Employee Directors of Equus
within thirty (30) days after receipt of an Order by the Commission as requested herein. Additional awards of Restricted Stock
to Non-Employee Directors and changes to the amounts set forth below may not be made without Commission Approval.
Name of Director
|
|
Number of Shares
|
|
Value
(1)
|
|
Vesting Terms
|
|
Percentage of
Outstanding
(2)
|
Fraser Atkinson
|
|
19,500
|
|
$ 33,735
|
|
One-fourth of the shares vest immediately. If the director remains in service on the Board, the remainder vest upon the earliest to occur of (i) a change of control of the Fund, or (ii) ratably over a three-year period from the date of grant.
|
|
0.15%
|
Richard F. Bergner
|
|
19,500
|
|
$ 33,735
|
|
|
0.15%
|
Henry W. Hankinson
|
|
19,500
|
|
$ 33,735
|
|
|
0.15%
|
Robert L. Knauss
|
|
21,000
|
|
$ 36,330
|
|
|
0.17%
|
Bertrand des Pallieres
|
|
15,000
|
|
$ 25,950
|
|
|
0.12%
|
TOTAL
|
|
94,500
|
|
|
|
|
|
0.75%
|
|
(1)
|
Based on an assumed price of $1.73 per share, the closing trading
price of the Fund’s common stock as of September 28, 2016.
|
|
(2)
|
Based on 12,673,646 shares of Equus common stock outstanding.
|
Proposed Awards of Options to Non-Employee
Directors
The following schedule summarizes the
proposed awards of Options and associated vesting terms, that are intended to be issued to Non-Employee Directors of Equus within
thirty (30) days after receipt of an Order by the Commission as requested herein. Additional awards of Options to Non-Employee
Directors and changes to the amounts set forth below may not be made without Commission Approval. The exercise price for each of
the Options proposed hereunder shall be equal to the closing trading price of the Fund’s common stock on the date of grant.
Name of Director
|
|
Number of Options
|
|
Value
(1)
|
|
Vesting Terms
|
|
Percentage of
Outstanding
(2)
|
Fraser Atkinson
|
|
39,000
|
|
$ 0
|
|
One-fourth of the Options vest immediately. If the director remains in service on the Board, the remainder vest upon the earliest to occur of (i) a change of control of the Fund, or (ii) ratably over a three-year period from the date of grant.
|
|
0.31%
|
Richard F. Bergner
|
|
39,000
|
|
$ 0
|
|
|
0.31%
|
Henry W. Hankinson
|
|
39,000
|
|
$ 0
|
|
|
0.31%
|
Robert L. Knauss
|
|
42,000
|
|
$ 0
|
|
|
0.33%
|
Bertrand des Pallieres
|
|
30,000
|
|
$ 0
|
|
|
0.24%
|
TOTAL
|
|
189,000
|
|
|
|
|
|
1.49%
|
|
(1)
|
Based on the difference between the exercise price and the closing
trading price of the Fund’s common stock on the date of grant.
|
|
(2)
|
Based on 12,673,646 shares of Equus common stock outstanding.
|
Other Non-Plan
Compensation to Non-Employee Directors
The following table
sets forth cash compensation that the Fund paid to each of its current Non-Employee Directors during 2015. Equus expects similar
amounts to be paid to these individuals in 2016:
Name of Director
|
|
Director Fees
|
|
Other
Fees
(1)
|
|
Total
|
Fraser Atkinson
|
|
$
|
96,000
|
|
|
$
|
0
|
|
|
$
|
96,000
|
|
Richard F. Bergner
|
|
$
|
41,000
|
|
|
$
|
0
|
|
|
$
|
41,000
|
|
Henry W. Hankinson
|
|
$
|
36,000
|
|
|
$
|
72,000
|
|
|
$
|
108,000
|
|
Robert L. Knauss
|
|
$
|
56,000
|
|
|
$
|
0
|
|
|
$
|
56,000
|
|
Bertrand des Pallieres
|
|
$
|
23,000
|
|
|
$
|
0
|
|
|
$
|
23,000
|
|
Standard for an Order under Rule
17d-1
Section 57(a)(4) and Rule 17d-l, made
applicable to BDCs by Section 57(i), provides that the Commission may, by order upon application, grant relief under Section 57(a)(4)
and Rule 17d-1 permitting certain joint enterprises or arrangements and profit-sharing plans. Rule 17d-1(b) further provides that
in passing upon such an application, the Commission will consider (i) whether the participation of the BDC in such enterprise,
arrangement or plan is consistent with the policies and purposes of the 1940 Act and (ii) the extent to which such participation
is on a basis different from or less advantageous than that of other participants.
Consistency with the 1940 Act’s
Policies and Purposes
The arguments as to why the Plan is consistent
with the 1940 Act are almost identical to the standards for exemptions under Section 6(c) and have been set forth above. Additionally,
Section 57(j)(1) expressly permits any director, officer or employee of a BDC to acquire warrants, options and rights to purchase
voting securities of such BDC, and the securities issued upon the exercise or conversion thereof, pursuant to an executive compensation
plan which meets the requirements of Section 61(a)(3)(B). In respect of awards of Restricted Stock, Equus submits that the issuance
of Restricted Stock pursuant to the Plan poses no greater risk to shareholders than the issuances permitted by Section 57(j)(1).
Differences in Participation
The Fund’s role is necessarily
different from that of other participants in the Plan since the other participants in the Plan are its directors, officers and
employees. Since Equus and its officers and employee-Participants are in an employer/employee relationship, their respective rights
and duties are different and not comparable. Likewise, the respective rights and duties of Equus and its Non-Employee Directors
are different and not comparable. However, the Fund’s participation with respect to the Plan will not be “less advantageous”
than that of the Participants. Equus, either directly or indirectly, is responsible for the compensation of the Participants; the
Plan is simply the Fund’s chosen method of providing such compensation. Moreover, Equus believes that the Plan will benefit
the Fund by enhancing its ability to attract and retain highly qualified personnel. The Plan, although benefiting the Participants
and the Fund in different ways, is in the interest of the Fund’s stockholders, because it will help align the interests of
its directors, officers, and employees with those of its stockholders, which will encourage conduct on the part of these individuals
to produce a better return for the Fund’s stockholders.
Precedents for Relief
The Commission has previously granted
exemptive relief from Section 23(c) of the 1940 Act to closed-end investment companies in circumstances substantially similar to
those contemplated under the Equus Plan. The following is a brief overview of certain of these exemptive orders:
|
·
|
Baker, Fentress & Company (1998) (Investment
Company Act Release No. 23619)
. Permitting (i) issuance of restricted stock, (ii) issuance of stock options to non-employee
directors, and (iii) the payment of the exercise price of stock options in shares of the company or as part of a cashless exercise.
|
|
·
|
Adams Express Company, et. al. (2005) (Investment
Company Act Release No. 26780)
. Permitting issuance of restricted stock pursuant to equity-based compensation plan.
|
|
·
|
MCG Capital Corporation (2006) (Investment Company
Act Release No. 27280)
. Permitting issuance of restricted stock pursuant to equity-based compensation plan.
|
|
·
|
Main Street Capital Corporation (2008) (Investment
Company Act Release No. 28120)
. Permitting the issuance of restricted stock pursuant to equity-based compensation plan.
|
|
·
|
Triangle Capital Corporation (2008) (Investment
Company Act Release No. 28196)
. Permitting the issuance of restricted stock pursuant to equity-based compensation plan.
|
|
·
|
Main Street Capital Corporation (2009) (Investment
Company Act Release No. 28726)
. Permitting use of company shares to satisfy tax withholding obligations pursuant to an incentive
plan award grant.
|
|
·
|
Triangle Capital Corporation (2009) (Investment
Company Act Release No. 28692)
. Permitting withholding of shares to enable incentive plan participants to satisfy tax withholding
obligations in connection with the vesting of restricted shares.
|
|
·
|
Medallion Financial Corp. (2010) (Investment Company
Act Release No. 30139)
. Permitting issuance of stock options to non-employee directors.
|
|
·
|
Harris & Harris Group, Inc. (2012) (Investment
Company Act Release No. 30027)
. Permitting (i) the issuance of restricted stock to directors (including non-employee directors),
officers, and employees, (ii) withholding or purchase of shares from plan participants to satisfy tax withholding obligations,
and (iii) cashless exercise of options pursuant to the plan by way of payment of shares of common stock.
|
|
·
|
Triangle Capital Corporation (2013) (Investment
Company Act Release No. 30432)
. Permitting an increase in the number of shares of restricted stock that may be issued to non-employee
directors.
|
|
·
|
Newtek Business Services Corp. (2016) (Investment
Company Act Release No. 32109).
Permitting (i) the issuance of restricted stock to directors (including non-employee directors),
officers, and employees, (ii) withholding or purchase of shares from plan participants to satisfy tax withholding obligations,
and (iii) cashless exercise of options pursuant to the plan by way of payment of shares of common stock.
|
Because the exemptive relief sought by
this Application is substantially similar to those in a number of orders granted by the Commission permitting comparable arrangements
as summarized above, Equus respectfully requests that the Commission grant the exemptive relief requested by this Application.
In addition, it is important to highlight
that stock withholding provisions contained in the Plan are common features found in the equity compensation plans of many public
companies not regulated under the 1940 Act with which Equus competes for personnel resources.
|
IV.
|
TAX WITHHOLDING OBLIGATIONS AND ABILITY OF PARTICIPANTS TO PAY THE EXERCISE PRICE OF OPTIONS WITH STOCK ALREADY OWNED
|
Requested Order
Equus requests an order of the Commission
for relief under Section 23(c) to permit Equus to withhold shares of its common stock or purchase shares of Equus’ common
stock from Participants to satisfy tax withholding obligations related to the vesting of Restricted Stock or the exercise of Options
to purchase shares of Equus’ common stock that will be granted pursuant to the Plan. In addition, Equus requests an exemption
from Section 23(c) to permit participants to pay the exercise price of Options to purchase shares of Equus’ common stock
that will be granted to them pursuant to the Plan with shares of Equus’ common stock.
Tax Consequences of Restricted
Stock Awards
Generally, a grant under the Plan of
Restricted Stock will not result in taxable income to the recipient for U.S. federal income tax purposes at the time of the grant.
Instead, the value of the Restricted Stock will generally be taxable to the recipient as ordinary income in the years in which
the restrictions on the shares lapse. Such value will be the fair market value of the shares on the dates the restrictions lapse.
Any recipient, however, may elect pursuant to Section 83(b) of the Code to treat the fair market value of the shares on the date
of grant as ordinary income in the year of the grant, provided the recipient makes the election within 30 days after the date of
the grant. Generally, participants forego such elections in order to avoid the risk of being taxed on compensation they never realize,
either because they forfeit the Restricted Stock or the value of the Restricted Stock drops prior to vesting.
On the date the Restricted Stock vests
(assuming no Section 83(b) election has been made), the shares are released to the Participant and available for sale or transfer
(subject to Equus’ share retention guidelines). In accordance with the applicable regulations of the IRS, the Equus requires
the recipient to pay to it an amount sufficient to satisfy withholding taxes in respect of such compensation income at the time
the restrictions on the shares lapse or the recipient makes a Section 83(b) election. Where the cumulative withholding for all
employees exceeds $100,000, the amounts withheld generally must be deposited with the IRS by the next business day, therefore procedures
generally must be implemented to collect the withholding from employees on the vesting date itself or as soon as possible thereafter.
In lieu of receiving a cash payment or
withholding other compensation from a participant, typically a stock plan will provide for withholding of shares equal in value
at the vesting date to the monetary amount of the company’s withholding obligation, sometimes referred to as a “net
share settlement.” In this scenario, shares with value equal to the tax payment are withheld from the award and may be returned
to the plan reserve, if permitted under the terms of the plan or award agreement. If Equus withholds shares to satisfy this withholding
tax obligation, instead of cash, the recipient nonetheless will be required to include in income the fair market value of the shares
withheld.
The Plan incorporates this concept of
“net share settlement.” Specifically, it provides that the Equus is authorized to withhold stock (in whole or in part)
from any award of restricted shares granted in satisfaction of a Participant’s tax obligations. However, no such withholding
of shares will take place except pursuant to written assurance from the staff of the Commission or exemptive relief from the Commission.
Tax Consequences of Stock Option
Awards
Options are granted under the Plan. Options
granted under the Plan will not be taxable to a recipient at the time of grant. Upon the exercise of an option, the amount by which
the fair market value of the shares of Equus’ common stock received, determined as of the date of exercise, exceeds the exercise
price will be treated as ordinary income to the recipient of the option in the year of exercise. In accordance with applicable
regulations of the IRS, Equus requires the optionee to pay to it an amount sufficient to satisfy taxes required to be withheld
in respect of such compensation income at the time of the exercise of the option. If Equus withholds shares to satisfy this withholding
tax obligation, instead of cash, the optionee nonetheless will be required to include in income the fair market value of the shares
withheld. When the optionee sells the shares of common stock received upon exercise of the option, he or she will generally recognize
a capital gain or loss (long-term or short-term, depending upon the holding period of the stock sold) in an amount equal to the
difference between the amount realized upon the sale of the shares and his or her basis in the shares (
i.e.
, the exercise
price plus the amount taxed to the optionee as compensation income).
Applicable Law and Need for Relief
Section 23(c), which is made applicable
to BDCs by Section 63, generally prohibits a BDC from purchasing any securities of which it is the issuer except in the open market
pursuant to tenders, or “under such other circumstances as the Commission may permit by rules and regulations or orders for
the protection of investors in order to insure that such purchases are made in a manner or on a basis which does not unfairly discriminate
against any holders of the class or classes of securities to be purchased.” No rule addresses “purchases” by
a BDC in the circumstances described in this Application. Thus, to the extent that the transactions between Equus and the Participants
described in this Application with respect to the Plan constitute “purchases” by Equus of its own securities, Section
23(c) would prohibit these transactions.
Equus’ Legal Arguments
Section 23(c)(3) permits a BDC to purchase
securities of which it is the issuer “under such . . . circumstances as the Commission may permit by . . . orders for the
protection of investors in order to insure that such purchases are made in a manner or on a basis which does not unfairly discriminate
against any holders of the class or classes of securities to be purchased.” As noted above, the transactions between Equus
and the Participants described in this Application with respect to the Plan may entail “purchases” by Equus of its
own securities within the meaning of Section 23(c). However, Equus submits that any such purchases will be made in a manner that
does not unfairly discriminate against Equus’ other shareholders. In that regard, Equus will use the closing sales price
of its shares of common stock on the New York Stock Exchange (or any primary exchange on which its shares of common stock may be
traded in the future) as the “fair market value” of its common stock under the Plan (
i.e.
, the public market
price on the date of grant of Restricted Stock and the date of grant of Options). The shares of the Equus’ common stock used
to satisfy tax withholding will be valued based on the current fair market value on the date of the transaction. Because all of
the transactions between Equus and the Participants described in this Application with respect to the Plan will take place at the
public market price for the Equus’ common stock, these transactions will not be significantly different than could be achieved
by any shareholder selling in a transaction on the New York Stock Exchange. Moreover, these transactions may be made only as permitted
by the Plan, which was approved by the Equus shareholders on June 13, 2016. These transactions permit Equus to deliver only shares
net of the required tax withholding to the award recipients, thereby reducing the number of shares issued in connection with awards
granted under the Plan. The resulting reduction in dilution using these transactions should benefit all of Equus’ shareholders.
Finally, without the relief sought hereby, Participants may be forced to sell more shares in the open market or a portion of the
non-cash awards that vest or are delivered under the Plan to satisfy their tax withholding obligations. A large influx of Equus
shares into the open market over a short period of time would not be beneficial to Equus’ shareholders. No transactions will
be conducted pursuant to the requested Order on days where there are no reported market transactions involving Equus’ shares.
Moreover, the withholding provisions in the Plan do not raise concerns about preferential treatment of Equus’ insiders because
the Plan is a bona fide compensation plan of the type that is common among corporations generally. Finally, the vesting schedule
is determined at the time of the initial grant of the Restricted Stock and the option exercise price is determined at the time
of the initial grant of the Options.
In light of the foregoing, Equus believes
that the requested relief meets the standards of Section 23(c)(3). Moreover, the important role that equity compensation can play
in attracting and retaining qualified personnel has been expressly recognized by the Commission with respect to certain types of
investment companies, including closed-end investment companies, small business investment companies and BDCs. Equus believes that
its request for an Order is consistent with the policies underlying the provisions of the Act permitting the use of equity compensation
as well as prior exemptive relief granted by the SEC for relief under Section 23(c).
Precedent
The Commission has previously granted
exemptive relief from Section 23(c) to BDCs in substantially similar circumstances. On April 3, 2012, the Commission issued an
order for an exemption from Section 23(c) to permit Harris & Harris to withhold shares of its common stock from participants
and to permit participants to pay the exercise price of options that were granted to them pursuant to a predecessor plan with shares
of common stock (
Harris & Harris Group, Inc.
, Investment Company Act Release No., 30027 (April 3, 2012). On April
20, 2010, the Commission issued an order for an exemption from Section 23(c) permitting MCG Capital to withhold shares of its common
stock or purchase shares of its common stock from the participants to satisfy tax withholding obligations related to the vesting
of Restricted Stock that were or will be granted pursuant to its incentive compensation plans (
MCG Capital Corporation
,
Investment Company Act Release No. 29210 (April 20, 2010). On May 5, 2009, the Commission issued an order granting Triangle exemptive
relief from Section 23(c) in connection with withholding obligations related to vesting Restricted Stock and option exercises,
and the payment of an option exercise price with shares of common stock already held by the participant (
Triange Capital Corporation
,
Investment Company Act Release No. 28718 (May 5, 2009).
Additionally, in 1998, the Commission
issued Baker Fentress and Adams Express exemptive relief from Section 23(c) in connection with the payment of a stock option exercise
price with previously acquired stock.
Because the exemptive relief sought by
this Application is substantially identical to those in a number of orders granted by the Commission permitting comparable arrangements,
including the orders issued to Triangle and MCG Capital discussed above, Equus respectfully requests that the Commission grant
the exemptive relief requested by this Application.
In addition, it is important to highlight
that that stock withholding provisions and the other provisions contained in the Plan described in this Application are common
features found in the equity compensation plans of many public companies not regulated under the Act with which Equus competes
for personnel resources.
Accordingly, Equus respectfully requests
that the Commission issue an order under Section 23(c) to permit (1) Equus to withhold shares of its common stock or purchase shares
of Equus’ common stock from Participants to satisfy tax withholding obligations related to the vesting of Restricted Stock
or the exercise of Options to purchase shares of Equus’ common stock that will be granted pursuant to the Plan, and (2) Participants
to pay the exercise price of Options to purchase shares of Equus’ common stock that will be granted to them pursuant to the
Plan with shares of Equus’ common stock.
Applicant Agrees that the Order granting
the requested relief will be subject to the following conditions:
1. The
Plan will be authorized by the Fund’s shareholders.
2. Each
issuance of Restricted Stock to a Participant will be approved by the Required Majority on the basis that such grant is in the
best interest of the Fund and its shareholders.
3. The
amount of voting securities that would result from the exercise of all of the Fund’s outstanding warrants, Options and rights,
together with any Restricted Stock issued pursuant to the Plan, at the time of issuance shall not exceed 25% of the outstanding
voting securities of the Fund, except that if the amount of voting securities that would result from the exercise of all of the
Fund’s outstanding warrants, Options and rights issued to the Fund’s directors, officers and employees, together with
any Restricted Stock issued pursuant to the Plan, would exceed 15% of the outstanding voting securities of the Fund, then the total
amount of voting securities that would result from the exercise of all outstanding warrants, Options and rights, together with
any Restricted Stock issued pursuant to the Plan, at the time of issuance shall not exceed 20% of the outstanding voting securities
of the Fund.
4. The
maximum amount of shares of Restricted Stock that may be issued under the Plan will be 10% of the outstanding shares of common
stock of the Fund on the effective date of the Plan plus 10% of the number of shares of the Fund’s common stock issued or
delivered by the Fund (other than pursuant to compensation plans) during the term of the Plan.
5. The
Board will review the Plan at least annually. In addition, the Board will review periodically the potential impact that the issuance
of Restricted Stock under the Plan could have on the Fund’s earnings and net asset value per share, such review to take place
prior to any decisions to grant Restricted Stock under the Plan, but in no event less frequently than annually. Adequate procedures
and records will be maintained to permit such review. The Board will be authorized to take appropriate steps to ensure that the
issuance of Restricted Stock under the Plan will be in the best interest of the Fund and its shareholders. This authority will
include the authority to prevent or limit the granting of additional Restricted Stock under the Plan. All records maintained pursuant
to this condition will be subject to examination by the Commission and its staff.
Communications
Please address all communications concerning
this Application and the Notice and Order to:
Mr. Kenneth I. Denos
Secretary and Chief Compliance Officer
Equus Total Return, Inc.
700 Louisiana Street, 48th Floor
Houston, Texas 77002
Telephone: (713) 529-0900
Facsimile (212) 671-1534
Please address any questions, and a copy
of any communications, concerning this Application, the Notice and Order to:
Martin C. Glass, Esq.
Jenner & Block LLP
919 Third Avenue
New York, NY 10022
Telephone: (212) 891-1600
Facsimile: (212) 891-1699
Authorizations
The verification required by Rule 0-2(d)
under the 1940 Act is attached as Exhibit B. The filing of this Application has been specifically authorized by a resolution of
the Board of Directors of Equus dated April 15, 2016. A copy of this resolution, which remains in full force and effect, is attached
to this Application as Exhibit C.
Equus has caused this Application to
be duly signed on its behalf on the 29
th
day of September, 2016.
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EQUUS TOTAL RETURN, INC.
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Date: September 29, 2016
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By:
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/s/ Kenneth I. Denos
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Kenneth I. Denos
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Secretary and Chief Compliance Officer
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exhibit
“A”
EQUUS
TOTAL RETURN, INC.
2016 EQUITY INCENTIVE PLAN
(A)
General Purpose
. The Plan has been established to advance the interests of the Company
by providing for the grant of Awards to Participants. At all times during such periods as the Company qualifies or is intended
to qualify as a “business development company” under the 1940 Act, the terms of the Plan shall be construed so as to
conform to the stock-based compensation requirements applicable to “business development companies” under the 1940
Act. An Award or related transaction will be deemed to be permitted under the 1940 Act if permitted by any exemptive or “no-action”
relief granted by the Commission or its staff.
(B)
Available Awards
. The purpose of the Plan is to provide a means by which eligible recipients
of Awards may be given an opportunity to benefit from increases in the value of the Company’s Stock through the granting
of Restricted Stock, Incentive Stock Options and Non-statutory Stock Options.
(C)
Eligible Participants
. All Officers, key Employees and all Directors are eligible to
be granted Awards under the Plan;
provided, however
, that a Director who is not an Employee shall not be granted an Award
unless and until the Company has received an order from the Commission permitting Awards to non-Employee Directors;
provided
further
, that no Participant shall be granted an Award of Restricted Stock unless and until the Company has received an order
from the Commission permitting Awards of Restricted Stock hereunder.
(A)
“
1940 Act
”
means the Investment Company Act of 1940, as amended,
and the rules and regulations promulgated thereunder.
(B)
“
Affiliate
”
means any corporation or other entity that stands in
a relationship to the Company that would result in the Company and such corporation or other entity being treated as one employer
under Section 414(b) or Section 414(c) of the Code, except that in determining eligibility for the grant of an Option by reason
of service for an Affiliate, Sections 414(b) and 414(c) of the Code shall be applied by substituting “at least 50%”
for “at least 80%” under Section 1563(a)(1), (2) and (3) of the Code and Treas. Regs. § 1.414(c)-2;
provided
,
that to the extent permitted under Section 409A, “at least 20%” shall be used in lieu of “at least 50%”;
and further provided
, that the lower ownership threshold described in this definition (50% or 20% as the case may be) shall
apply only if the same definition of affiliation is used consistently with respect to all compensatory stock options or stock awards
(whether under the Plan or another plan). The Company may at any time by amendment provide that different ownership thresholds
(consistent with Section 409A) apply. Notwithstanding the foregoing provisions of this definition, except as otherwise determined
by the Board, a corporation or other entity shall be treated as an Affiliate only if its employees would be treated as employees
of the Company for purposes of the rules promulgated under the Securities Act of 1933, as amended, with respect to the use of Form
S-8.
(C)
“
Award
”
means an award of Restricted Stock or Options granted pursuant
to the Plan.
(D)
“
Award Agreement
”
means any written agreement, contract, or other
instrument or document approved by the Board which evidences an Award granted under the Plan.
(E)
“
Board
”
means the Board of Directors of the Company.
(F)
“
Change of Control
”
shall mean the first to occur of the following:
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(i)
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Any Person (including one or more Persons acting as a partnership, limited partnership, syndicate,
or other group for the purposes of acquiring, holding, or disposing of securities of the Company) other than (a) a trustee or other
fiduciary holding securities under an employee benefit plan of the Company, or (b) a corporation owned directly or indirectly by
the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes
the beneficial owner, directly or indirectly, of securities of the Company representing forty percent (40%) or more of the total
voting power represented by the Company’s then-outstanding voting securities; or
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(ii)
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During any period of two (2) consecutive years, individuals who at the beginning of such period
constitute the Board plus any new Director whose election by the Board or nomination for election by the Company’s shareholders
was approved by a vote of at least two-thirds (2/3) of the Board at the beginning of the period or whose election or nomination
for election was previously so approved, cease for any reason to constitute a majority thereof; or
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(iii)
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The shareholders of the Company approve a merger or consolidation of the Company with any other
corporation (and such merger or consolidation is in fact consummated), other than a merger or consolidation which would result
in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding
or by being converted into voting securities of the surviving entity) at least eighty percent (80%) of the total voting power represented
by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or
the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all the Company’s assets , provided that such merger, consolidation, liquidation,
sale or disposition, as the case may be, is actually consummated.
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However, in no event shall a Change
of Control be deemed to have occurred, with respect to a Participant, if such Participant is part of a purchasing group which consummates
the transaction resulting in the Change of Control. The Participant shall be deemed “part of a purchasing group” for
purposes of the preceding sentence if the Participant is an equity participant in the purchasing company or group (except for (i)
passive ownership of less than three percent (3%) of the stock (or membership or partnership units, as the case may be) of the
purchasing company or group which is otherwise not significant, as reasonably determined prior to the Change of Control by a majority
of the Directors who were members of the Board at least six (6) months prior to the Change of Control).
(G)
“
Code
”
means the Internal Revenue Code of 1986, as amended and in
effect, or any successor statute as from time to time in effect. Any reference to a provision of the Code shall be deemed to include
a reference to any applicable guidance (as determined by the Board) with respect to such provision.
(H)
“
Commission
”
means the U.S. Securities and Exchange Commission.
(I)
“
Committee
”
has the meaning set forth in Section 3.
(J)
“
Company
”
means, collectively, Equus Total Return, Inc. and its
subsidiaries.
(K)
“
Continuous Service”
means, with respect to any Participant, such
Participant’s uninterrupted service with the Company or an Affiliate, whether as an Employee, Officer, or Director.
(L)
“
Covered Employee
”
shall mean a Participant who the Committee determines
is or may be one of the group of “covered employees” as defined in the regulations promulgated under Code Section 162(m),
or any successor statute.
(M)
“
Covered Transaction
”
means any of (i) a consolidation, merger,
stock sale, Change of Control or similar transaction or series of related transactions in which the Company is not the surviving
corporation or which results in the acquisition of all or substantially all of the Company’s then outstanding common stock
by a single person or entity or by a group of persons and/or entities acting in concert, (ii) a sale or transfer of all or substantially
all the Company’s assets, (iii) a dissolution or liquidation of the Company or (iv) following such time as the Company has
a class of equity securities listed on a national securities exchange or quoted on an inter-dealer quotation system, a change in
the membership of the Board for any reason such that the individuals who, as of the Effective Date, constitute the Board of Directors
of the Company (the
“
Continuing Directors
”
) cease for any reason to constitute at least a majority of
the Board;
provided however
, that any individual becoming a Director after the Effective Date, whose election or nomination
for election by the Company’s shareholders was approved by a vote of at least a majority of the Continuing Directors, will
be considered as though such individual were a Continuing Director, but excluding for this purpose any such individual whose initial
assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended) or other actual or threatened solicitation
of proxies or consents by or on behalf of any person or entity other than the Board. Where a Covered Transaction involves a tender
offer that is reasonably expected to be followed by a merger described in clause (i) (as determined by the Board), the Covered
Transaction shall be deemed to have occurred upon consummation of the tender offer.
(N)
“
Current Market Value
”
has the meaning set forth in Section 8.
(O)
“
Director
”
means a member of the Board of Directors of the Company.
(P)
“
Effective Date
”
has the meaning set forth in Section 12.
(Q)
“
Employee
”
means any person employed by the Company or an Affiliate.
(R)
“
Family Member
”
means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Participant’s household (other
than a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation
in which these persons (or the Participant) control the management of assets, and any other entity in which these persons (or the
Participant) own more than fifty percent of the voting interests.
(S)
“
Incentive Stock Option
”
means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
(T)
“
Non-statutory Stock Option
”
means an Option that is not an Incentive
Stock Option.
(U)
“
Officer
”
means any person appointed as an officer of the Company.
(V)
“
Option
”
means an Incentive Stock Option or a Non-statutory Stock
Option granted pursuant to the Plan.
(W)
“
Participant
”
means an individual to whom an Award is granted pursuant
to the Plan.
(X)
“
Performance-Based Exception
”
shall mean the performance-based exception
from the deductibility limitations as set forth in Code Section 162(m).
(Y)
“
Permitted Transferee
”
means a Family Member of a Participant to
whom an Award has been transferred by gift.
(Z)
“
Person
”
means any individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization, or government or political subdivision thereof.
(AA)
“
Plan
”
means this 2016 Equity Incentive Plan, as from time to time
amended and in effect.
(BB)
“
Restricted Stock
”
means an Award of Stock for so long as the Stock
remains subject to restrictions requiring that it be forfeited to the Company if specified conditions are not satisfied.
(CC)
“
Securities Act
”
means the Securities Act of 1933, as amended.
(DD)
“
Shares”
or “
Stock
”
means the common stock of
the Company, par value $.001 per share.
(A)
Administration By Board
. The Board shall administer the Plan unless and until it delegates
administration to a Committee, as provided in Section 3(C).
(B)
Powers of Board
. The Board shall have the power, subject to the express provisions
of the Plan and applicable law:
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(i)
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To determine from time to time which of the persons eligible under the Plan shall be granted
Awards; when and how each Award shall be granted and documented; what type or combination of types of Awards shall be granted;
the provisions of each Award granted, including the time or times when a person shall be permitted to exercise an Award; the number
of shares of Stock with respect to which an Award shall be granted to each such Person; to determine whether, to what extent, and
under what circumstances Awards may be settled or exercised, or canceled, forfeited or suspended, and the method or methods by
which Awards may be settled, exercised, canceled, forfeited or suspended; and, to determine requirements for the vesting of Awards
or performance or service criteria to be achieved in order for Awards to vest.
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(ii)
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To construe and interpret the Plan and Awards granted under it, and to establish, amend and revoke
rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency
in the Plan or in any Award Agreement, in such manner and to such extent as it shall deem necessary or expedient to make the Plan
fully effective.
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(iii)
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To amend the Plan or an Award as provided in Section 10.
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(iv)
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To terminate or suspend the Plan as provided in Section 11.
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(v)
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Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient
to promote the best interests of the Company and that are not in conflict with the provisions of the Plan.
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(C)
Delegation to Committee
. The Board may delegate administration of the Plan to a Committee
or Committees of two (2) or more Directors, and the term
“
Committee
”
shall apply to any persons to whom
such authority has been delegated; provided that a “required majority,” as defined in Section 57(o) of the 1940 Act,
must approve each issuance of Awards in accordance with Section 61(a)(3)(A)(iv) of the 1940 Act. For purposes of Code Section 162(m),
the Committee must be comprised of two or more “outside” directors as set forth in Code Section 162(m). If administration
of the Plan is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee
is authorized to exercise (and references in this Plan to the Board, other than the Board reference at the end of this sentence
and the Board references in the last sentence of this subsection (c), shall thereafter be to the Committee or subcommittee), subject,
however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board.
The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.
(D)
Effect of Board’s Decision
. Determinations, interpretations and constructions
made by the Board in good faith shall not be subject to review by any Person and shall be final, binding and conclusive on all
Participants.
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4.
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SHARES SUBJECT TO THE PLAN; CERTAIN LIMITS.
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(A)
Share Reserve
. Subject to such adjustments as may be provided in this Section 4 and
Section 9 herein, the maximum aggregate number of shares of Stock that may be issued under the Plan pursuant to grants of Restricted
Stock or the exercise of Awards is 2,534,728 shares.
(B)
No Addition of Forfeited, Canceled, or Held Back Shares
. Shares of Stock underlying
any Awards that are forfeited, canceled, held back upon exercise of an Option or settlement of an Award to cover the exercise price
or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of Stock or otherwise terminated
(other than by exercise) shall not be added back to the number of Shares available for issuance under the Plan and shall not be
considered as part of the number of Shares otherwise reserved thereunder, and
further provided
, that in the event the Company
repurchases Stock on the open market, such Stock shall not be added to the number of Shares available for issuance under the Plan.
(C)
Type of Shares
. The shares of Stock subject to the Plan may be unissued shares or reacquired
shares bought on the market or otherwise. No fractional shares of Stock will be delivered under the Plan.
(D)
Limits on Individual Grants
. The maximum number of Shares underlying an Option for
which any Participant may be granted Awards in any calendar year is One Million (1,000,000) Shares, net of any Shares canceled
or redeemed as payment of any applicable tax withholding. The maximum number of Shares of Restricted Stock for which any Participant
may be granted Awards in any calendar year is Five Hundred Thousand (500,000) Shares, net of any Shares canceled or redeemed as
payment of any applicable tax withholding.
(E)
Limits on Aggregate Grants of Restricted Stock
. The combined maximum amount of Restricted
Stock that may be issued under the Plan to all Participants will be 10% of the outstanding shares of Stock on the effective date
of the Plan, plus 10% of the number of Shares issued or delivered by the Company (other than pursuant to compensation plans) during
the term of the Plan. No one Participant shall be granted Awards of Restricted Stock relating to more than 25% of the Shares available
for issuance under this Plan. Shares granted pursuant to an Award of Restricted Stock that are used to settle tax withholding obligations
pursuant to Section 9(E) shall be included as “Restricted Stock issued” for purposes of the calculations set forth
in this Section 4(E).
(F)
No Grants in Contravention of 1940 Act
. At all times during such periods as the Company
qualifies or is intended to qualify as a “business development company,” no Award may be granted under the Plan if
the grant of such Award would cause the Company to violate Section 61(a)(3) of the 1940 Act, and, if otherwise approved for grant,
shall be void and of no effect.
(G)
Limits on Number of Awards
. The amount of voting securities that would result from
the exercise of all of the Company’s outstanding warrants, options, and rights, together with any Restricted Stock issued
pursuant to this Plan and any other compensation plan of the Company, at the time of issuance shall not exceed 25% of the outstanding
voting securities of the Company, except that if the amount of voting securities that would result from the exercise of all of
the Company’s outstanding warrants, options, and rights issued to the Company’s Directors, Officers, and Employees,
together with any Restricted Stock pursuant to this Plan and any other compensation plan of the Company, would exceed 15% of the
outstanding voting securities of the Company, then the total amount of voting securities that would result from the exercise of
all outstanding warrants, options, and rights, together with any Restricted Stock issued pursuant to this Plan and any other compensation
plan of the Company, at the time of issuance shall not exceed 20% of the outstanding voting securities of the Company. Shares granted
pursuant to an Award of Restricted Stock that are used to settle tax withholding obligations pursuant to Section 9(E) shall be
included as “Restricted Stock issued” for purposes of the calculations set forth in this Section 4(H).
(H)
Date of Award’s Grant
. The date on which the “required majority,”
as defined in Section 57(o) of the 1940 Act, approves the issuance of an Award will be deemed the date on which such Award is granted.
Incentive Stock Options may be granted
to Employees or Employee Directors of the Company or a “parent” or “subsidiary” corporation of the Company
as those terms are used in Section 424 of the Code. Awards other than Incentive Stock Options may be granted to Officers, Employees
and Directors. Notwithstanding the foregoing, no Officer, Employee or Director shall be eligible to receive any Award of Options
under the Plan until such time as the Plan has been approved by the Company’s shareholders and no Award of Restricted Stock
to any Officer, Employee or Director or Award of Options to any Director who is not also an Employee shall granted under the Plan
until such time as the Company has received an order from the Securities Exchange Commission as required by the 1940 Act, permitting
such Awards. By accepting any Award granted hereunder, the Participant agrees to the terms of the Award and the Plan. Notwithstanding
any provision of this Plan to the contrary, awards of an acquired company that are converted, replaced or adjusted in connection
with the acquisition may contain terms and conditions that are inconsistent with the terms and conditions specified herein, as
determined by the Board.
Each Option shall contain such terms
and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Non-statutory
Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates shall be issued for
shares of Stock purchased on exercise of each type of Option. The provisions of separate Options need not be identical, but, to
the extent relevant, each Option shall include (through incorporation by reference or otherwise) the substance of each of the following
provisions:
(A)
Time and Manner of Exercise
. Unless the Board expressly provides otherwise, an Option
will not be deemed to have been exercised until the Board receives a notice of exercise (in form acceptable to the Board) signed
by the appropriate person and accompanied by any payment required under the Award. If the Option is exercised by any person other
than the Participant, the Board may require satisfactory evidence that the person exercising the Option has the right to do so.
No Option shall be exercisable after the expiration of ten (10) years from the date on which it was granted.
(B)
Exercise Price of an Option
. The exercise price of each Option shall be not less than
the Current Market Value of the stock subject to the Option on the date the Option is granted,
provided however
, if no such
market value exists the exercise price of each Option shall be not less than the current net asset value of the stock subject to
the Option as determined in good faith by the Board on the date the Option is granted. In the case of an Option granted to a 10%
Holder and intended to qualify as an Incentive Stock Option, the exercise price will not be less than 110% of the Current Market
Value (or net asset value, as the case may be, if no market value exists) determined as of the date of grant. A “10% Holder”
is an individual owning stock possessing more than 10% of the total combined voting power of all classes of Stock of the Company
or its parent or subsidiary entities. No such Option, once granted, may be repriced other than in accordance with the 1940 Act
and the applicable stockholder approval requirements of the New York Stock Exchange.
(C)
Consideration
. The purchase price for Stock acquired pursuant to an Option shall be
paid in full at the time of exercise either (i) in cash, or, if so permitted by the Board and if permitted by the 1940 Act and
otherwise legally permissible, (ii) through a broker-assisted exercise program acceptable to the Board, (iii) by such other means
of payment as may be acceptable to the Board, or (iv) in any combination of the foregoing permitted forms of payment.
(D)
Transferability of an Incentive Stock Option
. An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Participant
only by the Participant.
(E)
Transferability of a Non-statutory Stock Option
. A Non-statutory Stock Option shall
be transferable by will or by the laws of descent and distribution, or, to the extent provided by the Board, by gift to a Permitted
Transferee, and a Non-statutory Stock Option that is nontransferable except at death shall be exercisable during the lifetime of
the Participant only by the Participant.
(F)
Limitation on Repurchase Rights
. If an Option gives the Company the right to repurchase
shares of Common Stock issued pursuant to the Plan upon termination of employment of such Participant, the terms of such repurchase
right must comply with the 1940 Act.
(G)
Exercisability
. The Board may determine the time or times at which an Option will vest
or become exercisable and the terms on which an Option requiring exercise will remain exercisable. Notwithstanding the foregoing,
vesting shall take place at the rate of at least 20% per year over not more than five years from the date the award is granted,
subject to reasonable conditions such as continued employment.
(H)
Termination of Continuous Service
. Unless the Board expressly provides otherwise in
the Award Agreement, immediately upon the cessation of a Participant’s Continuous Service that portion, if any, of any Option
held by the Participant or the Participant’s Permitted Transferee that is not then exercisable will terminate and the balance
will remain exercisable for the lesser of (i) a period of three months or (ii) the period ending on the latest date on which such
Option could have been exercised without regard to this Section 6(H), and will thereupon terminate subject to the following provisions
(which shall apply unless the Board expressly provides otherwise):
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(i)
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if a Participant’s Continuous Service ceases by reason of death, or if a Participant dies
following the cessation of his or her Continuous Service but while any portion of any Option then held by the Participant or the
Participant’s Permitted Transferee is still exercisable, the then exercisable portion, if any, of all Options held by the
Participant or the Participant’s Permitted Transferee immediately prior to the Participant’s death will remain exercisable
for the lesser of (A) the one year period ending with the first anniversary of the Participant’s death or (B) the period
ending on the latest date on which such Option could have been exercised without regard to this Section 6(H)(i), and will thereupon
terminate; and
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(ii)
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if the Board, in its sole discretion, determines that the cessation of a Participant’s
Continuous Service resulted for reasons that cast such discredit on the Participant as to justify immediate termination of his
or her Options, all Options then held by the Participant or the Participant’s Permitted Transferee will immediately terminate.
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7.
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RESTRICTED STOCK PROVISIONS.
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Each grant of Restricted Stock shall
contain such terms and conditions as the Board shall deem appropriate. The provisions of separate grants of Restricted Stock need
not be identical, but, to the extent relevant, each grant shall include (through incorporation by reference or otherwise) the substance
of each of the following provisions:
(A)
Consideration
. To the extent permitted by the 1940 Act, Awards of Restricted Stock
may be made in exchange for past services or other lawful consideration.
(B)
Transferability of Restricted Stock
. Upon the grant of the Award of Restricted Stock,
a Participant shall have the rights of a stockholder with respect to the voting of the Restricted Stock and receipt of dividends;
provided that, in the Board’s discretion, an Award Agreement may provide that any dividends paid by the Company prior to
vesting of shares of Restricted Stock shall accrue and shall not be paid to the Participant until and to the extent Restricted
Stock vests. Unless the Board shall otherwise determine, (i) Restricted Stock, if uncertificated, shall be accompanied by a notation
on the records of the Company or the transfer agent to the effect that they are subject to forfeiture until such Restricted Stock
are vested as provided in Section 7(D) below, and (ii) certificated Restricted Stock shall remain in the possession of the Company
until such Restricted Stock is vested as provided in Section 7(D) below, and the Participant shall be required, as a condition
of the grant, to deliver to the Company such instruments of transfer as the Board may prescribe.
(C)
Transferability of Restricted Stock
. Except as the Board otherwise expressly provides,
Restricted Stock shall not be transferable other than by will or by the laws of descent and distribution.
(D)
Vesting
. The Board may determine the time or times at which shares of Restricted Stock
will vest or become exercisable and the terms on which shares of Restricted Stock will remain exercisable. The vesting schedule
for Restricted Stock issued under the Plan will be determined at the time of the initial grant of Restricted Stock.
(E)
Termination of Continuous Service
. Unless the Board expressly provides otherwise, immediately
upon the cessation of a Participant’s Continuous Service that portion, if any, of any Restricted Stock held by Participant
or the Participant’s Permitted Transferee that is not then vested will thereupon terminate and the unvested shares will be
returned to the Company and will be available to be issued as Awards under this Plan.
(A)
Acceleration
. The Board shall have the power to accelerate the time at which an Award
or any portion thereof vests or may first be exercised, regardless of the tax or other consequences to the Participant or the Participant’s
Permitted Transferee resulting from such acceleration.
(B)
Stockholder Rights
. No Participant or other person shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares of Stock subject to an Option unless and until such Award
has been delivered to the Participant or other person upon exercise of the Award. Unless otherwise set forth in their respective
Award Agreements, Holders of Restricted Stock shall have all the rights of a holder upon issuance of the Restricted Stock Award.
(C)
No Employment or Other Service Rights
. Nothing in the Plan or any instrument executed
or Award granted pursuant thereto shall confer upon any Participant any right to continue in the employment of, or to continue
to serve as a director of, the Company or an Affiliate or shall affect the right of the Company or an Affiliate to terminate (i)
the employment of the Participant (if the Participant is an Employee) with or without notice and with or without cause or (ii)
the service of a Director (if the Participant is a Director) pursuant to the Bylaws of the Company or an Affiliate and any applicable
provisions of the corporate law of the state in which the Company or the Affiliate is incorporated. Nothing in the Plan will be
construed as giving any person any rights as a stockholder except as to shares of Stock actually issued under the Plan. The loss
of existing or potential profit in Awards will not constitute an element of damages in the event of termination of service for
any reason, even if the termination is in violation of an obligation of the Company or an Affiliate to the Participant.
(D)
Legal Conditions on Delivery of Stock
. The Company will not be obligated to deliver
any shares of Stock pursuant to the Plan or to remove any restriction from shares of Stock previously delivered under the Plan
until: (i) the Company is satisfied that all legal matters in connection with the issuance and delivery of such shares have been
addressed and resolved; (ii) if the outstanding Stock is at the time of delivery listed on any stock exchange or national market
system, the shares to be delivered have been listed or authorized to be listed on such exchange or system upon official notice
of issuance; and (iii) all conditions of the Award have been satisfied or waived. If the sale of Stock has not been registered
under the Securities Act, the Company may require, as a condition to the grant or the exercise of the Award, such representations
or agreements as counsel for the Company may consider appropriate to avoid violation of the Securities Act. The Company may require
that certificates evidencing Stock issued under the Plan bear an appropriate legend reflecting any restriction on transfer applicable
to such Stock, and the Company may hold the certificates pending lapse of the applicable restrictions.
(E)
Withholding Obligations
. Each grant or exercise of an Award granted hereunder shall
be subject to the Participant’s having made arrangements satisfactory to the Board for the full and timely satisfaction of
all federal, state, local and other tax withholding requirements applicable to such grant, exercise or exchange. Without limiting
the generality of the foregoing, the Participant may satisfy such withholding requirements by tendering a check (acceptable to
the Board) for the full amount of such withholding. In the event the Company or an Affiliate becomes liable for tax withholding
with respect to an Option prior to the date of exercise, the Company may require the Participant to remit the required tax withholding
by separate check acceptable to the Company or may make such other arrangements (including withholding from other payments to the
Participant) for the satisfaction of such withholding as it determines.
The Company or its designated third party
administrator shall have the right to deduct applicable taxes from any Award payment and withhold, at the time of delivery or vesting
of cash or shares of Stock under this Plan, an appropriate amount of cash or number of shares of Stock or a combination thereof
for payment of taxes or other amounts required by law or to take such other action as may be necessary in the opinion of the Company
to satisfy all obligations for withholding of such taxes. Subject to Section 4(B), a Participant may also satisfy tax withholding
obligations by the transfer to the Company of shares of Stock theretofore owned by the holder of the Award with
respect to which withholding is required.
Shares of Stock used to satisfy tax withholding obligations shall be valued based on the shares’ Current Market Value on
the date of the transaction. Consistent with Section 409A of the Internal Revenue Code, the Company will use the closing sales
price of its shares of Common Stock on the New York Stock Exchange (or any other such exchange on which its shares of Common Stock
may be traded in the future) as
“Current Market Value”
for all purposes under the Plan.
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9.
|
ADJUSTMENTS UPON CHANGES IN STOCK.
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(A)
Capitalization Adjustments
. In the event of a Stock dividend, Stock split or combination
of Shares (including a reverse stock split), recapitalization or other change in the Company’s capital structure, the Board
will make appropriate adjustments to the maximum number of Shares specified in Section 4(A) that may be delivered under the Plan,
to the maximum per-participant Share limit described in Section 4(D) and will also make appropriate adjustments to the number and
kind of Shares or securities subject to Awards then outstanding or subsequently granted, any exercise prices relating to Awards
and any other provision of Awards affected by such change. To the extent consistent with qualification of Incentive Stock Options
under Section 422 of the Code and with the performance-based compensation rules of Section 162(m), where applicable, the Board
may also make adjustments of the type described in the preceding sentence to take into account distributions to stockholders other
than those provided for in such sentence, or any other event, if the Board determines that adjustments are appropriate to avoid
distortion in the operation of the Plan and to preserve the value of Awards granted hereunder;
provided, however
, that the
exercise price of Awards granted under the Plan will not be adjusted unless the Company receives an exemptive order from the Commission
or written confirmation from the staff of the Commission that the Company may do so.
(B)
Covered Transaction
. Except as otherwise provided in an Award Agreement, in the event
of a Covered Transaction in which there is an acquiring or surviving entity, the Board may provide for the assumption of some or
all outstanding Awards, or for the grant of new awards in substitution therefor, by the acquiror or survivor or an affiliate of
the acquiror or survivor, in each case on such terms and subject to such conditions as the Board determines. In the absence of
such an assumption or if there is no substitution, except as otherwise provided in the Award Agreement, the Board may provide that
(i) each Award will become fully vested or exercisable prior to the Covered Transaction on a basis that gives the holder of the
Award a reasonable opportunity, as determined by the Board, to participate as a stockholder in the Covered Transaction following
vesting or exercise, and the Award will terminate upon consummation of the Covered Transaction; (ii) provide that each Award (whether
vested or not) is cancelled in exchange for an amount equal to the product of (a) in the case of an Option, the excess, if
any, of the product of the Change of Control Price over the exercise price for such Award, and (b) in the case of Restricted
Stock, the Change of Control Price multiplied by the aggregate number of shares of Common Stock covered by such Award; and
(iii) provide that any then-outstanding Options (or other award continued or substituted therefor) shall remain exercisable for
a period of 6 months following such termination, or, if earlier, the expiration date of such Option;
provided, further
,
that where the Change of Control does not constitute a “change in control event” as defined under Code Section 409A,
the shares to be issued, or the amount to be paid, for each Award that constitutes deferred compensation subject to Code Section
409A shall be paid at the time or schedule applicable to such Awards (assuming for these payment purposes [but not the lapsing
of the period of restriction] that no such Change of Control had occurred). Notwithstanding the foregoing, the Board may,
in its discretion, instead terminate any outstanding Option if either (x) the Company provides holders of such Options with
reasonable advance notice to exercise their outstanding and unexercised Options or (y) the Board reasonably determines that
the Change of Control Price is equal to or less than the exercise price for such Options. For the purpose of this subsection,
“Change
of Control Price”
means the price per share on a fully diluted basis offered in conjunction with any transaction
resulting in a Change of Control, as determined in good faith by the Board as constituted before the Change of Control, if any
part of the offered price is payable other than in cash.
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10.
|
AMENDMENT OF THE PLAN AND AWARDS.
|
The Board may at any time or times amend
the Plan or any outstanding Award for any purpose which may at the time be permitted by law, and may at any time terminate the
Plan as to any future grants of Awards;
provided, however
, that except as otherwise expressly provided in the Plan the Board
may not, without the Participant’s consent, alter the terms of an Award so as to affect substantially and adversely the Participant’s
rights under the Award, unless the Board expressly reserved the right to do so at the time of the grant of the Award. Any amendments
to the Plan shall be conditioned upon stockholder approval only to the extent, if any, such approval is required by law (including
the Code and applicable stock exchange requirements), as determined by the Board.
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11.
|
TERMINATION OR SUSPENSION OF THE PLAN.
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(A)
Plan Term
. The Board may suspend or terminate the Plan at any time. Unless sooner terminated,
the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is initially adopted by the Board
or approved by the stockholders of the Company, whichever is earlier. No Awards may be granted under the Plan while the Plan is
suspended or after it is terminated.
(B)
No Impairment of Rights
. Suspension or termination of the Plan shall not impair rights
and obligations under any Awards granted while the Plan is in effect except with the written consent of the Participant.
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12.
|
EFFECTIVE DATE OF PLAN.
|
The Plan shall become effective upon
approval by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan
is adopted by the Board;
provided, however
, that the Plan shall not be effective with respect to an Award of Restricted
Stock unless the Company has received an order of the Commission that permits such Award (the
“
Effective Date
”
).
No provision of this Plan shall contravene
any portion of the 1940 Act, and in the event of any conflict between the provisions of the Plan or any Award and the 1940 Act,
the applicable Section of the 1940 Act shall control and all Awards under the Plan shall be so modified. All Participants holding
such modified Awards shall be notified of the change to their Awards and such change shall be binding on such Participants.
(A)
Performance Goals
.
The Committee, in its discretion, may determine that an Award
of Restricted Stock to a Covered Employee will be designed to comply with the Performance-Based Exception under Code Section 162(m).
In such case, the level of vesting of the award will depend on the attainment of any of the following performance criteria, either
alone or in any combination, which may be expressed with respect to the Company or one or more operating units or groups, as the
Board may determine: (a) cash flow; (b) cash flow from operations; (c) total earnings; (d) earnings per share, diluted or basic;
(e) earnings per share from continuing operations, diluted or basic; (f) earnings before interest and taxes; (g) earnings before
interest, taxes, depreciation, and amortization; (h) earnings from operations; (i) net asset turnover; (j) inventory turnover;
(k) capital expenditures; (l) net earnings; (m) operating earnings; (n) gross or operating margin; (o) debt; (p) working capital;
(q) return on equity; (r) return on net assets; (s) return on total assets; (t) return on capital; (u) return on investment; (v)
return on sales; (w) net or gross sales; (x) market share; (y) economic value added; (z) cost of capital; (aa) change in assets;
(bb) expense reduction levels; (cc) debt reduction; (dd) productivity; (ee) delivery performance; (ff) safety record; (gg) stock
price; and (hh) total stockholder return. Performance goals may be determined on an absolute basis or relative to internal goals
or relative to levels attained in prior years or related to other companies or indices or as ratios expressing relationships between
two or more performance goals. Performance goals may but need not be determinable in conformance with generally accepted accounting
principles.
(B)
Performance Period; Adjustments
.
The Committee shall determine the performance
period over which the designated performance goals shall be attained and shall, in the case of an Award designed to comply with
the Performance-Based Exception under Code Section 162(m), establish the performance goals no later than 90 days after the beginning
of such performance period (or such other date as may be required or permitted under Code Section 162(m)). Following the end of
the performance period, the Committee shall certify in writing the level of attainment of the performance goal(s). The Committee
may reduce (including a reduction to zero), but may not increase the amount of an available award. The Committee may provide in
any performance based Award, at the time the performance goals are established, that any evaluation of performance shall exclude
or otherwise objectively adjust for any specified circumstance or event that occurs during a performance period, including by way
of example, but without limitation, the following: (a) asset write-downs or impairment charges; (b) litigation or claim judgments
or settlements; (c) the effect of changes in tax laws, accounting principles or other laws or provisions affecting reported results;
(d) accruals for reorganization and restructuring programs; (e) extraordinary nonrecurring items as described in then-current accounting
principles; (f) extraordinary nonrecurring items as described in management’s discussion and analysis of financial condition
and results of operations appearing in the Company’s annual report for the applicable year; (g) acquisitions or divestitures;
and (h) foreign exchange gains and losses. To the extent such inclusions or exclusions affect Awards to Covered Employees, they
shall be prescribed in a form that meets the requirements of Code Section 162(m) for deductibility.
To
the extent any Award is subject to Code Section 409A, such Award and the Plan are intended to be administered in a manner consistent
with the requirements of Code Section 409A. Where reasonably possible and practicable, the Plan shall be administered in
a manner to avoid the imposition on Participants of immediate tax recognition and additional taxes pursuant to Code Section 409A.
Notwithstanding the foregoing, neither the Company nor the Board shall have any liability to any person in the event Code Section
409A applies to any such Award in a manner that results in adverse tax consequences for the Participant or any of his beneficiaries
or transferees. Solely for purposes of determining the time and form of payments due under any Award that is considered nonqualified
deferred compensation under Code Section 409A and that is not otherwise exempt from
Code
Section 409A, a Participant shall not be deemed to have incurred a termination of employment unless and until he shall incur a
“separation from service” within the meaning of Code Section 409A. Notwithstanding any other provision in this
Plan, if as of a Participant’s separation from service, the Participant is a “specified employee” as determined
by the Company, then to the extent any amount payable under any Award that is considered nonqualified deferred compensation under
Code Section 409A and that is not otherwise exempt from Code Section 409A, for which payment is triggered by the Participant’s
separation from service (other than on account of death), and that under the terms of the Award would be payable prior to the six-month
anniversary of the Participant’s separation from service, such payment shall be delayed until the earlier to occur of (a) the
six-month anniversary of such separation from service or (b) the date of the Participant’s death.
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16.
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INFORMATION RIGHTS OF PARTICIPANTS.
|
The Company shall provide to each Participant
who acquires Stock pursuant to the Plan, not less frequently than annually, copies of annual financial statements (which need not
be audited). The Company shall not be required to provide such statements to Participants who are key Employees and whose duties
in connection with the Company assure their access to equivalent information.
If any provision of this Plan or any
Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Participant or Award,
or would disqualify this Plan or any Award under any applicable law, such provision shall be construed or deemed amended to conform
to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Board, materially altering
the intent of this Plan or the Award, such provision shall be stricken as to such jurisdiction, Participant or Award and the remainder
of this Plan and any such Award shall remain in full force and effect.
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18.
|
OTHER COMPENSATION ARRANGEMENTS.
|
The existence of the Plan or the grant
of any Award will not in any way affect the Company’s right to award a Participant bonuses or other compensation in addition
to Awards under the Plan.
|
19.
|
WAIVER OF JURY TRIAL.
|
By accepting an Award under the Plan,
each Participant waives any right to a trial by jury in any action, proceeding or counterclaim concerning any rights under the
Plan and any Award, or under any amendment, waiver, consent, instrument, document or other agreement delivered or which in the
future may be delivered in connection therewith, and agrees that any such action, proceedings or counterclaim shall be tried before
a court and not before a jury. By accepting an Award under the Plan, each Participant certifies that no Director, Officer, Employee,
representative, or attorney of the Company has represented, expressly or otherwise, that the Company would not, in the event of
any action, proceeding or counterclaim, seek to enforce the foregoing waivers.
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20.
|
CODE SECTION 83(b) ELECTIONS.
|
The Company and the Board have
no responsibility for any Participant’s election, attempt to elect or failure to elect to include the value of an Award of
Restricted Stock or other Award subject to Code Section 83 in the Participant’s gross income for the year of payment pursuant
to Code Section 83(b). Any Participant who makes an election pursuant to Code Section 83(b) will promptly provide the Board
with a copy of the election form.
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21.
|
NO OBLIGATION TO EXERCISE.
|
The grant of an Award of an Option will impose
no obligation upon the Participant to exercise the Award. The Company and the Board have no obligation to inform a Participant
of the date on which any Award lapses except as may be set forth in the Award Agreement.
Notwithstanding any provisions of the Plan to
the contrary, and to the extent permitted by applicable law (including Code Section 409A), the Company may offset any amounts to
be paid to a Participant (or, in the event of the Participant’s death, to his beneficiary or estate) under the Plan against
any amounts that such Participant may owe to the Company.
A Participant will cooperate with the Board
by furnishing any and all information requested by the Board and take such other actions as may be requested in order to facilitate
the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations
as the Board may deem necessary when eligibility or entitlement to any compensation or benefit based on any matter relating
to the disability of the Participant is at issue.
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24.
|
NO CONSTRAINT ON CORPORATE ACTION
.
|
Nothing
in this Plan shall be construed (i) to limit, impair or otherwise affect the Company’s right or power to make adjustments,
reclassifications, reorganizations or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate,
sell, or transfer all or any part of its business or assets or (ii) to limit the right or power of the Company to take any
action which such entity deems to be necessary or appropriate.
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25.
|
LIMITATION ON LIABILITY.
|
Notwithstanding anything to the contrary
in the Plan, neither the Company nor the Board, nor any person acting on behalf of the Company or the Board, shall be liable to
any Participant or to the estate or beneficiary of any Participant by reason of any acceleration of income, or any additional tax,
asserted by reason of the failure of an Award to satisfy the requirements of Section 422 or Section 409A or by reason of Section
4999 of the Code;
provided, however
, that nothing in this Section 20 shall limit the ability of the Board or the Company
to provide by express agreement with a Participant for a gross-up payment or other payment in connection with any such tax or additional
tax.
EXHIBIT “B”
Verification Required
by Rule 0-2(d)
The undersigned being duly sworn deposes
and says that he has duly executed the attached Application for an Order Pursuant to Section 6(c) of the Investment Company Act
of 1940 granting an exemption from Sections 23(a), 23(b), and 63 of the 1940 Act, pursuant to Section 61(a)(3)(B) of the 1940 Act
permitting awards of common stock purchase options to Non-Employee Directors, and pursuant to Sections 57(a)(4)and 57(i) of the
1940 Act and Rule 17d-l under the 1940 Act authorizing certain joint transactions otherwise prohibited by Section 57(a)(4) of the
1940 Act, and pursuant to Section 23(c)(3) of the 1940 Act granting an exemption from Section 23(c) of the 1940 Act for and on
behalf of Equus Total Return, Inc.; that he is the Secretary of such company; and that all action by stockholders, directors, and
other bodies necessary to authorize deponent to execute and file such instrument has been taken. Deponent further says that he
is familiar with such instrument, and the contents thereof, and that the facts therein set forth are true to the best of his knowledge,
information and belief.
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EQUUS TOTAL RETURN, INC.
|
|
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Date: September 29, 2016
|
By:
|
/s/ Kenneth I. Denos
|
|
|
Kenneth I. Denos
|
|
|
Secretary and Chief Compliance Officer
|
|
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EXHIBIT “C”
Resolutions of the
Board of Directors
EQUUS TOTAL RETURN,
INC.
RESOLUTIONS ADOPTED
BY THE BOARD OF DIRECTORS
APPLICATION FOR
EXEMPTIVE ORDER
RESOLVED, that the appropriate officers
of the Fund shall be, and each of them hereby is, authorized and directed, by and on behalf of the Fund, and in its name, to execute
and cause to be filed with the Commission any applications, or amendments thereto, for exemptive relief or certifications, or requests
for no-action or interpretive positions under the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company
Act of 1940, or any other applicable federal or state securities law, or applicable provisions of the Internal Revenue Code of
1986, as amended, as such officers, in their sole discretion, deem necessary or to effect such actions or pursue such activities
or transactions of the Fund as are duly authorized;
FURTHER RESOLVED, that all prior actions
taken by the officers of the Fund in connection with the filing of such application with the Commission or otherwise in connection
with the foregoing resolution is hereby approved and ratified in all respects.
[1]
Section 2(a)(48) defines a BDC to be any closed-end investment company that operates for the purpose
of making investments in securities described in sections 55(a)(1) through 55(a)(3) of the 1940 Act and makes available significant
managerial assistance with respect to the issuers of such securities.
[2]
Section 57(o) provides that the term “required majority,” when used with respect to the
approval of a proposed transaction, plan, or arrangement, means both a majority of a BDC’s directors or general partners
who have no financial interest in such transaction, plan or arrangement and a majority of such directors or general partners who
are not interested persons of such company.
[3]
For purposes of calculating compliance with this limit, the Fund will count as Restricted Stock all
shares of the Fund’s common stock that are issued pursuant to the Plan less any shares that are forfeited back to the Fund
and cancelled as a result of forfeiture restrictions not lapsing.
[4]
See Executive Compensation and Related Party Disclosure, Securities Act Release No. 8655 (Jan. 27,
2006) (proposed rule); Executive Compensation and Related Party Disclosure, Securities Act Release No. 8732A (Aug. 29, 2006) (final
rule and proposed rule), as amended by Executive Compensation Disclosure, Securities Act Release No. 8756 (Dec. 22, 2006) (adopted
as interim final rules with request for comments).
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