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As filed with the Securities and Exchange Commission on December 23, 2020

Registration No. 333-

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-14

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Pre-Effective Amendment No.  

Post-Effective Amendment No.  

(Check appropriate box or boxes)

 

 

FS KKR Capital Corp.

(Exact Name of Registrant as Specified in Charter)

 

 

201 Rouse Boulevard

Philadelphia, PA 19112

(Address of Principal Executive Offices)

(215) 495-1150

(Area Code and Telephone Number)

 

 

Michael C. Forman

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

(Name and Address of Agent for Service)

 

 

Copies to:

James A. Lebovitz, Esq.

Eric S. Siegel, Esq.

Dechert LLP

Cira Centre

2929 Arch Street

Philadelphia, PA 19104

Telephone: (215) 994-4000

Fax: (215) 994-2222

 

 

Approximate Date of Proposed Public Offering: As soon as practicable after this registration statement becomes effective and upon completion of the merger described in the enclosed document.

 

 

Calculation of Registration Fee Under the Securities Act of 1933

 

 

Title of Securities

Being Registered

  Amount
Being Registered(1)
 

Proposed

Maximum

Offering Price

per Share of
Common Stock

 

Proposed

Maximum Aggregate

Offering Price(2)

  Amount of
Registration Fee(3)

Common Stock, $0.001 par value per share

  250,000,000 shares   N/A   $2,814,640,503.84   $307,077.28

 

 

 

(1)

The number of shares to be registered represents the maximum number of shares of the registrant’s common stock estimated to be issuable in connection with the merger agreement described in the enclosed document. Pursuant to Rule 416, this registration statement also covers additional securities that may be issued as a result of stock splits, stock dividends or similar transactions.

(2)

Estimated solely for the purpose of calculating the registration fee and calculated pursuant to Rule 457(c) and Rule 457(f)(1) under the Securities Act of 1933, as amended, the proposed maximum offering price is equal to: $16.56, the average of the high and low prices per share of FS KKR Capital Corp. II (the securities to be cancelled in the merger) on December 18, 2020, as reported on the New York Stock Exchange, multiplied by (2) 169,966,214, the maximum number of shares of FS KKR Capital Corp. II that may be exchanged for shares of the registrant’s common stock in accordance with the terms of the merger agreement.

(3)

Based on a rate of $109.10 per $1,000,000 of the proposed maximum aggregate offering price.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the U.S. Securities and Exchange Commission. We may not sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This document is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or jurisdiction where such offer or sale is not permitted.

 

PRELIMINARY—SUBJECT TO COMPLETION—DATED DECEMBER 23, 2020

 

LOGO

FS KKR Capital Corp.

MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

Dear Fellow Stockholder,

You are cordially invited to attend a special meeting of stockholders of FS KKR Capital Corp. (“FSK”), to be held on [●], 2021 at [●] [a.m. / p.m.], Eastern Time, at 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112 (together with any adjournments or postponements thereof, the “FSK Special Meeting”).

The Notice of Special Meeting of Stockholders and joint proxy statement/prospectus accompanying this letter provide an outline of the business to be conducted at the FSK Special Meeting. At the FSK Special Meeting, you will be asked to consider and vote upon:

 

  i.

a proposal to approve the Agreement and Plan of Merger, dated as of November 23, 2020 (the “Merger Agreement”), by and among FSK, FS KKR Capital Corp. II (“FSKR”), Rocky Merger Sub, Inc., a wholly owned subsidiary of FSK (“Merger Sub”) and FS/KKR Advisor, LLC (the “Advisor”) and the transactions contemplated thereby, including the merger of Merger Sub with and into FSKR with FSKR as the surviving corporation (such proposal, the “FSK Merger Proposal”);

 

  ii.

a proposal to approve the issuance of shares of FSK common stock, $0.001 par value per share (“FSK Common Stock”), pursuant to the Merger Agreement (such proposal, the “Merger Stock Issuance Proposal”); and

 

  iii.

a proposal to amend the investment advisory agreement, dated December 20, 2018, by and between FSK and the Advisor (the “Existing FSK Investment Advisory Agreement”) to (1) reduce FSK’s income incentive fee rate from 20% to 17.5% and (2) remove the total return lookback provision applicable to the subordinated incentive fee on income from the Existing FSK Investment Advisory Agreement (such proposal, the “FSK Advisory Agreement Amendment Proposal”).

FSK and FSKR are proposing a combination of both companies by a merger (the “Merger”), in which Merger Sub would merge with and into FSKR, with FSKR continuing as the surviving corporation. Immediately following the Merger, in a subsequent combination, the surviving company would merge with and into FSK with FSK continuing as the surviving corporation. Closing of the Merger is contingent upon (1) FSK stockholder approval of each of the above proposals, (2) FSKR stockholder approval of the Merger and the other transactions contemplated by the Merger Agreement and (3) certain other closing conditions. If the Merger does not close, then no FSK Common Stock will be issued pursuant to the Merger Stock Issuance Proposal, even if approved by the FSK stockholders.

Subject to the terms and conditions of the Merger Agreement, if the Merger is completed, each holder of FSKR common stock, $0.001 par value per share (“FSKR Common Stock”) issued and outstanding immediately prior to the effective time of the Merger (other than FSK and its consolidated subsidiaries) will have the right to receive, for each share of FSKR Common Stock held, that number of shares of FSK Common Stock with a net asset value (“NAV”) equal to the NAV of a share of FSKR Common Stock held, in each case calculated as of the same date within 48 hours (excluding Sundays and holidays) prior to the closing of the Merger (the “Merger Consideration”). Holders of FSKR Common Stock may receive fractional shares or cash in lieu of fractional shares, at the election of FSK.

The market value of the Merger Consideration will fluctuate with changes in the market price of FSK Common Stock. We urge you to obtain current market quotations of FSK Common Stock. FSK Common Stock trades on the New York Stock Exchange (the “NYSE”) under the ticker symbol “FSK” and FSKR


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Common Stock trades on the NYSE under the ticker symbol “FSKR.” The following table shows the closing sale prices of FSK Common Stock and FSKR Common Stock, as reported on the NYSE on November 23, 2020, the last trading day before the public announcement of the Merger.

 

     FSK
Common
Stock
     FSKR
Common
Stock
 

Closing Sales Price at November 23, 2020

   $ 17.34      $ 15.84  

Your vote is extremely important. At the FSK Special Meeting, you will be asked to vote on the FSK Merger Proposal, the Merger Stock Issuance Proposal and FSK Advisory Agreement Amendment Proposal. Pursuant to the Merger Agreement, the approval of the FSK Merger Proposal requires the affirmative vote of holders of (1) a majority of the outstanding shares of FSK Common Stock entitled to vote at the FSK Special Meeting and (2) the affirmative vote of a majority of the outstanding shares of FSK Common Stock held by stockholders unaffiliated with the Advisor and its affiliates entitled to vote at the FSK Special Meeting. The approval of the Merger Stock Issuance Proposal requires the affirmative vote of holders of a majority of the votes cast by holders of FSK Common Stock at a meeting at which a quorum is present. The approval of the FSK Advisory Agreement Amendment Proposal requires the approval of a majority of the outstanding shares of FSK Common Stock. Under the Investment Company Act of 1940, as amended, a majority of the outstanding shares of FSK Common Stock may be the lesser of: (1) 67% of the FSK Common Stock at the FSK Special Meeting if the holders of more than 50% of the outstanding shares of FSK Common Stock are present or represented by proxy or (2) more than 50% of the outstanding shares of FSK Common Stock.

Abstentions will have the same effect as votes against the FSK Merger Proposal and the FSK Advisory Agreement Amendment Proposal. Abstentions will have no effect on the outcome of the Merger Stock Issuance Proposal.

After careful consideration, the board of directors of FSK (including all of the independent directors of FSK) unanimously recommends that FSK stockholders vote “FOR” the FSK Merger Proposal, “FOR” the Merger Stock Issuance Proposal and “FOR” the FSK Advisory Agreement Amendment Proposal.

It is important that your shares of FSK Common Stock be represented at the FSK Special Meeting. Even if you plan to attend the FSK Special Meeting in person, we urge you to complete, date and sign the enclosed proxy card and promptly return it in the envelope provided. If you prefer, you can save time by voting through the Internet or by telephone as described in this joint proxy statement/prospectus and on the enclosed proxy card. If you do not vote, it may result in FSK not having a sufficient quorum of one-third of outstanding FSK Common Stock represented in person or by proxy at the FSK Special Meeting and a meeting cannot be held unless a quorum is present.

This joint proxy statement/prospectus concisely describes the FSK Special Meeting, the Merger, the documents related to the Merger (including the Merger Agreement), the documents related to the FSK Advisory Agreement Amendment Proposal (including the proposed amended and restated FSK investment advisory agreement) and other related matters that FSK stockholders ought to know before voting on the FSK Merger Proposal, the Merger Stock Issuance Proposal and the FSK Advisory Agreement Amendment Proposal and should be retained for future reference. Please carefully read this entire document, including “Risk Factors” beginning on page 23, for a discussion of the risks relating to the Merger. You also can obtain information about FSK and FSKR from documents that each has filed with the U.S. Securities and Exchange Commission. See “Where You Can Find More Information” for instructions on how to obtain such information.

Sincerely,

Michael C. Forman

Chairman and Chief Executive Officer of FS KKR Capital Corp.


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Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of the shares of FSK Common Stock to be issued under this joint proxy statement/prospectus or determined if this joint proxy statement/prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

This joint proxy statement/prospectus is dated [●], 2021 and it is first being mailed or otherwise delivered to FSK stockholders on or about [●], 2021.

 

 

FS KKR Capital Corp.

FS KKR Capital Corp. II

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

 


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LOGO

FS KKR CAPITAL CORP.

201 Rouse Boulevard

Philadelphia, PA 19112

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held On [], 2021

To the Stockholders of FS KKR Capital Corp.:

NOTICE IS HEREBY GIVEN THAT a special meeting of stockholders of FS KKR Capital Corp. (“FSK”) will be held at 201 Rouse Boulevard, Philadelphia, PA 19112 on [●], 2021, at [●] [a.m. / p.m.], Eastern Time (together with any adjournments or postponements thereof, the “FSK Special Meeting”), to consider and vote upon:

 

  i.

a proposal to approve the Agreement and Plan of Merger, dated as of November 23, 2020 (the “Merger Agreement”), by and among FSK, FS KKR Capital Corp. II (“FSKR”), Rocky Merger Sub, Inc., a wholly owned subsidiary of FSK (“Merger Sub”) and FS/KKR Advisor, LLC (the “Advisor”) and the transactions contemplated thereby, including the merger (the “Merger”) of Merger Sub with and into FSKR with FSKR as the surviving corporation (such proposal, the “FSK Merger Proposal”);

 

  ii.

a proposal to approve the issuance of shares of FSK common stock, $0.001 par value per share (“FSK Common Stock”), pursuant to the Merger Agreement (such proposal, the “Merger Stock Issuance Proposal”); and

 

  iii.

a proposal to amend the investment advisory agreement, dated December 20, 2018, by and between FSK and the Advisor (the “Existing FSK Investment Advisory Agreement”) to (1) reduce FSK’s income incentive fee rate from 20% to 17.5% and (2) remove the total return lookback provision applicable to the subordinated incentive fee on income from the Existing FSK Investment Advisory Agreement (such proposal, the “FSK Advisory Agreement Amendment Proposal”).

The FSK board of directors (including all of the independent directors of FSK) has unanimously approved each of (1) the Merger Agreement and the transactions contemplated thereby, including the Merger, (2) the issuance of shares of FSK Common Stock pursuant to the Merger and (3) the amendment of the Existing FSK Investment Advisory Agreement, and unanimously recommends that FSK stockholders vote “FOR” the FSK Merger Proposal, “FOR” the Merger Stock Issuance Proposal and “FOR” the FSK Advisory Agreement Amendment Proposal.

It is important that your shares of FSK Common Stock be represented at the FSK Special Meeting. If you are unable to attend the FSK Special Meeting in person, please complete, date and sign the enclosed proxy card and promptly return it in the envelope provided. If you prefer, you can save time by voting through the Internet or by telephone as described in this joint proxy statement/prospectus and on the enclosed proxy card.

The Merger and the Merger Agreement are each described in more detail in this joint proxy statement/prospectus, which you should read carefully and in its entirety before authorizing a proxy to vote. Attached to this joint proxy statement/prospectus as Annex A is a copy of the Merger Agreement. The FSK Advisory Agreement Amendment Proposal is described in more detail in this joint proxy statement/prospectus, which you should read carefully and in its entirety before authorizing a proxy to vote. Attached to this joint proxy statement/prospectus as Annex D is a copy of the proposed amended and restated FSK investment advisory agreement.

The board of directors of FSK has fixed the close of business on [●], 2021 as the record date for the determination of stockholders entitled to notice of, and to vote at, the FSK Special Meeting.


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FSK currently intends to hold the FSK Special Meeting in person. However, FSK is actively monitoring developments in connection with the coronavirus (COVID-19) pandemic and is sensitive to the public health and travel concerns that stockholders may have and the protocols or guidance that federal, state and local governments and agencies such as the Center for Disease Control and World Health Organization may recommend or impose. In the event it is not possible or advisable to hold the FSK Special Meeting in person, FSK will announce alternative arrangements for the meeting as promptly as possible, which may include holding the FSK Special Meeting as a virtual meeting by means of a live webcast. If the FSK Special Meeting will be held through a virtual meeting format, FSK will announce that fact as promptly as practicable, and details on how to participate will be issued by press release, posted on the website at which FSK’s proxy materials are available at www.proxyvote.com, and filed with the U.S. Securities and Exchange Commission as additional proxy material. Please monitor the website at which FSK’s proxy materials are available at www.proxyvote.com for updated information. FSK encourages you to vote your shares at the FSK Special Meeting.

If you plan on attending the FSK Special Meeting and voting your shares of FSK Common Stock in person, you will need to bring photo identification in order to be admitted to the FSK Special Meeting. If your shares are held through a broker and you attend the FSK Special Meeting in person, please bring a letter from your broker identifying you as the beneficial owner of the shares and authorizing you to vote your shares at the FSK Special Meeting. To obtain directions to the FSK Special Meeting, please call FSK at (877) 628-8575.

By Order of the Board of Directors,

Stephen S. Sypherd

General Counsel and Secretary

[●], 2021

FSK stockholders are requested to promptly authorize a proxy over the Internet or by telephone, or execute and return the accompanying proxy card, which is being solicited by the board of directors of FSK. Instructions are shown on the proxy card. Authorizing a proxy is important to ensure a quorum at the FSK Special Meeting. Proxies may be revoked at any time before they are exercised by submitting a written notice of revocation or a subsequently executed proxy, or by attending the FSK Special Meeting and voting in person.


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Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the U.S. Securities and Exchange Commission. We may not sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This document is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or jurisdiction where such offer or sale is not permitted.

 

PRELIMINARY—SUBJECT TO COMPLETION—DATED DECEMBER 23, 2020

 

 

LOGO

FS KKR Capital Corp. II

MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

Dear Fellow Stockholder,

You are cordially invited to attend a special meeting of stockholders of FS KKR Capital Corp. II, (“FSKR”) to be held on [●], 2021 at [●] [a.m. / p.m.], Eastern Time, at 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112 (together with any adjournments or postponements thereof, the “FSKR Special Meeting”).

The Notice of Special Meeting of Stockholders and joint proxy statement/prospectus accompanying this letter provide an outline of the business to be conducted at the FSKR Special Meeting. At the FSKR Special Meeting, you will be asked to consider and vote upon a proposal to approve the merger of FSKR and Rocky Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of FS KKR Capital Corp. (“FSK”), pursuant to the Agreement and Plan of Merger, dated as of November 23, 2020 (the “Merger Agreement”), by and among FSK, FSKR, Merger Sub and FS/KKR Advisor, LLC (the “Advisor”) and the other transactions contemplated by the Merger Agreement (such proposal, the “FSKR Merger Proposal”).

FSK and FSKR are proposing a combination of both companies by a merger (the “Merger”), in which Merger Sub would merge with and into FSKR, with FSKR continuing as the surviving corporation. Immediately following the Merger, in a subsequent combination, the surviving company would merge with and into FSK, with FSK continuing as the surviving corporation. Closing of the Merger is contingent upon (1) FSKR stockholder approval of the FSKR Merger Proposal, (2) FSK stockholder approval of the Merger Agreement and the transactions contemplated thereby and the issuance of shares of FSK common stock, $0.001 par value per share (“FSK Common Stock”) in connection with the Merger and (3) certain other closing conditions. Subject to the terms and conditions of the Merger Agreement, if the Merger is completed, each holder of FSKR common stock, $0.001 par value per share (“FSKR Common Stock”) issued and outstanding immediately prior to the effective time of the Merger (other than FSK and its consolidated subsidiaries) will have the right to receive, for each share of FSKR Common Stock held, that number of shares of FSK Common Stock with a net asset value (“NAV”) equal to the NAV of a share of FSKR Common Stock held, in each case calculated as of the same date within 48 hours (excluding Sundays and holidays) prior to the closing of the Merger (the “Merger Consideration”). Holders of FSKR Common Stock may receive fractional shares or cash in lieu of fractional shares, at the election of FSK.

The market value of the Merger Consideration will fluctuate with changes in the market price of FSK Common Stock. We urge you to obtain current market quotations of FSK Common Stock. FSK Common Stock trades on the New York Stock Exchange (the “NYSE”) under the ticker symbol “FSK” and FSKR Common Stock trades on the NYSE under the ticker symbol “FSKR.” The following table shows the closing sale prices of FSK Common Stock and FSKR Common Stock, as reported on the NYSE on November 23, 2020, the last trading day before the public announcement of the Merger.

 

     FSK
Common
Stock
     FSKR
Common
Stock
 

Closing Sales Price at November 23, 2020

   $ 17.34      $ 15.84  

Your vote is extremely important. At the FSKR Special Meeting, you will be asked to vote on the FSKR Merger Proposal. Pursuant to the Merger Agreement, the approval of the FSKR Merger Proposal requires the affirmative vote of holders of (1) a majority of the outstanding shares of FSKR Common Stock entitled to vote at the FSKR Special Meeting and (2) a majority of the outstanding shares of FSKR Common Stock held by stockholders unaffiliated with the Advisor and its affiliates entitled to vote at the FSKR Special Meeting.


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Abstentions will have the same effect as votes against the FSKR Merger Proposal.

After careful consideration, the board of directors of FSKR (including all of the independent directors of FSKR) unanimously recommends that FSKR stockholders vote “FOR” the FSKR Merger Proposal.

It is important that your shares of FSKR Common Stock be represented at the FSKR Special Meeting. Even if you plan to attend the FSKR Special Meeting in person, we urge you to complete, date and sign the enclosed proxy card and promptly return it in the envelope provided. If you prefer, you can save time by voting through the Internet or by telephone as described in this joint proxy statement/prospectus and on the enclosed proxy card. If you do not vote, it may result in FSKR not having a sufficient quorum of one-third of outstanding FSKR Common Stock represented in person or by proxy at the FSKR Special Meeting and a meeting cannot be held unless a quorum is present.

This joint proxy statement/prospectus concisely describes the FSKR Special Meeting, the Merger, the documents related to the Merger (including the Merger Agreement) and other related matters (including the amended and restated FSK investment advisory agreement proposed for approval by FSK) that FSKR stockholders ought to know before voting on the FSKR Merger Proposal and should be retained for future reference. Please carefully read this entire document, including “Risk Factors” beginning on page 23, for a discussion of the risks relating to the Merger. You also can obtain information about FSK and FSKR from documents that each has filed with the U.S. Securities and Exchange Commission. See “Where You Can Find More Information” for instructions on how to obtain such information.

Sincerely,

Michael C. Forman

Chairman and Chief Executive Officer of FS KKR Capital Corp. II

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of the shares of FSKR Common Stock to be issued under this joint proxy statement/prospectus or determined if this joint proxy statement/prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

This joint proxy statement/prospectus is dated [●], 2021 and it is first being mailed or otherwise delivered to FSKR stockholders on or about [●], 2021.

 

 

FS KKR Capital Corp.

FS KKR Capital Corp. II

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

 


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LOGO

FS KKR CAPITAL CORP. II

201 Rouse Boulevard

Philadelphia, PA 19112

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held On [], 2021

To the Stockholders of FS KKR Capital Corp. II:

NOTICE IS HEREBY GIVEN THAT a special meeting of stockholders of FS KKR Capital Corp. II (“FSKR”) will be held at 201 Rouse Boulevard, Philadelphia, PA 19112 on [●], 2021, at [●] [a.m. / p.m.], Eastern Time (together with any adjournments or postponements thereof, the “FSKR Special Meeting”), to consider and vote upon a proposal to approve the merger of FSKR and Rocky Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of FS KKR Capital Corp. (“FSK”), pursuant to the Agreement and Plan of Merger, dated as of November 23, 2020 (the “Merger Agreement”), by and among FSK , FSKR, Merger Sub and FS/KKR Advisor, LLC (the “Advisor”) and the other transactions contemplated the Merger Agreement (such proposal, the “FSK Merger Proposal”).

The FSKR board of directors (including all of the independent directors of FSKR) unanimously recommends that FSKR stockholders vote “FOR” the FSKR Merger Proposal.

It is important that your shares of FSKR Common Stock be represented at the FSKR Special Meeting. If you are unable to attend the FSKR Special Meeting in person, please complete, date and sign the enclosed proxy card and promptly return it in the envelope provided. If you prefer, you can save time by voting through the Internet or by telephone as described in this joint proxy statement/prospectus and on the enclosed proxy card.

The Merger and the Merger Agreement are each described in more detail in this joint proxy statement/prospectus, which you should read carefully and in its entirety before authorizing a proxy to vote. Attached to this joint proxy statement/prospectus as Annex A is a copy of the Merger Agreement.

The board of directors of FSKR has fixed the close of business on [●], 2021 as the record date for the determination of stockholders entitled to notice of, and to vote at, the FSKR Special Meeting.

FSKR currently intends to hold the FSKR Special Meeting in person. However, FSKR is actively monitoring developments in connection with the coronavirus (COVID-19) pandemic and is sensitive to the public health and travel concerns that stockholders may have and the protocols or guidance that federal, state and local governments and agencies such as the Center for Disease Control and World Health Organization may recommend or impose. In the event it is not possible or advisable to hold the FSKR Special Meeting in person, FSKR will announce alternative arrangements for the meeting as promptly as possible, which may include holding the FSKR Special Meeting solely as a virtual meeting by means of a live webcast. If the FSKR Special Meeting will be held solely through a virtual meeting format, FSKR will announce that fact as promptly as practicable, and details on how to participate will be issued by press release, posted on the website at which FSKR’s proxy materials are available at www.proxyvote.com, and filed with the U.S. Securities and Exchange Commission as additional proxy material. Please monitor the website at which FSKR’s proxy materials are available at www.proxyvote.com for updated information. FSKR encourages you to vote your shares at the FSKR Special Meeting.

If you plan on attending the FSKR Special Meeting and voting your shares of FSKR Common Stock in person, you will need to bring photo identification in order to be admitted to the FSKR Special Meeting. If your


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shares are held through a broker and you attend the FSKR Special Meeting in person, please bring a letter from your broker identifying you as the beneficial owner of the shares and authorizing you to vote your shares at the FSKR Special Meeting. To obtain directions to the FSKR Special Meeting, please call FSKR at (877) 628-8575.

By Order of the Board of Directors,

Stephen S. Sypherd

General Counsel and Secretary

[●], 2021

FSKR stockholders are requested to promptly authorize a proxy over the Internet or by telephone, or execute and return the accompanying proxy card, which is being solicited by the board of directors of FSKR. Instructions are shown on the proxy card. Authorizing a proxy is important to ensure a quorum at the FSKR Special Meeting. Proxies may be revoked at any time before they are exercised by submitting a written notice of revocation or a subsequently executed proxy, or by attending the FSKR Special Meeting and voting in person.


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TABLE OF CONTENTS

 

ABOUT THIS DOCUMENT

     1  

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETINGS AND THE MERGER

     3  

SUMMARY OF THE MERGER

     12  

RISK FACTORS

     23  

COMPARATIVE FEES AND EXPENSES

     28  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     32  

CAPITALIZATION

     34  

THE SPECIAL MEETINGS

     35  

THE MERGER

     39  

DESCRIPTION OF THE MERGER AGREEMENT

     69  

ACCOUNTING TREATMENT OF THE MERGER

     86  

CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

     87  

FS KKR CAPITAL CORP. PROPOSAL 1: APPROVAL OF THE FSK MERGER PROPOSAL

     100  

FS KKR CAPITAL CORP. PROPOSAL 2: APPROVAL OF THE MERGER STOCK ISSUANCE

     101  

FS KKR CAPITAL CORP. PROPOSAL 3: APPROVAL OF FSK ADVISORY AGREEMENT AMENDMENT PROPOSAL

     102  

FS KKR CAPITAL CORP. II PROPOSAL 1: APPROVAL OF THE FSKR MERGER PROPOSAL

     109  

MARKET PRICE, DIVIDEND AND DISTRIBUTION INFORMATION

     110  

SENIOR SECURITIES OF FS KKR CAPITAL CORP.

     113  

SENIOR SECURITIES OF FS KKR CAPITAL CORP. II

     114  

PORTFOLIO COMPANIES OF FS KKR CAPITAL CORP.

     115  

PORTFOLIO COMPANIES OF FS KKR CAPITAL CORP. II

     141  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS OF THE FUND PARTIES

     164  

CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS OF FSK

     169  

DESCRIPTION OF CAPITAL STOCK

     171  

CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS OF FSKR

     180  

COMPARISON OF THE FUND PARTIES’ DISTRIBUTION, PURCHASE AND REDEMPTION PROCEDURES

     182  

COMPARISON OF THE FUND PARTIES’ STOCKHOLDER RIGHTS

     183  

CUSTODIAN, TRANSFER AND DISTRIBUTION PAYING AGENT AND REGISTRAR OF THE FUND PARTIES

     184  

BROKERAGE ALLOCATION AND OTHER PRACTICES

     185  

LEGAL MATTERS

     186  

EXPERTS

     187  

OTHER MATTERS

     188  

STOCKHOLDERS SHARING AN ADDRESS

     189  

WHERE YOU CAN FIND MORE INFORMATION

     190  

INCORPORATION BY REFERENCE

     191  

ANNEX A MERGER AGREEMENT

     A-1  

ANNEX B OPINION OF FSK’S FINANCIAL ADVISOR

     B-1  

ANNEX C OPINION OF FSKR’S FINANCIAL ADVISOR

     C-1  

ANNEX D PROPOSED FSK INVESTMENT ADVISORY AGREEMENT

     D-1  

PART C OTHER INFORMATION

     E-1  

 

i


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ABOUT THIS DOCUMENT

This document, which forms part of a registration statement on Form N-14 filed with the U.S. Securities and Exchange Commission (the “SEC”) by FSK (File No. 333-                ), constitutes a prospectus of FSK under Section 5 of the Securities Act of 1933, as amended (the “Securities Act”) with respect to the shares of FSK Common Stock to be issued to FSKR stockholders pursuant to the Merger Agreement.

This document also constitutes a joint proxy statement of FSK and FSKR under Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). It also constitutes a notice of meeting with respect to: (1) the FSK Special Meeting, at which FSK stockholders will be asked to vote upon (a) the FSK Merger Proposal, (b) the Merger Stock Issuance Proposal and (c) the FSK Advisory Agreement Amendment Proposal; and (2) the FSKR Special Meeting, at which FSKR stockholders will be asked to vote on the FSKR Merger Proposal.

You should rely only on the information contained in this joint proxy statement/prospectus. No one has been authorized to provide you with information that is different from that contained in this joint proxy statement/prospectus. This joint proxy statement/prospectus is dated [●], 2021. You should not assume that the information contained in this joint proxy statement/prospectus is accurate as of any date other than that date. Neither the mailing of this joint proxy statement/prospectus to FSK stockholders or FSKR stockholders nor the issuance of FSK Common Stock in connection with the Merger will create any implication to the contrary.

This joint proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction.

Except where the context otherwise indicates, information contained in this joint proxy statement/prospectus regarding FSK has been provided by FSK and information contained in this joint proxy statement/prospectus regarding FSKR has been provided by FSKR.

When used in this document, unless otherwise indicated in this document or the context otherwise requires:

 

   

“Advisor” refers to FS/KKR Advisor, LLC, FSK’s and FSKR’s investment adviser;

 

   

“Closing Date” refers to the closing date of the Merger;

 

   

“Determination Date” refers to an agreed upon date no more than 48 hours (excluding Sundays and holidays) prior to the closing of the Merger;

 

   

“Effective Time” refers to the effective time of Merger Sub with and into FSKR, with FSKR as the surviving corporation;

 

   

“Existing FSK Investment Advisory Agreement” refers to the Investment Advisory Agreement, dated December 20, 2018, by and between FSK and the Advisor;

 

   

“FSK” refers to FS KKR Capital Corp. and, where applicable, its consolidated subsidiaries;

 

   

“FSK Administration Agreement” refers to the Administration Agreement, dated April 9, 2018, by and between FSK and the Advisor;

 

   

“FSK Board” refers to the board of directors of FSK;

 

   

“FSK Bylaws” refers to the Third Amended and Restated Bylaws of FSK;

 

   

“FSK Charter” refers to the Second Articles of Amendment and Restatement of FSK, as amended;

 

   

“FSK Form 10-K” refers to the Annual Report on Form 10-K of FSK for the fiscal year ended December 31, 2019, filed on February 27, 2020;

 

   

“FSK Independent Directors” refers to Independent Directors on the FSK Board;

 

   

“FSK Special Meeting” refers to the special meeting of stockholders of FSK to which this joint proxy statement/prospectus relates;

 

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“FSKR” refers to FS KKR Capital Corp. II and, where applicable, its consolidated subsidiaries;

 

   

“FSKR Board” refers to the board of directors of FSKR;

 

   

“FSKR Bylaws” refers to the Fourth Amended and Restated Bylaws of FSKR;

 

   

“FSKR Charter” refers to the Second Articles of Amendment and Restatement, of FSKR, as amended;

 

   

“FSKR Form 10-K” refers to the Annual Report on Form 10-K of FSKR for the fiscal year ended December 31, 2019, filed on March 13, 2020;

 

   

“FSKR Independent Directors” refers to Independent Directors on the FSKR Board;

 

   

“FSKR Investment Advisory Agreement” refers to the Investment Advisory Agreement, dated December 20, 2019, by and between FSKR and the Advisor;

 

   

“FSKR Special Meeting” refers to the special meeting of stockholders of FSK to which this joint proxy statement/prospectus relates;

 

   

“Fund Boards” refers to the FSK Board and the FSKR Board, collectively (which boards have common membership);

 

   

“Fund Parties” refers to FSK and FSKR;

 

   

“Independent Directors” refers to independent directors on the Fund Boards;

 

   

“J.P. Morgan” refers to J.P. Morgan Securities LLC, the financial advisor to the FSKR independent directors;

 

   

“Merger” refers to the merger of Merger Sub with and into FSKR and unless the context otherwise requires, includes the Subsequent Combination;

 

   

“Merger Agreement” refers to the Agreement and Plan of Merger, dated November 23, 2020, by and among FSK, FSKR, Merger Sub and the Advisor;

 

   

“Proposed FSK Investment Advisory Agreement” refers to proposed investment advisory agreement between FSK and the Advisor attached hereto as Annex D;

 

   

“Merger Sub” refers to Rocky Merger Sub, Inc., a wholly owned subsidiary of FSK;

 

   

“NAV” refers to net asset value;

 

   

“NYSE” refers to the New York Stock Exchange;

 

   

“RBCCM” refers to RBC Capital Markets, LLC, the financial advisor to the FSK Independent Directors;

 

   

“Special Meetings” refers to FSK Special Meeting and the FSKR Special Meeting; and

 

   

“Subsequent Combination” refers to the merger of the surviving corporation of the Merger with and into FSK.

In May 2020, the SEC adopted certain new disclosure rules applicable to transactions such as the Merger under SEC release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses (the “Final Rule”), which among other things, adds a new rule Regulation S-X Rule 6-11 that eliminates the requirement to provide pro forma financial information for fund acquisitions if certain supplemental information is disclosed, as described under Regulation S-X Rule 6-11(d) (“Regulation S-X Rule 6-11(d)”). Furthermore, the Final Rule amends Form N-14 to make the disclosure requirements consistent with Regulation S-X Rule 6-11(d). The Final Rule is effective January 1, 2021, but it permits voluntary early compliance provided that a registrant adopts the Final Rule and applies the Final Rule in its entirety from the date of early compliance. FSK has elected to early adopt the provisions of the Final Rule. Under the Final Rule, FSK has determined that it has met the supplemental disclosure requirements consistent with Regulation S-X Rule 6-11(d) as it has (1) included a pro forma fee table, showing (a) the pre-transaction fee structures of FSK and FSKR and (b) the post-transaction fee structure of the combined company, (2) determined that the Merger would not result in a material change in FSK or FSKR’s investment portfolio due to investment restrictions and (3) determined that there are no material differences in accounting policies between FSK and FSKR.

 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETINGS AND THE MERGER

The questions and answers below highlight only selected information from this joint proxy statement/prospectus. They do not contain all of the information that may be important to you. You should read carefully this entire document to fully understand the Merger Agreement and the transactions contemplated thereby (including the Merger) and the voting procedures for each of the Fund Parties’ Special Meetings.

Questions and Answers about the Special Meetings

 

Q:

Why am I receiving these materials?

 

A:

The Fund Parties are furnishing these materials in connection with the solicitation of proxies by each Fund Party’s board of directors at each of the Special Meetings.

This joint proxy statement/prospectus and the accompanying materials are being mailed on or about [●], 2021 to stockholders of record of FSK and FSKR described below and are available at www.proxyvote.com.

 

Q:

What items will be considered and voted on at the Special Meetings?

 

A:

At the FSK Special Meeting, FSK stockholders will be asked to (1) approve the Merger Agreement and the transactions contemplated thereby, including the Merger (such proposal, the “FSK Merger Proposal”), (2) approve the issuance of shares of FSK Common Stock pursuant to the Merger Agreement (such proposal, the “Merger Stock Issuance Proposal”) and (3) approve the Proposed FSK Investment Advisory Agreement (such proposal, the “FSK Advisory Agreement Amendment Proposal”).

At the FSKR Special Meeting, FSKR stockholders will be asked to approve the Merger and the other transactions contemplated by the Merger Agreement (such proposal, the “FSKR Merger Proposal”).

 

Q:

How does the board of directors of each of the Fund Parties recommend voting on the proposals presented at the Special Meetings?

 

A:

The FSK Board, including each of the independent directors of FSK, has unanimously approved the Merger Agreement and the transactions contemplated thereby, including the Merger, and the issuance of shares of FSK Common Stock as consideration in the Merger, and the Proposed FSK Investment Advisory Agreement and recommends that FSK stockholders vote “FOR” the FSK Merger Proposal, “FOR” the Merger Stock Issuance Proposal and “FOR” the FSK Advisory Agreement Amendment Proposal.

The FSKR Board, including each of the independent directors of FSKR, has unanimously approved the Merger, the Merger Agreement, and the transactions contemplated thereby and recommends that FSKR stockholders vote “FOR” the FSKR Merger Proposal.

 

Q:

When is the “Record Date” and what does it mean?

 

A:

The record date for the each of the Special Meetings is [●], 2021 (the “Record Date”). The Record Date for each of the Fund Parties was established by the board of directors of such Fund Party, and only holders of record of shares of the applicable Fund Party at the close of business on the Record Date are entitled to receive notice of the applicable Special Meeting and vote at the applicable Special Meeting. As of the Record Date, there were [●] shares of FSK Common Stock outstanding and [●] shares of FSKR Common Stock outstanding. A new Record Date may be set for a Fund Party by a vote of the applicable Fund Party’s board of directors.

 

Q:

If I am a stockholder of one or more of the Fund Parties, how many votes do I have?

 

A:

Each share of common stock of a Fund Party held by a holder of record as of the Record Date has one vote on each matter considered at the Special Meeting of such Fund Party.

 

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Q:

If I am a stockholder of one or more of the Fund Parties, how do I vote?

 

A:

A stockholder may vote in person at such Fund Party’s Special Meeting or by proxy in accordance with the instructions provided below. A stockholder may also authorize a proxy by telephone or through the Internet using the toll-free telephone number or web address printed on your proxy card. Authorizing a proxy by telephone or through the Internet requires you to input the control number located on your proxy card. After inputting the control number, you will be prompted to direct your proxy to vote on each proposal. You will have an opportunity to review your directions and make any necessary changes before submitting your directions and terminating the telephone call or Internet link.

 

   

By Internet: www.proxyvote.com

 

   

By telephone: (800) 690-6903

 

   

By mail: You may vote by proxy by indicating your instructions on the enclosed proxy card, dating and signing the proxy card, and promptly returning the proxy card in the envelope provided, which requires no postage if mailed in the United States. Please allow sufficient time for your proxy card to be received on or prior to 5:00 p.m., Eastern Time, on [●], 2021.

 

   

In person: You may vote in person at a Fund Party’s Special Meeting by requesting a ballot when you arrive. You will need to bring photo identification in order to be admitted to the Special Meeting(s). To obtain directions to the Special Meetings, please call (844) 358-7276 and select Option 1. If your shares of stock are held through a broker and you attend such Fund Party’s Special Meeting in person, please bring a letter from your broker identifying you as the beneficial owner of the shares and authorizing you to vote your shares at such Special Meeting.

Important notice regarding the availability of proxy materials for the Special Meetings. This joint proxy statement/prospectus and applicable proxy cards are available at www.proxyvote.com.

 

Q:

What if a Fund Party stockholder does not specify a choice for a matter when authorizing a proxy?

 

A:

All properly executed proxies representing shares of the applicable Fund Party’s common stock received prior to such Fund Party’s Special Meeting will be voted in accordance with the instructions marked thereon. If a proxy card is signed and returned without any instructions marked, the shares of the applicable Fund Party’s common stock will be voted “FOR” the proposals presented at the applicable Fund Party’s Special Meeting.

 

Q:

If I am a Fund Party stockholder, how can I change my vote or revoke a proxy?

 

A:

You may revoke your proxy and change your vote before the proxies are voted at each Fund Party’s Special Meeting. You may change your vote using the Internet or telephone methods described herein, prior to the applicable cutoff time before such Special Meeting, in which case only your latest Internet or telephone proxy will be counted. Alternatively, you may revoke your proxy and change your vote by signing and returning a new proxy dated as of a later date, or by attending such Fund Party’s Special Meeting and voting in person. However, your attendance at such Fund Party’s Special Meeting will not automatically revoke your proxy, unless you properly vote at such Special Meeting, or specifically request that your prior proxy be revoked by delivering a written notice of revocation to such Fund Party prior to the applicable Special Meeting. Stockholders of the Fund Parties should direct their proxy revocations to the applicable Fund Party(ies) at the following address: 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112, Attention: Stephen S. Sypherd, General Counsel and Secretary.

 

Q:

If my shares of FSK Common Stock or FSKR Common Stock, as applicable, are held in a broker-controlled account or in “street name,” will my broker vote my shares for me?

 

A:

No. You should follow the instructions provided by your broker on your voting instruction form. It is important to note that your broker will vote your shares only if you provide instructions on how you would like your shares to be voted at the applicable Special Meeting.

 

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Q:

What constitutes a “quorum” for each of the Special Meetings of the Fund Parties?

 

A:

Under each of the FSK Charter and the FSK Bylaws and the FSKR Charter and the FSKR Bylaws, holders of one-third of the number of shares of FSK Common Stock or FSKR Common Stock, as applicable, entitled to vote, present in person or by proxy, constitutes a quorum for the transaction of business. Abstentions will be treated as shares of common stock that are present for purposes of determining the presence of a quorum for transacting business at each Fund Party’s Special Meeting.

In the event that a quorum is not present or if it appears that there are not enough votes to approve the proposals presented at either of the Special Meetings, the chairman of such Special Meeting shall have the power to adjourn such Special Meeting from time to time to a date not more than 120 days after the record date originally fixed for such Special Meeting without notice, other than the announcement at such Special Meeting, to permit further solicitation of proxies. Any business that might have been transacted at such Special Meeting originally called may be transacted at any such adjourned session(s) at which a quorum is present.

 

Q:

What vote is required to approve the FSK Merger Proposal, the Merger Stock Issuance Proposal and the FSK Advisory Agreement Amendment Proposal at the FSK special meeting?

 

A:

Pursuant to the Merger Agreement, approval of the FSK Merger Proposal requires the affirmative vote of holders of (1) a majority of the outstanding shares of FSK Common Stock entitled to vote at the FSK Special Meeting and (2) a majority of the votes cast by holders of outstanding shares of FSK Common Stock entitled to vote at the FSK Special Meeting, other than shares that are owned of record or beneficially by the Advisor, affiliates of the Advisor or any members of the FSK Board. The approval of the FSK Merger Proposal is a condition to the parties’ obligations to close the Merger under the Merger Agreement, but it is not required by law. The Maryland General Corporation Law (“MGCL”) provides in general that a transaction between a Maryland corporation and another corporation in which any of its directors is a director or has a material financial interest is not voidable solely because of the potential conflict of interest, if, among other procedures, the potential conflict is disclosed and the transaction is approved by a majority of the votes cast by stockholders entitled to vote other than votes that could be cast with respect to stock owned of record or beneficially by the conflicted directors or the other corporation. The FSK Board considered the requirement of such approval by the FSK stockholders to be an additional positive factor in favor of the FSK Merger Proposal and the Merger Stock Issuance Proposal.

The approval of the Merger Stock Issuance Proposal requires the affirmative vote of holders of a majority of the votes cast by holders of FSK Common Stock at a meeting at which a quorum is present. The approval of the Merger Stock Issuance Proposal is a condition to the parties’ obligations to close the Merger because it is a requirement of the NYSE.

The approval of the FSK Advisory Agreement Amendment Proposal requires the approval of a majority of the outstanding shares of FSK Common Stock. Under the Investment Company Act of 1940, as amended (the “1940 Act”), a majority of the outstanding shares of FSK Common Stock may be the lesser of: (1) 67% of the FSK Common Stock at the FSK Special Meeting if the holders of more than 50% of the outstanding shares of FSK Common Stock are present or represented by proxy or (2) more than 50% of the outstanding shares of FSK Common Stock.

Abstentions will have the same effect on the outcome of the FSK Merger Proposal and the FSK Advisory Agreement Amendment Proposal as votes against the proposal. Abstentions will have no effect on the outcome of the Merger Stock Issuance Proposal.

 

Q:

What vote is required to approve the FSKR Merger Proposal at the FSKR Special Meeting?

 

A:

Pursuant to the Merger Agreement, approval of the FSKR Merger Proposal requires the affirmative vote of holders of (1) a majority of the outstanding shares of FSKR Common Stock entitled to vote at the FSKR Special Meeting and (2) a majority of the votes cast by holders of the outstanding shares of FSKR Common Stock other than the Advisor, any affiliates of the Advisor and members of the FSKR Board, entitled to vote

 

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  at the FSKR Special Meeting. The approval of the FSKR Merger Proposal by holders of a majority of the outstanding shares of FSKR Common Stock entitled to vote on the matter is a condition to the parties’ obligations to close the Merger because it is a requirement of Maryland law in order to approve the Merger. The approval of the FSKR Merger Proposal by a majority of the votes cast by holders of outstanding shares of FSKR Common Stock other than the Advisor, any affiliates of the Advisor and members of the FSKR Board is a condition to the parties’ obligations to close the Merger, but it is not required by law. The MGCL provides in general that a transaction between a Maryland corporation and another corporation in which any of its directors is a director or has a material financial interest is not voidable solely because of the potential conflict of interest, if the potential conflict is disclosed and the transaction is approved by a majority of the votes cast by stockholders entitled to vote other than votes that could be cast with respect to stock owned of record or beneficially by any conflicted directors or the other corporation. The FSKR Board considered the requirement of such approval by the FSKR stockholders to be an additional positive factor in favor of the FSKR Merger Proposal.

Abstentions will have the same effect on the outcome of the FSKR Merger Proposal as votes against the proposal.

 

Q:

How will the final voting results be announced?

 

A:

Preliminary voting results will be announced at each Special Meeting. Final voting results will be published by each of the Fund Parties in a current report on Form 8-K filed by such Fund Party within four business days after the date of such Fund Party’s Special Meeting.

 

Q:

Will the Fund Parties incur expenses in soliciting proxies?

 

A:

The expenses of the solicitation of proxies for each of the Special Meetings, including the cost of preparing, printing and mailing this joint proxy statement/prospectus, the applicable accompanying Notice of Special Meeting of Stockholders and the proxy card, will be borne equally by the Fund Parties. The Fund Parties have requested that brokers, nominees, fiduciaries and other persons holding shares of common stock of the Fund Parties in their names, or in the name of their nominees, which are beneficially owned by others, forward the proxy materials to, and obtain proxies from, such beneficial owners. The Fund Parties will reimburse such persons for their reasonable expenses in so doing.

In addition to the solicitation of proxies by mail, proxies may be solicited in person and by telephone or facsimile transmission by directors, officers or employees of each of the Fund Parties and their respective affiliates (without special compensation therefor). Each of the Fund Parties has also retained Broadridge Investor Communication Solutions, Inc. (“Broadridge”) to assist in the solicitation of proxies, and it is expected that FSK will pay an estimated fee of approximately $[●], plus out-of-pocket expenses, and FSKR will pay an estimated fee of approximately $[●], plus out-of-pocket expenses.

For more information regarding expenses related to the Merger, see “Questions and Answers about the Merger—‘Who is responsible for paying the expenses relating to completing the Merger?’”

 

Q:

What does it mean if I receive more than one proxy card?

 

A:

Some of your shares of FSK Common Stock or FSKR Common Stock, as applicable, may be registered differently or held in a different account. You should authorize a proxy to vote the shares in each of your accounts by mail, by telephone or via the Internet. If you mail proxy cards, please sign, date and return each proxy card to guarantee that all of your shares are voted.

 

Q:

Are the proxy materials available electronically?

 

A:

In accordance with regulations promulgated by the SEC, the Fund Parties have made the registration statement (of which this joint proxy statement/prospectus forms a part), the applicable Notice of Special

 

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  Meeting of Stockholders and the applicable proxy card available to stockholders of each of the Fund Parties on the Internet. Stockholders may (1) access and review the proxy materials of each of the Fund Parties, (2) authorize their proxies, as described in “The Special Meetings—Proxy Voting Procedures” and/or (3) elect to receive future proxy materials by electronic delivery, via the Internet address provided below.

The registration statement (of which this joint proxy statement/prospectus forms a part), each Notice of Special Meeting of Stockholders and each proxy card are available at www.proxyvote.com.

Pursuant to the rules adopted by the SEC, each of the Fund Parties will furnish proxy materials by email to those stockholders who have elected to receive their proxy materials electronically. While each of the Fund Parties encourages its stockholders to take advantage of electronic delivery of proxy materials, which helps to reduce the environmental impact of stockholder meetings and the cost associated with the physical printing and mailing of materials, stockholders who have elected to receive proxy materials electronically by email, as well as beneficial owners of shares of FSK Common Stock and FSKR Common Stock, as applicable, held by a broker or custodian, may request a printed set of proxy materials.

 

Q:

Will my vote make a difference?

 

A:

Yes. Your vote is needed to ensure the proposals can be acted upon. Your vote is very important. Your immediate response will help avoid potential delays and may save significant additional expenses associated with soliciting stockholder votes.

 

Q:

Whom can I contact with any additional questions?

 

A:

If you are a stockholder of either of the Fund Parties, you can contact Broadridge at the below contact information with any additional questions:

Broadridge Financial Solutions, Inc.

51 Mercedes Way

Edgewood, New York 11717

1-833-868-3374.

 

Q:

Where can I find more information about each of the Fund Parties?

 

A:

You can find more information about each of the Fund Parties in the documents described under the caption “Where You Can Find More Information.”

 

Q:

What do I need to do now?

 

A:

We urge you to read carefully this entire document, including its annexes. You should also review the documents referenced under “Where You Can Find More Information” and consult with your accounting, legal and tax advisors.

Questions and Answers about the Merger

 

Q:

What will happen in the Merger and Subsequent Combination?

 

A:

FSKR shall be the surviving corporation of the merger between FSKR and Merger Sub and shall continue its existence as a corporation under the laws of the State of Maryland until the Subsequent Combination. As of the Effective Time, the separate corporate existence of Merger Sub shall cease. Immediately after the Effective Time, pursuant to the Subsequent Combination, the surviving corporation will merge with and into FSK, with FSK as the surviving corporation.

 

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Q:

What will FSKR stockholders receive in the Merger?

 

A:

Each FSKR stockholder will be entitled to receive, for each share of FSKR Common Stock, that number of shares of FSK Common Stock equal to the quotient of the NAV per share of FSKR Common Stock divided by the NAV per share of FSK Common Stock, in each case calculated as of an agreed upon date no more than 48 hours (excluding Sundays and holidays) prior to the closing of the Merger, subject to adjustment pursuant to the terms of the Merger Agreement and the payment of cash in lieu of fractional shares at the election of FSK.

 

Q:

Is the Exchange Ratio subject to any adjustment?

 

A:

Yes. The Exchange Ratio will be adjusted only if, between the Determination Date and the Effective Time, the respective outstanding shares of FSK Common Stock or FSKR Common Stock is increased or decreased or changed into or exchanged for a different number or kind of shares or securities, as a result of any reclassification, recapitalization, stock split, reverse stock split, split-up, combination or exchange of shares, or if a stock dividend or dividend payable in any other securities will be declared with a record date within such period, as permitted by the Merger Agreement. Because the Exchange Ratio will be determined within 48 hours (excluding Sundays and holidays) prior to the closing of the Merger, the time period during which such an adjustment could occur will be relatively short.

 

Q:

Who is responsible for paying the expenses relating to completing the Merger?

 

A:

In general, all fees and expenses incurred in connection with the Merger shall be paid by the person incurring such fees and expenses, whether or not the Merger is consummated. However, the Fund Parties shall equally bear the costs and expenses of printing and mailing this joint proxy statement/prospectus and all filing and other fees paid to the SEC in connection with the Merger and all other filings and fees in connection with any other filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). See “Description of the Merger Agreement—Expenses and Fees.” It is anticipated that FSK will bear expenses of approximately $[●] million in connection with the Merger and FSKR will bear expenses of approximately $[●] million in connection with the Merger.

 

Q:

Will I receive dividends after the Merger?

 

A:

Subject to applicable legal restrictions and the sole discretion of the FSK Board, FSK intends to declare and pay regular cash distributions to its stockholders on a quarterly basis. The amount and timing of past dividends and distributions are not a guarantee of any future dividends or distributions, or the amount thereof, the payment, timing and amount of which will be determined by the FSK Board and depend on FSK’s cash requirements, its financial condition and earnings, contractual restrictions, legal and regulatory considerations and other factors.

Regular quarterly dividends will be paid; if the Merger closes between the record date and the payment date for a dividend, FSK would pay FSKR stockholders as of the payment date.

No dividends or other distributions with respect to the FSK Common Stock will be paid to the holder of any unsurrendered shares of FSKR Common Stock with respect to the shares of the FSK Common Stock represented thereby, in each case unless such shares are surrendered in accordance with the Merger Agreement. Following surrender of any such shares of FSKR Common Stock, the record holders of such shares of FSKR Common Stock shall be entitled to receive, without interest, (1) the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to the whole shares of FSK Common Stock represented by such shares of FSKR Common Stock and not paid and/or (2) at the appropriate payment date, the amount of dividends or other distributions payable with respect to shares of FSK Common Stock represented by such shares of FSKR Common Stock with a record date after the Effective Time (but before such surrender date) and with a payment date subsequent to the issuance of the FSK Common Stock issuable with respect to such shares of FSKR Common Stock.

 

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Each FSKR stockholder will become a stockholder of FSK in the Merger. FSKR stockholders who participate in FSKR’s dividend reinvestment plan will be deemed to have elected to participate in FSK’s dividend reinvestment plan in connection with the Merger. FSKR stockholders who do not participate in FSKR’s dividend reinvestment plan will be deemed to have elected to opt out of FSK’s dividend reinvestment plan in connection with the Merger, unless such FSKR stockholders are also stockholders of FSK who participate in FSK’s dividend reinvestment plan.

For a history of the dividends and distributions paid by FSK since June 1, 2018 and by FSKR since the listing of the FSKR Common Stock on the NYSE, see “Market Price, Dividend and Distribution Information.”

 

Q:

Is the Merger subject to any third-party consents?

 

A:

Under the Merger Agreement, each of the Fund Parties shall use its reasonable best efforts to obtain all approvals, confirmations and consents that are necessary or advisable to consummate the Merger. As of the date of this joint proxy statement/prospectus, the Fund Parties believe that, subject to the satisfaction of certain conditions, they have obtained all necessary third-party consents other than stockholder approval.

The Fund Parties have agreed to cooperate with each other and use their reasonable best efforts to take, or cause to be taken, in good faith, all actions, and to do, or cause to be done, all things necessary, including to obtain as promptly as practicable all consents, approvals, confirmations and authorizations of all third parties, in each case, that are necessary or advisable, to consummate the transactions contemplated by the Merger Agreement, including the Merger, in the most expeditious manner practicable. There can be no assurance that any permits, consents, approvals, confirmations or authorizations will be obtained or that such permits, consents, approvals, confirmations or authorizations will not impose conditions or requirements that, individually or in the aggregate, would or could reasonably be expected to have a material adverse effect on the financial condition, results of operations, assets or business of the combined company following the Merger.

 

Q:

How do the Fund Parties’ investment objectives and strategies differ from one another?

 

A:

The Fund Parties’ investment objectives and strategies are identical. As a result, the Advisor does not anticipate any significant portfolio repositioning in connection with the Merger.

 

Q:

How do the distribution procedures, purchase procedures, redemption procedures and exchange rights of the Fund Parties differ from one another?

 

A:

The Fund Parties have substantially identical distribution, purchase and redemption procedures. Neither of the Fund Parties offers exchange rights with respect to its common stock. FSK anticipates that the combined company will maintain the same distribution, purchase and redemption procedures following the closing of the Merger. For more information, see “Comparison of FSK and FSKR Distribution, Purchase and Redemption Procedures.”

 

Q:

How will the combined company be managed following the Subsequent Combination?

 

A:

The directors of FSK immediately prior to the Subsequent Combination shall remain the directors of FSK and shall hold office until their respective successors are duly elected and qualify, or their earlier death, resignation or removal. The officers of FSK immediately prior to the Subsequent Combination shall remain the officers of FSK and shall hold office until their respective successors are duly appointed and qualify, or their earlier death, resignation or removal. Following the Subsequent Combination, the Advisor shall continue to be the investment adviser of the combined company pursuant to the Proposed FSK Investment Advisory Agreement.

 

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Q:

Is the approval of the Proposed FSK Investment Advisory Agreement a condition precedent to the closing of the Merger and vice versa?

 

A:

Yes. The closing of the Merger is a condition to the adoption of the Proposed FSK Investment Advisory Agreement. Similarly, the approval of the Proposed FSK Investment Advisory Agreement is a condition to the closing of the Merger. If the Proposed FSK Investment Advisory Agreement is approved by FSK stockholders, it will become effective as of Closing Date.

 

Q:

Are stockholders of the Fund Parties able to exercise dissenters’ or appraisal rights?

 

A:

No. The Fund Parties’ stockholders will not be entitled to exercise dissenters’ or appraisal rights with respect to any matter to be voted upon at the applicable Fund Party’s Special Meeting. Any stockholder of either of the Fund Parties may abstain from voting or vote against any of such matters.

 

Q:

When do you expect to complete the Merger and Subsequent Combination?

 

A:

While there can be no assurance as to the exact timing, or that the Merger will be completed at all, the Fund Parties are working to complete the Merger in the second or third quarter of 2021. It is currently expected that the Merger will be completed promptly following receipt of the required stockholder approvals at the Special Meetings and satisfaction of the other closing conditions set forth in the Merger Agreement. The Subsequent Combination will occur immediately after the Merger is completed.

 

Q:

Is the Merger expected to be taxable to FSK stockholders?

 

A:

No. The Merger and Subsequent Combination are not expected to be a taxable event for FSK stockholders.

 

Q:

Is the Merger expected to be taxable to FSKR stockholders?

 

A:

No. The Merger and Subsequent Combination are intended to qualify as a “reorganization,” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and it is a condition to the Fund Parties’ respective obligations to complete the Merger that each of them receives a legal opinion to that effect. FSKR stockholders are not expected to recognize any gain or loss for U.S. federal income tax purposes on the exchange of shares of FSKR Common Stock for shares of FSK Common Stock pursuant to the Merger, except with respect to cash received in lieu of fractional shares of FSK Common Stock. FSKR stockholders should read the section captioned “Certain Material U.S. Federal Income Tax Consequences of the Merger” for a more complete discussion of the U.S. federal income tax consequences of the Merger. Tax matters can be complicated and the tax consequences of the Merger to an FSKR stockholder will depend on the particular tax situation of such stockholder. FSKR stockholders should consult with their own tax advisors to determine the tax consequences of the Merger to them.

 

Q:

What happens if the Merger is not consummated?

 

A:

If the Merger is not completed because the requisite vote of the stockholders of FSK or FSKR is not obtained, or if the Merger is not completed for any other reason, FSKR’s stockholders will not receive any consideration for their shares of FSKR Common Stock in connection with the Merger. Instead, FSKR will remain an independent company and the FSKR Common Stock will continue to be listed and traded on the NYSE. In addition, under circumstances specified in the Merger Agreement, a third-party suitor of FSKR may be required to pay FSK a termination fee of $126.2 million and a third-party suitor of FSK may be required to pay FSKR a termination fee of $90.8 million. See “Description of the Merger Agreement—Termination of the Merger Agreement.”

 

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Q:

Did the FSK Board receive an opinion from its financial advisor regarding the Exchange Ratio?

 

A:

The FSK Independent Directors received an oral opinion, which was subsequently confirmed by delivery of a written opinion, dated November 19, 2020, from their financial advisor that, as of the date of such opinion, and based on and subject to the assumptions, qualifications, limitations and other matters set forth therein, the RBCCM September Exchange Ratio (as defined below) was fair, from a financial point of view, to FSK. For more information, see the section entitled “The Merger—Opinion of FSK’s Financial Advisor.”

 

Q:

Did the FSKR Board receive an opinion from its financial advisor regarding the Exchange Ratio?

 

A:

The FSKR Independent Directors received an oral opinion (subsequently confirmed in writing), dated November 19, 2020, from J.P. Morgan, financial advisor to the FSKR Independent Directors, to the effect that, as of the date of such opinion and based on and subject to the assumptions made, matters considered and limitations set forth therein, the J.P. Morgan September Exchange Ratio (as defined below) was fair, from a financial point of view, to the holders of FSKR Common Stock other than the Advisor and its other affiliates. For more information, see the section entitled “The Merger—Opinion of FSKR’s Financial Advisor.”

 

Q:

If I am a Fund Party stockholder, what happens if I sell my shares before such Fund Party’s Special Meeting?

 

A:

The Record Date is earlier than the date that the Merger is expected to be completed. If you transfer your shares of common stock after the Record Date but before such Fund Party’s Special Meeting, you will retain your right to vote at such Special Meeting, but, as to any FSKR shares owned by you, you will have transferred the right to receive shares of FSK Common Stock, subject to the payment of cash instead of fractional shares at the election of FSK, for each share of FSKR Common Stock owned immediately prior to the Merger. In order to receive shares of FSK Common Stock for each share of FSKR Common Stock owned, subject to the payment of cash instead of fractional shares at the election of FSK, you must hold your FSKR shares through completion of the Merger.

 

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SUMMARY OF THE MERGER

This summary highlights selected information contained elsewhere in this joint proxy statement/prospectus and may not contain all of the information that is important to you. You should carefully read this entire joint proxy statement/prospectus, including the other documents to which this joint proxy statement/prospectus refers for a more complete understanding of the Merger. In particular, you should read the annexes attached to this joint proxy statement/prospectus, including the Merger Agreement, which is attached as Annex A hereto, as it is the legal document that governs the Merger. See “Where You Can Find More Information.” For a discussion of the risk factors you should carefully consider, see the section entitled “Risk Factors” beginning on page 23.

The Parties to the Merger

FS KKR Capital Corp.

FS KKR Capital Corp. II

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

FSK and FSKR were incorporated under the MGCL on December 21, 2007 and July 12, 2011, respectively, and formally commenced investment operations on January 2, 2009 and June 18, 2012, respectively. FSK and FSKR are externally managed, non-diversified, closed-end management investment companies that have elected to be regulated as business development companies (“BDCs”), under the 1940 Act. As such, FSK and FSKR are required to comply with certain regulatory requirements. In addition, FSK and FSKR have elected to be treated for U.S. federal income tax purposes, and intend to qualify annually, as regulated investment companies (“RICs”), under Subchapter M of the Code. As of September 30, 2020, FSK and FSKR had total assets of approximately $7.2 billion and $7.8 billion, respectively.

FSK and FSKR are managed by the Advisor, a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), which oversees the management of FSK’s and FSKR’s operations and is responsible for making investment decisions with respect to their portfolios. FSK’s and FSKR’s investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. FSK and FSKR seek to meet their investment objectives by:

 

   

utilizing the experience and expertise of the management team of the Advisor;

 

   

employing a defensive investment approach focused on long-term credit performance and principal protection;

 

   

focusing primarily on debt investments in a broad array of private U.S. companies, including middle-market companies, which FSK and FSKR define as companies with annual earnings before interest, taxes, depreciation and amortization of $25 million to $100 million at the time of investment;

 

   

investing primarily in established, stable enterprises with positive cash flows; and

 

   

maintaining rigorous portfolio monitoring in an attempt to anticipate and pre-empt negative credit events within their portfolios, such as an event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company.

FSK’s and FSKR’s portfolios are both comprised primarily of investments in senior secured loans and second lien secured loans of private middle market U.S. companies and, to a lesser extent, subordinated loans and certain asset-based financing loans of private U.S. companies. Although FSK and FSKR do not expect a significant portion of their respective portfolios to be comprised of subordinated loans, there is no limit on the amount of such loans in which FSK and FSKR may invest. FSK and FSKR may purchase interests in loans or



 

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make other debt investments, including investments in senior secured bonds, through secondary market transactions in the “over-the-counter” market or directly from their target companies as primary market or directly originated investments. In connection with FSK’s and FSKR’s debt investments, FSK and FSKR may on occasion receive equity interests such as warrants or options as additional consideration. FSK and FSKR may also purchase or otherwise acquire interests in the form of common or preferred equity or equity-related securities, such as rights and warrants that may be converted into or exchanged for common stock or other equity or the cash value of common stock or other equity, including through a co-investment with a financial sponsor or possibly the restructuring of an investment. In addition, a portion of FSK’s and FSKR’s portfolios may be comprised of corporate bonds, structured products, other debt securities and derivatives, including total return swaps and credit default swaps. The Advisor will seek to tailor FSK’s and FSKR’s investment focus as market conditions evolve. Depending on market conditions, FSK and FSKR may each increase or decrease its exposure to less senior portions of the capital structures of its portfolio companies or otherwise make opportunistic investments, such as where the market price of loans, bonds or other securities reflects a lower value than deemed warranted by the Advisor’s fundamental analysis. Such investment opportunities may occur due to general dislocations in the markets, a misunderstanding by the market of a particular company or an industry being out of favor with the broader investment community and may include event driven investments, anchor orders and structured products.

The senior secured loans, second lien secured loans and senior secured bonds in which FSK and FSKR invest generally have stated terms of three to seven years and subordinated debt investments that FSK and FSKR make generally have stated terms of up to ten years, but the expected average life of such securities is generally three to four years. However, FSK and FSKR may invest in loans and securities with any maturity or duration. FSK’s and FSKR’s debt investments may be rated by a nationally recognized statistical rating organization (“NRSRO”), and, in such case, generally will carry a rating below investment grade (rated lower than “Baa3” by Moody’s Investors Service, Inc., or lower than “BBB-” by Standard & Poor’s Ratings Services). FSK and FSKR may invest without limit in debt or other securities of any rating, as well as debt or other securities that have not been rated by a NRSRO.

To seek to enhance their returns, FSK and FSKR employ leverage as market conditions permit and at the discretion of the Advisor, but in no event will leverage employed exceed the maximum amount permitted by the 1940 Act. Prior to June 14, 2019, in accordance with the 1940 Act, FSK was allowed to borrow amounts such that its asset coverage, calculated pursuant to the 1940 Act, was at least 200% after such borrowing. Effective June 15, 2019, following approval by FSK’s stockholders, FSK’s asset coverage requirement was reduced from 200% to 150%. Similarly, effective June 18, 2020, following approval by FSKR’s stockholders, FSKR’s asset coverage requirement was reduced from 200% to 150%.

As BDCs, FSK and FSKR are subject to certain regulatory restrictions in making their investments. For example, BDCs generally are not permitted to co-invest with certain affiliated entities in transactions originated by the BDC or its affiliates in the absence of an exemptive order from the SEC. However, BDCs are permitted to, and may, simultaneously co-invest in transactions where price is the only negotiated term. In an order dated April 3, 2018, the SEC granted exemptive relief permitting FSK and FSKR, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions, including investments originated and directly negotiated by the Advisor or KKR Credit Advisors (US) LLC (“KKR Credit”) with FSK’s and FSKR’s co-investment affiliates. FSK and FSKR believe this relief enhances their ability to further their investment objectives and strategy. FSK and FSKR believe this relief may also increase favorable investment opportunities for FSK and FSKR in part by allowing FSK and FSKR to participate in larger investments, together with their co-investment affiliates, than would be available to FSK and FSKR if such relief had not been obtained.



 

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Rocky Merger Sub, Inc.

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

Merger Sub is a Maryland corporation and a newly formed wholly owned subsidiary of FSK. Merger Sub was formed in connection with and for the sole purpose of the Merger.

FS/KKR Advisor, LLC

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

The Advisor is a Delaware limited liability company, located at 201 Rouse Boulevard, Philadelphia, PA 19112, registered as an investment adviser with the SEC under the Advisers Act. The Advisor is a partnership between an affiliate of Franklin Square Holdings, L.P., which does business as FS Investments (“FS Investments”), and KKR Credit. The chairman and chief executive officer of FSK and FSKR, Michael C. Forman, serves as the Advisor’s chairman and chief executive officer.

The Advisor has significant experience in private lending and private equity investing, and has developed an expertise in using all levels of a firm’s capital structure to produce income-generating investments, while focusing on risk management. The Advisor also has extensive knowledge of the managerial, operational and regulatory requirements of publicly registered alternative asset entities, such as BDCs. FSK and FSKR believe that the active and ongoing participation by the Advisor, FS Investments, KKR Credit and their respective affiliates in the credit markets, and the depth of experience and disciplined investment approach of the Advisor, will allow the Advisor to successfully execute FSK’s and FSKR’s investment strategies.

The FSK Board and the FSKR Board, which are comprised of a majority of independent directors, oversee and monitor the investment performance of the Advisor.

Merger Structure

Pursuant to the terms of the Merger Agreement, at the Effective Time, Merger Sub will be merged with and into FSKR. FSKR will be the surviving corporation and will continue its existence as a corporation under the laws of the State of Maryland. As of the Effective Time, the separate corporate existence of Merger Sub will cease. Immediately after the occurrence of the Effective Time, in the Subsequent Combination, the surviving corporation will merge with and into FSK in accordance with the MGCL, with FSK as the surviving corporation.



 

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LOGO

Based on the number of shares of FSK Common Stock issued and outstanding and the NAVs of FSK and FSKR as of September 30, 2020, on a pro forma basis following the closing of the Merger, it is expected that FSK stockholders will own approximately 42% of the outstanding FSK Common Stock and former FSKR stockholders will own approximately 58% of the outstanding FSK Common Stock. The Exchange Ratio will be calculated based on the NAV per share of FSK Common Stock and the NAV per share of FSKR Common Stock, each as of the Determination Date. Following the Merger, FSK will continue its operations as conducted before the Merger.



 

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The Merger Agreement is attached as Annex A to this joint proxy statement/prospectus and is incorporated by reference into this joint proxy statement/prospectus. FSK and FSKR encourage their respective stockholders to read the Merger Agreement carefully and in its entirety, as it is the principal legal document governing the Merger.

Merger Consideration

If the Merger is consummated, each FSKR stockholder (other than FSK and its consolidated subsidiaries) will be entitled to receive, for each share of FSKR Common Stock, that number of shares of FSK Common Stock with a NAV equal to the NAV of a share of FSKR Common Stock, in each case calculated as of the same date within 48 hours (excluding Sundays and holidays) prior to the closing of the Merger (the “Merger Consideration”). Holders of FSKR Common Stock may receive cash in lieu of fractional shares at the election of FSK.

After the Determination Date, the market value of the shares of FSK Common Stock to be issued in the Merger will continue to fluctuate, but the number of shares to be issued to FSKR stockholders will remain fixed.

Comparative Market Price of Securities

Shares of FSK Common Stock trade on the NYSE under the symbol “FSK.” Shares of FSKR Common Stock trade on the NYSE under the symbol “FSKR.”

The following table presents the closing prices and most recently determined NAV per share of FSK Common Stock and FSKR Common Stock.

 

     FSK
Common
Stock
     FSKR
Common
Stock
 

NAV per Share at September 30, 2020

   $ 24.46      $ 24.66  

Closing Sales Price at December 22, 2020

   $ 16.42      $ 15.99  

Risks Relating to the Proposed Merger

The Merger and the other transactions contemplated by the Merger Agreement are subject to, among others, the following risks. FSK and FSKR stockholders should carefully consider these risks before deciding how to vote on the proposals to be voted on at their respective Special Meetings.

 

   

Because the market price of FSK Common Stock will fluctuate, FSKR stockholders cannot be sure of the market value of the Merger Consideration they will receive until the Effective Time.

 

   

Sales of shares of FSK Common Stock after the completion of the Merger may cause the market price of FSK Common Stock to fall.

 

   

Each of the Fund Parties’ stockholders will experience a reduction in percentage ownership and voting power in the combined company as a result of the Merger.

 

   

FSK may be unable to realize the benefits anticipated by the Merger, including estimated cost savings, or it may take longer than anticipated to achieve such benefits.

 

   

The Merger may trigger certain “change of control” provisions and other restrictions in contracts of each of the Fund Parties or their affiliates and the failure to obtain any required consents or waivers could adversely impact the combined company.



 

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The opinions delivered to the FSK Independent Directors and the FSKR Independent Directors from their respective financial advisors will not reflect changes in circumstances between signing the Merger Agreement and completion of the Merger.

 

   

If the Merger does not close, neither of the Fund Parties will benefit from the expenses incurred in its pursuit.

 

   

Termination of the Merger Agreement could negatively impact each of the Fund Parties.

 

   

Under certain circumstances, a third-party suitor of a Fund Party may become obligated to pay the other Fund Party a termination fee upon termination of the Merger Agreement.

 

   

The Merger Agreement limits the ability of each of the Fund Parties to pursue alternatives to the Merger.

 

   

The Merger is subject to closing conditions, including stockholder approvals, that, if not satisfied or waived, will result in the Merger not being completed, which may result in material adverse consequences to each of the Fund Parties’ respective business and operations.

 

   

Each of the Fund Parties will be subject to operational uncertainties and contractual restrictions while the Merger is pending.

 

   

Each of the Fund Parties may waive one or more conditions to the Merger without resoliciting stockholder approval.

 

   

The market price of FSK Common Stock after the Merger may be affected by factors different from those affecting FSK Common Stock currently, including a larger stockholder base.

See the section captioned “Risk Factors—Risks Relating to the Merger” below for a more detailed discussion of these factors.

Tax Consequences of the Merger

The Merger is intended to qualify as a “reorganization,” within the meaning of Section 368(a) of the Code, and it is a condition to each Fund Party’s obligations to complete the Merger that each of them receives a legal opinion to that effect. Accordingly, the Merger is not expected to be a taxable event for FSKR stockholders for U.S. federal income tax purposes as to the shares of FSK Common Stock they receive in the Merger, except for any gain or loss that may result from the receipt of cash in lieu of fractional shares of FSK Common Stock.

FSKR stockholders should read the section captioned “Certain Material U.S. Federal Income Tax Consequences of the Merger” for a more complete discussion of the U.S. federal income tax consequences of the Merger. Tax matters can be complicated and the tax consequences of the Merger to FSKR stockholders will depend on their particular tax situation. Holders of FSKR Common Stock should consult with their own tax advisors to determine the tax consequences of the Merger to them.

The Merger is not expected to be a taxable event for FSK stockholders.

Special Meeting of FSK Stockholders

FSK plans to hold the FSK Special Meeting on [●], 2021, at [●] [a.m. / p.m.], Eastern Time, at 201 Rouse Boulevard, Philadelphia, PA 19112. At the FSK Special Meeting, holders of FSK Common Stock will be asked to approve (1) the FSK Merger Proposal, (2) the Merger Stock Issuance Proposal and (3) the FSK Advisory Agreement Amendment Proposal.



 

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An FSK stockholder can vote at the FSK Special Meeting if such stockholder owned shares of FSK Common Stock at the close of business on the Record Date. As of that date, there were approximately [●] shares of FSK Common Stock outstanding and entitled to vote, approximately [●] of which, or [less than 1%], were owned beneficially or of record by directors and executive officers of FSK.

Special Meeting of FSKR Stockholders

FSKR plans to hold the FSKR Special Meeting on [●], 2021, at [●] [a.m. / p.m.], at 201 Rouse Boulevard, Philadelphia, PA 19112. At the FSKR Special Meeting, holders of FSKR Common Stock will be asked to approve the FSKR Merger Proposal.

A FSKR stockholder can vote at the FSKR Special Meeting if such stockholder owned shares of FSKR Common Stock at the close of business on the Record Date. As of that date, there were approximately [●] shares of FSKR Common Stock outstanding and entitled to vote. Approximately [●] of such total outstanding shares, or [●]%, were owned beneficially or of record by directors and executive officers of FSKR.

FSK Board Recommendation

The FSK Board has unanimously approved the Merger, the Merger Agreement and the transactions contemplated thereby, including the Merger, the issuance of shares of FSK Common Stock in connection with the Merger and the Proposed FSK Investment Advisory Agreement and determined that the Merger, the Merger Agreement and the transactions contemplated thereby are advisable and in the best interests of FSK and the FSK stockholders, and recommends that FSK stockholders vote “FOR” the FSK Merger Proposal, “FOR” the Merger Stock Issuance Proposal and “FOR” the FSK Advisory Agreement Amendment Proposal.

FSKR Board Recommendation

The FSKR Board has unanimously approved the Merger, the Merger Agreement, and the transactions contemplated thereby, and determined them to be advisable and in the best interests of FSKR and the FSKR stockholders, and recommends that FSKR stockholders vote “FOR” the FSKR Merger Proposal.

Vote Required

Each share of common stock held by a holder of record of each of the Fund Parties as of the Record Date has one vote on each matter considered at the applicable Special Meeting.

FSK

The FSK Merger Proposal

Pursuant to the Merger Agreement, the approval of the FSK Merger Proposal requires the affirmative vote of holders of (1) a majority of the outstanding shares of FSK Common Stock entitled to vote at the FSK Special Meeting and (2) a majority of the outstanding shares of FSK Common Stock unaffiliated with the Advisor and its affiliates entitled to vote at the FSK Special Meeting. Abstentions will have the same effect on the outcome of the proposal as votes against the proposal.

The Merger Stock Issuance Proposal

The approval of the Merger Stock Issuance Proposal requires the affirmative vote of holders of a majority of the votes cast by holders of FSK Common Stock at a meeting at which a quorum is present. Abstentions will have no effect on the outcome of the Merger Stock Issuance Proposal.



 

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The FSK Advisory Agreement Amendment Proposal

The approval of the FSK Advisory Agreement Amendment Proposal requires the approval of a majority of the outstanding shares of FSK Common Stock. Under the 1940 Act, a majority of the outstanding shares of FSK Common Stock may be the lesser of: (1) 67% of the FSK Common Stock at the FSK Special Meeting if the holders of more than 50% of the outstanding shares of FSK Common Stock are present or represented by proxy or (2) more than 50% of the outstanding shares of FSK Common Stock. Abstentions will not count as affirmative votes cast and will therefore have the same effect as votes against the FSK Advisory Agreement Amendment Proposal.

FSKR

The FSKR Merger Proposal

Pursuant to the Merger Agreement, the approval of the FSKR Merger Proposal requires the affirmative vote of holders (1) a majority of the outstanding shares of FSKR Common Stock entitled to vote at the FSKR Special Meeting and (2) a majority of the outstanding shares of FSKR Common Stock unaffiliated with the Advisor and its affiliates entitled to vote at the FSKR Special Meeting. Abstentions will have the same effect on the outcome of the proposal as votes against the proposal.

Completion of the Merger

As more fully described in this joint proxy statement/prospectus and in the Merger Agreement, the completion of the Merger depends on a number of conditions being satisfied or, where legally permissible, waived. For information on the conditions that must be satisfied or waived for the Merger to occur, see “Description of the Merger—Conditions to the Closing of the Merger.” While there can be no assurances as to the exact timing, or that the Merger will be completed at all, the Fund Parties are working to complete the Merger in the second or third quarter of 2021. It is currently expected that the Merger will be completed promptly following receipt of the required stockholder approvals at the Special Meetings and satisfaction of the other closing conditions set forth in the Merger Agreement. The Subsequent Combination will occur immediately after the Merger is completed.

Termination of the Merger Agreement and Termination Fee

The Merger Agreement contains certain termination rights for FSK and FSKR, each of which is discussed below in “Description of the Merger—Termination of the Merger Agreement.” The Merger Agreement provides that, in connection with the termination of the Merger Agreement under specified circumstances and subject to applicable law, a third-party suitor of FSKR may be required to pay a termination fee of $126.2 million to FSK and a third-party suitor of FSK may be required to pay a termination fee of $90.8 million to FSKR. See “Description of the Merger Agreement—Termination of the Merger Agreement” for a discussion of the circumstances that could result in the payment of the termination fees. FSK or FSKR, as applicable, will be the entities entitled to receive any termination fees under the Merger Agreement. The FSKR Board and FSK Board have each approved the amount of the termination fees.

Reasons for the Merger

The Fund Boards (including each of the Independent Directors) consulted with the applicable Fund Parties’ management, the Advisor, as well as their respective legal and other advisors and considered numerous factors and, as a result, the Fund Boards, including each of the Independent Directors, determined that the Merger is in the respective Fund Parties’ best interests and advisable and in the best interests of the applicable Fund Parties’ stockholders, and that the applicable Fund Parties’ stockholders will not suffer economic dilution as a result of the Merger.



 

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Certain material factors considered by the Fund Boards, including the Independent Directors, that favored the conclusion of the Fund Boards that the Merger is in the respective Fund Parties’ best interests and advisable and in the best interests of the applicable Fund Parties’ stockholders included, among others:

 

   

the anticipated increased scale and operating leverage that the combined company would have as a result of the Merger;

 

   

despite portfolio overlap, the combined company would be expected to have a portfolio that is more diversified than the portfolio of either Fund Party on a standalone basis;

 

   

an expected reduction in general and administrative expenses that would result from the Merger relative to the Fund Parties’ combined assets;

 

   

based on management’s projections, the expected net reduction in the combined company’s investment advisory fees taking into consideration the Proposed FSK Investment Advisory Agreement along with the proposed Incentive Fee Waiver (as defined below);

 

   

the issuance of FSK Common Stock in the Merger will significantly increase FSK’s market capitalization and this could result in increased profile and additional market coverage of FSK by financial analysts and potentially increased investor focus on the combined company;

 

   

the Fund Boards considered that the Merger is expected to unlock capital for deployment, and provide the combined company with the opportunity to take advantage of attractive near-term investment opportunities and provide greater access to debt financing at attractive pricing;

 

   

the investment programs of each of the Fund Parties, including the fact that the Fund Parties have substantially identical investment objectives, strategies and risks and that each focuses primarily on making senior secured credit investments in privately-held middle market companies;

 

   

that the combined company would have the same Advisor and management team, as well as the overall investment and operational performance of the Advisor since taking over the management of the Fund Parties in April 2018, as well as the Advisor’s demonstrated competence in evaluating the Merger for the benefit of stockholders of each of the Fund Parties;

 

   

that the Merger will be executed on a NAV-for-NAV basis (as determined shortly before the Closing Date on the basis of methodologies that were considered and approved by the Fund Boards), and therefore the Fund Parties’ existing stockholders will not be diluted on a NAV basis as a result of the Merger;

 

   

with respect to the FSK Independent Directors, the oral opinion, which was subsequently confirmed by delivery of a written opinion, dated November 19, 2020, rendered to the FSK Independent Directors by RBCCM that, as of the date of such opinion, and based on and subject to the assumptions, qualifications, limitations and other matters set forth therein, the RBCCM September Exchange Ratio (as defined below), was fair, from a financial point of view, to FSK, as more fully described in the section entitled “The Merger—Opinion of FSK’s Financial Advisor”;

 

   

with respect to the FSKR Independent Directors, the oral opinion (subsequently confirmed in writing), dated November 19, 2020, rendered to the FSKR Independent Directors by J.P. Morgan that, as of the date of such opinion and based on and subject to the assumptions made, matters considered and limitations set forth therein, the J.P. Morgan September Exchange Ratio (as defined below), was fair, from a financial point of view, to the holders of FSKR Common Stock other than the Advisor and its other affiliates, as more fully described in the section entitled “The Merger—Opinion of FSKR’s Financial Advisor”;

 

   

the position of the combined company as compared to each Fund Party on a standalone basis, and the fact that Merger does not limit the strategic alternatives available for the combined company following



 

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the Merger and may enhance the optionality the combined company would have as compared to either individual Fund Party, including with respect to future bolt-on acquisitions; and

 

   

that the Merger is anticipated to be treated as a tax-free reorganization for U.S. federal income tax purposes, except with respect to any cash received in lieu of fractional shares.

The foregoing list does not include all the factors that the Fund Boards considered in approving the proposed Merger and the Merger Agreement and recommending that the Fund Parties’ stockholders approve, with respect to the FSK Board and the FSK Independent Directors, the FSK Merger Proposal, the FSK Stock Issuance Proposal and the FSK Advisory Amendment Proposal, as applicable, and in the case of the FSKR Board and the FSKR Independent Directors, the FSKR Merger Proposal. For a further discussion of the material factors considered by the Fund Boards, see “The Merger—Reasons for the Merger.”

Opinion of the Financial Advisor to FSK

The FSK Independent Directors retained RBCCM to provide its opinion as to the fairness, from a financial point of view, to FSK of the RBCCM September Exchange Ratio (as defined below) provided for pursuant to the terms and subject to the conditions set forth in the Merger Agreement. RBCCM has rendered an oral opinion, which was subsequently confirmed by delivery of a written opinion, dated November 19, 2020, to the FSK Independent Directors to the effect that, as of the date of such opinion, and based on and subject to the assumptions, qualifications, limitations and other matters set forth therein, the RBCCM September Exchange Ratio was fair, from a financial point of view, to FSK. For the avoidance of doubt, RBCCM expressed no opinion as to the Exchange Ratio calculated as of the Determination Date.

RBCCM’s advice (written or oral) and opinion were provided for the benefit, information and assistance of the FSK Independent Directors (in their capacity as such) in connection with their evaluation of the Merger. RBCCM’s opinion did not address the underlying business decision of FSK to engage in the Merger or the relative merits of the Merger compared to any alternative business strategy or transaction that may be available to FSK or in which FSK might engage. RBCCM’s opinion does not constitute an opinion or recommendation to any holder of FSK Common Stock as to how any such holder should vote or act with respect to the Merger or any proposal to be voted upon in connection with the Merger or otherwise.

The full text of RBCCM’s written opinion, dated November 19, 2020, is attached to this joint proxy statement/prospectus as Annex B, and constitutes part of this joint proxy statement/prospectus. The opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations and qualifications of the review undertaken by RBCCM in rendering its opinion.

For a further discussion of RBCCM’s opinion, FSK’s relationship with RBCCM and the terms of RBCCM’s engagement, see “The Merger—Opinion of FSK’s Financial Advisor” beginning on page 47 of this joint proxy statement/prospectus.

Opinion of the Financial Advisor to FSKR

In connection with the Merger, J.P. Morgan rendered to the FSKR Independent Directors on November 19, 2020 its oral opinion, and confirmed its oral opinion by delivering to the FSKR Independent Directors its written opinion, dated November 19, 2020, as discussed in more detail in the section entitled “Opinion of FSKR’s Financial Advisor,” to the effect that, as of the date of such opinion and based on and subject to the assumptions made, matters considered and limitations set forth therein, the J.P. Morgan September Exchange Ratio (as defined on page 57) was fair, from a financial point of view, to the holders of FSKR Common Stock other than the Advisor and its other affiliates. The full text of J.P. Morgan’s opinion, which sets forth the assumptions



 

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made, matters considered and limits on the review undertaken by J.P. Morgan in preparing the opinion, is attached as Annex D to this joint proxy statement/prospectus. J.P. Morgan’s written opinion was addressed to the FSKR Independent Directors (in their capacity as such) in connection with and for the purposes of their evaluation of the proposed Merger, was directed only to the J.P. Morgan September Exchange Ratio and did not address any other aspect of the Merger. J.P. Morgan expressed no opinion as to the underlying decision by FSKR to engage in the Merger or enter into the Merger Agreement. J.P. Morgan’s opinion did not constitute a recommendation to the FSKR Board or the FSKR Independent Directors in connection with the Merger, and it does not constitute a recommendation to any stockholder of FSKR or of any other entity as to how such stockholder should vote with respect to the Merger or any other matter.

Fund Party Stockholders Do Not Have Dissenters’ Rights

Stockholders of the Fund Parties will not be entitled to exercise dissenters’ rights in connection with the Merger under the laws of the State of Maryland.



 

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RISK FACTORS

In addition to the other information included in this document, stockholders should carefully consider the matters described below in determining whether to approve (1) in the case of FSK stockholders, (a) the FSK Merger Proposal, (b) the Merger Stock Issuance Proposal and (c) the FSK Advisory Agreement Amendment Proposal and (2) in the case of FSKR stockholders, the FSKR Merger Proposal. The information in “Risk Factors” in Part I, Item 1A of FSK’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in Item 1A, Part II of FSK’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and September 30, 2020 is incorporated herein by reference for general risks related to FSK. The information in “Risk Factors” in Part I, Item 1A of FSKR’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in Item 1A, Part II of FSKR’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and September 30, 2020 is incorporated herein by reference for general risks related to FSK. The risks, as set out below and incorporated by reference herein are not the only risks FSK and FSKR and, following the Merger, the combined company, face. Additional risks and uncertainties not currently known to FSK or FSKR or that they currently deem to be immaterial also may materially adversely affect their or, following the Merger, the combined company’s, business, financial condition or operating results. If any of the following events occur, FSK or FSKR or, following the Merger, the combined company’s, business, financial condition or results of operations could be materially adversely affected. See also “Incorporation by Reference” and “Where You Can Find More Information” in this joint proxy statement/prospectus.

Risks Relating to the Merger

Because the market price of FSK Common Stock will fluctuate, FSKR common stockholders cannot be sure of the market value of the Merger Consideration they will receive until the closing of the Merger.

The market value of the Merger Consideration may vary from the closing price of FSK Common Stock and FSKR Common Stock, respectively, on the date the Merger was announced, on the date that this joint proxy statement/prospectus was mailed to stockholders, on the date of the Special Meetings and on the date the Merger is completed and thereafter. Any change in the market price of FSK Common Stock prior to completion of the Merger will affect the market value of the Merger Consideration that FSKR stockholders will receive upon completion of the Merger.

Accordingly, at the time of the FSKR Special Meeting, FSKR stockholders will not know or be able to calculate the market value of the Merger Consideration they would receive upon completion of the Merger. Neither of the Fund Parties is permitted to terminate the Merger Agreement or resolicit the vote of their respective stockholders solely because of changes in the market price of shares of FSK Common Stock. There will be no adjustment to the Merger Consideration for changes in the market price of shares of FSK Common Stock. Changes in the market price of FSK Common Stock may result from a variety of factors, including, among other things, (1) general economic trends and other external factors, including the continued impact of the COVID-19 pandemic; (2) changes in regulatory policies or tax guidelines, particularly with respect to RICs or BDCs; (3) loss of RIC or BDC status; (4) changes in earnings or variations in operating results; (5) changes in the value of its portfolio of investments; (6) changes in accounting guidelines governing valuation of its investments; (7) any shortfall in revenue or net income or any increase in losses from levels expected by investors; (8) departure of its investment adviser or certain of its key personnel; and (9) loss of a major funding source. These factors are generally beyond the control of FSKR and FSK. See “Special Note Regarding Forward-Looking Statements” for other factors that could cause the market price of FSK Common Stock to change.

These factors are generally beyond the control of FSK and FSKR. Historical trading prices are not necessarily indicative of future performance. You should obtain current market quotations for shares of FSK Common Stock and FSKR Common Stock prior to the applicable Special Meeting.

 

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Sales of shares of FSK Common Stock after the completion of the Merger may cause the market price of FSK Common Stock to decline.

Based on the number of outstanding shares of FSKR Common Stock as of September 30, 2020, the NAV per share of FSK Common Stock and the NAV per share of FSKR Common Stock on such date, FSK would issue approximately 171.9 million shares of FSK Common Stock pursuant to the Merger Agreement. Former FSKR stockholders may decide not to hold the shares of FSK Common Stock that they will receive pursuant to the Merger Agreement. Certain FSKR stockholders, such as funds with limitations on their permitted holdings of stock in individual issuers, may be required to sell the shares of FSK Common Stock that they receive pursuant to the Merger Agreement. In addition, FSK stockholders may decide not to hold their shares of FSK Common Stock after completion of the Merger. In each case, such sales of FSK Common Stock could have the effect of depressing the market price for FSK Common Stock and may take place promptly following the completion of the Merger.

Stockholders of the Fund Parties will experience a reduction in percentage ownership and voting power in the combined company as a result of the Merger.

Stockholders of the Fund Parties will experience a substantial reduction in their respective percentage ownership interests and effective voting power in respect of the combined company relative to their respective percentage ownership interests in the Fund Parties prior to the Merger unless they hold a comparable or greater percentage ownership in the other Fund Party. Consequently, stockholders of the Fund Parties should expect to exercise less influence over the management and policies of the combined company following the Merger than they currently exercise over the management and policies of the applicable Fund Party or Fund Parties.

If the Merger is consummated, based on the number of shares of FSK Common Stock issued and outstanding on September 30, 2020, the NAV per share of FSK Common Stock and the NAV per share of FSKR Common Stock, each as of September 30, 2020, it is expected that FSK stockholders will own approximately 42% of the outstanding stock of the combined company and FSKR stockholders will own approximately 58% of the outstanding stock of the combined company. In addition, both prior to and after completion of the Merger, subject to certain restrictions in the Merger Agreement and stockholder approval, FSK may issue additional shares of FSK Common Stock (including, subject to certain restrictions under the 1940 Act, at prices below FSK Common Stock’s then current NAV per share), all of which would further reduce the percentage ownership of the combined company held by former FSKR stockholders and current FSK stockholders. In addition, the issuance or sale by FSK of shares of FSK Common Stock at a discount to NAV poses a risk of dilution to stockholders.

FSK may be unable to realize the benefits anticipated by the Merger, including estimated cost savings, or it may take longer than anticipated to achieve such benefits.

The realization of certain benefits anticipated as a result of the Merger will depend in part on the integration of FSKR’s investment portfolio with FSK’s and the integration of FSKR’s business with FSK’s. There can be no assurance that FSKR’s investment portfolio or business can be operated profitably or integrated successfully into FSK’s operations in a timely fashion or at all. The dedication of management resources to such integration may detract attention from the day-to-day business of the combined company and there can be no assurance that there will not be substantial costs associated with the transition process or there will not be other material adverse effects as a result of these integration efforts. Such effects, including, but not limited to, incurring unexpected costs or delays in connection with such integration and failure of FSKR’s investment portfolio to perform as expected, could have a material adverse effect on the financial results of the combined company.

FSK also expects to achieve certain synergies and cost savings from the Merger when the two companies have fully integrated their portfolios. It is possible that the estimates of the synergies and the potential cost savings could ultimately be incorrect. The cost savings estimates also assume FSK will be able to combine the

 

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operations of FSKR with its operations in a manner that permits those cost savings to be fully realized. If the estimates turn out to be incorrect or if FSK is not able to successfully combine FSKR’s investment portfolio or business with the operations of FSK, the anticipated synergies and cost savings may not be fully realized or realized at all or may take longer to realize than expected.

The Merger may trigger certain “change of control” provisions and other restrictions in contracts of the Fund Parties or their affiliates and the failure to obtain any required consents or waivers could adversely impact the combined company.

Certain agreements of the Fund Parties or their affiliates will or may require by their terms the consent or waiver of one or more counterparties in connection with the Merger. The failure to obtain any such consent or waiver may permit such counterparties to terminate, or otherwise increase their rights or any of the Fund Parties’ obligations under, any such agreement because the Merger or other transactions contemplated by the Merger Agreement may violate an anti-assignment, change of control or similar provision relating to any of such transactions. If this occurs, FSK may have to seek to replace that agreement with a new agreement or seek an amendment to such agreement. The Fund Parties cannot assure you that FSK will be able to replace or amend any such agreement on comparable terms or at all.

If any such agreement is material, the failure to obtain consents, amendments or waivers under, or to replace on similar terms or at all, any of these agreements could adversely affect the financial performance or results of operations of the combined company following the Merger, including preventing FSK from operating a material part of FSKR’s business.

In addition, the consummation of the Merger may violate, conflict with, result in a breach of provisions of, or the loss of any benefit under, constitute a default (or an event that, with or without notice or lapse of time or both, would constitute a default) under, or result in the termination, cancellation, acceleration or other change of any right or obligation (including any payment obligation) under, certain agreements of one or more of the Fund Parties. Any such violation, conflict, breach, loss, default or other effect could, either individually or in the aggregate, have a material adverse effect on the financial condition, results of operations, assets or business of the combined company following completion of the Merger.

The opinions delivered to the FSK Independent Directors and the FSKR Independent Directors from their respective financial advisors will not reflect changes in circumstances between signing the Merger Agreement and completion of the Merger.

Neither FSK nor FSKR has obtained an updated opinion as of the date of this joint proxy statement/prospectus from their respective financial advisors and neither anticipates obtaining an updated opinion prior to the Closing Date. Changes in the operations and prospects of FSK or FSKR, general market and economic conditions and other factors that may be beyond the control of FSK or FSKR, and on which their respective financial advisors’ opinions were based, may significantly alter the value of FSKR or the prices of shares of FSK Common Stock by the time the Merger is completed. The opinions do not speak as of the time the Merger will be completed or as of any date other than the date of such opinions. Because neither FSK nor FSKR currently anticipates asking their respective financial advisors to update their opinions, the opinions will not address the fairness of the Exchange Ratio from a financial point of view at the time the Merger is completed. The recommendations of the FSK Board and the FSKR Board are that their respective stockholders vote “FOR” approval of the matters described in this joint proxy statement/prospectus are made as of the date of this joint proxy statement/prospectus. For a description of the opinion that the FSK Independent Directors received from their financial advisor, see “The Merger—Opinion of FSK’s Financial Advisor.” For a description of the opinion that the FSKR Independent Directors received from their financial advisor, see “The Merger—Opinion of FSKR’s Financial Advisor.”

 

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If the Merger does not close, neither of the Fund Parties will benefit from the expenses incurred in its pursuit.

The Merger may not be completed. If the Merger is not completed, the Fund Parties will have incurred substantial expenses for which no ultimate benefit will have been received. Each of the Fund Parties has incurred out-of-pocket expenses in connection with the Merger for investment banking, legal and accounting fees and financial printing and other related charges, much of which will be incurred even if the Merger is not completed.

The termination of the Merger Agreement could negatively impact each of the Fund Parties.

If the Merger Agreement is terminated, there may be various consequences, including: (1) the Fund Parties’ businesses may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger, (2) in the case of FSKR, it may not be able to find a party willing to pay an equivalent or more attractive price than the price FSK agreed to pay in the Merger and (3) the market price of FSK Common Stock and/or FSKR Common Stock might decline to the extent that the market price prior to termination reflects a market assumption that the Merger will be completed.

The Merger Agreement limits the Fund Parties’ ability to pursue alternatives to the Merger.

The Merger Agreement contains provisions that limit each Fund Parties’ ability to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of other Fund Party. These provisions, which are typical for transactions of this type, and include a termination fee by a third-party suitor of a Fund Party to the other Fund Party under certain circumstances, might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of such Fund Party from considering or proposing that acquisition even if it were prepared to pay consideration with a higher per share market price than that proposed in the Merger or might result in a potential competing acquirer proposing to pay a lower per share price to acquire a Fund Party than it might otherwise have proposed to pay.

The Merger is subject to closing conditions, including stockholder approvals, that, if not satisfied or waived, will result in the Merger not being completed, which may result in material adverse consequences to FSK’s and FSKR’s business and operations.

The Merger is subject to closing conditions, including certain approvals of FSK’s and FSKR’s respective stockholders that, if not satisfied, will prevent the Merger from being completed. The closing condition that FSK’s stockholders approve the issuance of shares of FSK Common Stock to be issued in connection with the Merger is a requirement of the NYSE and may not be waived and must be satisfied for the Merger to be completed. In addition, the Merger Agreement provides that the approval of the FSK Advisory Agreement Amendment Proposal by FSK stockholders is a condition to the closing of the Merger. FSK currently expects that all directors and executive officers of FSK will vote their shares of FSK Common Stock in favor of the Merger Stock Issuance Proposal and the Proposed FSK Advisory Agreement Amendment Proposal. If FSK’s stockholders do not approve the Merger Stock Issuance Proposal or the FSK Advisory Agreement Amendment Proposal and the Merger is not completed, the resulting failure of the Merger could have a material adverse impact on FSK’s and FSKR’s business and operations. The closing condition that FSKR’s stockholders approve the Merger may not be waived under applicable law and must be satisfied for the Merger to be completed. FSKR currently expects that all of its directors and executive officers will vote their shares of FSKR Common Stock in favor of the FSKR Merger Proposal. If FSKR’s stockholders do not approve the Merger and the Merger is not completed, the resulting failure of the Merger could have a material adverse impact on FSKR’s and FSK’s business and operations. In addition to the required approvals of FSK’s and FSKR’s stockholders, the Merger is subject to a number of other conditions beyond FSK’s and FSKR’s control that may prevent, delay or otherwise materially adversely affect its completion. Neither FSK nor FSKR can predict whether and when these other conditions will be satisfied.

 

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The Fund Parties will be subject to operational uncertainties and contractual restrictions while the Merger is pending.

Uncertainty about the effect of the Merger may have an adverse effect on the Fund Parties and, consequently, on the combined company following completion of the Merger. These uncertainties may impair the Fund Parties’ abilities to motivate key personnel until the Merger is consummated and could cause those that deal with the Fund Parties to seek to change their existing business relationships with the Fund Parties. In addition, the Merger Agreement restricts the Fund Parties from taking actions that they might otherwise consider to be in their best interests. These restrictions may prevent FSK and FSKR from pursuing certain business opportunities that may arise prior to the completion of the Merger. Please see the section entitled “Description of the Merger Agreement—Conduct of Business Pending Completion of the Merger” for a description of the restrictive covenants to which the Fund Parties are subject.

The Fund Parties may waive one or more conditions to the Merger without resoliciting stockholder approval.

Certain conditions to the Fund Parties’ obligations to complete the Merger may be waived, in whole or in part, to the extent legally allowed, either unilaterally or by agreement of the Fund Parties. In the event that any such waiver does not require solicitation of stockholders, the parties to the Merger Agreement will have the discretion to complete the Merger without seeking further stockholder approval. The conditions requiring the approval of the Fund Parties’ stockholders, however, cannot be waived.

The market price of FSK Common Stock after the Merger may be affected by factors different from those affecting FSK Common Stock currently.

The businesses of FSK and FSKR differ in some respects and, accordingly, the results of operations of the combined company and the market price of FSK Common Stock after the Merger may be affected by factors different from those currently affecting the independent results of operations of each of FSK and FSKR, including a larger stockholder base. Accordingly, the historic trading prices and financial results of FSK may not be indicative of these matters for the combined company following the Merger. For a discussion of the business of FSK and of certain factors to consider in connection with its business, see “Item 1—Business” in the FSK Form 10-K. For a discussion of the business of FSKR and of certain factors to consider in connection with its business, see “Item 1—Business” in the FSKR Form 10-K. As described elsewhere in the joint proxy statement/prospectus, the risks associated with an investment in each of the Fund Parties are substantially identical.

Litigation filed against the Fund Parties in connection with the Merger could result in substantial costs and could delay or prevent the Merger from being completed.

From time to time, the Fund Parties may be subject to legal actions, including securities class action lawsuits and derivative lawsuits, as well as various regulatory, governmental and law enforcement inquiries, investigations and subpoenas in connection with the Merger. These or any similar securities class action lawsuits and derivative lawsuits, regardless of their merits, may result in substantial costs and divert management time and resources. An adverse judgment in such cases could have a negative impact on the Fund Parties’ liquidity and financial condition or could prevent the Merger from being completed.

The Merger may not be treated as a tax-free reorganization under Section 368(a) of the Code.

The Fund Parties intend that the Merger will qualify as a tax-free reorganization under Section 368(a) of the Code. If the IRS or a court determines that the Merger should not be treated as a tax-free reorganization under Section 368(a) of the Code, then a U.S. stockholder would generally recognize gains or losses for U.S. federal income tax purposes upon the exchange of FSKR Common Stock for FSK Common Stock in the Merger. For more information on certain U.S. federal income tax consequences of the Merger, see “Certain Material U.S. Federal Income Tax Consequences of the Merger.”

 

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COMPARATIVE FEES AND EXPENSES

Comparative Fees and Expenses Relating to the Merger

The following tables are intended to assist you in understanding the costs and expenses that an investor in the common stock of each of the Fund Parties bears directly or indirectly, and based on the assumptions set forth below, the pro forma costs and expenses estimated to be incurred by the combined company in the first year following the Merger. The Fund Parties caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this document contains a reference to fees or expenses paid or to be paid by “you,” “FSK” or “FSKR,” stockholders will indirectly bear such fees or expenses as investors in FSK or FSKR, as applicable.

 

     Actual     Pro Forma  
     FSK     FSKR     Fund Parties
Merged
 

Stockholder transaction expenses (as a percentage of offering price)

      

Sales load paid by each of the Fund Parties

     None (1)       None (1)       None (1)  

Offering expenses borne by each of the Fund Parties

     None (1)       None (1)       None (1)  

Distribution reinvestment plan expenses

     None (2)       None (2)       None (2)  
  

 

 

   

 

 

   

 

 

 

Total stockholder transaction expenses paid by each of the Fund Parties

     None       None       None  
  

 

 

   

 

 

   

 

 

 

 

     Actual     Pro Forma  
     FSK     FSKR     Fund Parties
Merged
 

Estimated annual expenses (as a percentage of consolidated net assets attributable to common stock)(3)

      

Base management fee(4)

     3.32     2.72     3.03

Incentive fee(5) (6)

     0.00     1.93     1.78

Interest payments on borrowed funds(7)

     5.76     3.45     4.43

Other expenses(8)

     0.94     0.66     0.62

Acquired Fund Fees and Expenses

     0.62     0.36     0.48 %
  

 

 

   

 

 

   

 

 

 

Total annual expenses (estimated)(9)

     10.64     9.12     10.34
  

 

 

   

 

 

   

 

 

 

 

(1)

The table does not include any sales load (underwriting discount or commission) that stockholders may have paid in connection with their purchase of shares of FSK Common Stock or FSKR Common Stock.

 

(2)

The estimated expenses associated with the Fund Parties’ respective distribution reinvestment plans are included in “Other expenses.”

 

(3)

“Consolidated net assets attributable to common stock” equals average net assets for the nine months ended September 30, 2020. For the pro forma column, the average net assets of the Fund Parties merged on a pro forma basis as of September 30, 2020 were used.

 

(4)

The Fund Parties are externally managed by the Advisor. Each Fund Parties’ base management fee is calculated at an annual rate of 1.50% of the average value of their respective gross assets excluding cash and cash equivalents (equal to total assets set forth on the respective Fund Party’s consolidated balance sheet) and 1.0% on all assets financed using leverage over 1.0x debt-to-equity, of which gross assets are assumed to equal 231% and 184% of FSK’s and FSKR’s average net assets of $3.2 billion and $4.4 billion, respectively, for the nine months ended September 30, 2020. Following completion of the Merger, the combined company will be externally managed by the Advisor. The pro forma base management fee has been calculated in a manner consistent with the terms and conditions of the Existing FSK Investment Advisory Agreement.

 

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(5)

The incentive fee in the Fund Parties’ respective investment advisory agreements in effect prior to the Merger consists of two parts. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, and equals 20.0% of the respective Fund Party’s “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on its net assets, equal to 1.75% per quarter, or an annualized hurdle rate of 7.0%. As a result, the Advisor will not earn this incentive fee for any quarter until the respective Fund Party’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.75%. Once the respective Fund Parties’ pre-incentive fee net investment income in any quarter exceeds the hurdle rate, the Advisor will be entitled to a “catch-up” fee equal to the amount of the respective Fund Party’s pre-incentive fee net investment income in excess of the hurdle rate, until the respective Fund Party’s pre-incentive fee net investment income for such quarter equals 2.1875%, or 8.75% annually, of the value of the respective Fund Party’s adjusted capital. Thereafter, the Advisor will be entitled to receive 20.0% of the respective Fund Party’s pre-incentive fee net investment income. Under the investment advisory agreement of the Fund Parties in effect prior to the Merger, the subordinated incentive fee on income is subject to a cap (with respect to FSKR, commencing with the quarter ended March 31, 2022), equal to (1) 20.0% of the “per share pre-incentive fee return” for the then-current and eleven preceding calendar quarters (or such fewer number of quarters and commencing with the quarter ended March 31, 2020, in the case of FSKR) minus the cumulative “per share incentive fees” accrued and/or payable for the eleven preceding calendar quarters (commencing with March 31, 2020, in respect of FSKR) multiplied by (2) the weighted average number of shares of the applicable Fund Party outstanding during the calendar quarter (or any portion thereof) for which the subordinated incentive fee on income is being calculated. The pro forma subordinated incentive fee on income has been calculated in a manner consistent with the terms and conditions of the applicable investment advisory agreement.

The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the applicable investment advisory and administrative services agreement). This fee equals 20.0% of the respective Fund Party’s incentive fee capital gains, which equals its realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. The Fund Parties accrue for the capital gains incentive fee, which, if earned, is paid annually. The Fund Parties accrue the incentive fee on capital gains based on net realized and unrealized gains; however, the fee payable to the Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. The amount in the table for the Fund Parties assumes that there is no incentive fee on capital gains and is based on the net unrealized depreciation as of September 30, 2020. Such amounts are expressed as a percentage of the average net assets as of such date.

 

(6)

After the closing of the Merger, FSK and FSKR will enter into the Proposed FSK Investment Advisory Agreement. The Proposed FSK Investment Advisory Agreement is substantially similar to the Existing FSK Investment Advisory Agreement except that the subordinated incentive fee on income will equal 17.5% (instead of 20.0%) of FSK’s “pre-incentive fee net investment income” for the immediately preceding quarter, subject to the hurdle rate. Under the Proposed FSK Investment Advisory Agreement, once FSK’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, the Advisor will be entitled to a “catch-up” fee equal to the amount of the respective Fund Party’s pre-incentive fee net investment income in excess of the hurdle rate, until the respective Fund Party’s pre-incentive fee net investment income for such quarter equals 2.12%, or 8.48% annually, of the value of FSK’s adjusted capital. Thereafter, the Advisor will be entitled to receive 17.5% of the respective Fund Party’s pre-incentive fee net investment income. The Proposed FSK Investment Advisory Agreement does not contain a total return lookback provision applicable to the subordinated incentive fee on income. The pro forma subordinated incentive fee on income has been calculated in a manner consistent with the terms and conditions of the Proposed FSK Investment Advisory Agreement.

 

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(7)

The figure in the table for FSK assumes that it borrows the full amount available under each financing facility as of September 30, 2020 and that the annualized weighted average borrowing costs under the financing facilities, including amortized costs and expenses, is 3.65%. Because the total assumed borrowing ($5.1 billion) represents 158% of its average net assets for the nine months ended September 30, 2020 ($3.2 billion), the borrowing cost as a percentage of net assets set forth in the table above is 5.76% (or 158% of 3.65%).

The figure in the table for FSKR assumes that it borrows the full amount available under each financing facility as of September 30, 2020 and that the annualized weighted average borrowing costs under the financing facilities, including amortized costs and expenses, is 3.11%. Because the total assumed borrowing ($4.9 billion) represents 111% of its average net assets for the six months ended September 30, 2020 ($4.4 billion), the borrowing cost as a percentage of net assets set forth in the table above is 3.45 % (or 111% of 3.11%).

 

(8)

Other expenses include accounting, legal and auditing fees and excise and state taxes, as well as the reimbursement of the compensation of administrative personnel and fees payable to the Fund Parties’ directors who do not also serve in an executive officer capacity for the Fund Parties or the Advisor. The amount presented in the table reflects actual amounts incurred during the nine months ended September 30, 2020, including anticipated excise taxes to be accrued in the fourth quarter of 2020.

 

(9)

“Total annual expenses” as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. The Fund Parties borrow money to leverage and increase their total assets. The SEC requires that the “Total annual expenses” percentage be calculated as a percentage of net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period), rather than the total assets, including assets that have been funded with borrowed monies.

Example

The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in FSK, FSKR or the combined company’s common stock following the Merger. In calculating the following expense amounts, each of FSK and FSKR has assumed that it would have no additional leverage and that its annual operating expenses would remain at the levels set forth in the tables above. Transaction expenses related to the Merger are not included in the following examples.

 

    

 

    

 

    

 

    

 

 

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return (none of which is subject to the incentive fee on capital gains):

           

FSK

   $ 103      $ 293      $ 462      $ 808  

FSKR

   $ 71      $ 209      $ 340      $ 645  

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return (all of which is subject to the incentive fee on capital gains, which was estimated at 1.0% of net assets):

           

FSK

   $ 113      $ 316      $ 493      $ 842  

FSKR

   $ 81      $ 234      $ 378      $ 700  

 

    

 

    

 

    

 

    

 

 

Pro forma combined company following the Merger

           

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return (none of which is subject to the incentive fee on capital gains):

   $ 84      $ 243      $ 392      $ 718  

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return (all of which is subject to the incentive fee on capital gains, which was estimated at 1.0% of net assets):

   $ 93      $ 268      $ 426      $ 764  

 

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The above table is to assist you in understanding the various costs and expenses that an investor in FSK, FSKR or, following the Merger, the combined company’s, common stock will bear directly or indirectly. Because the example assumes, as required by the SEC, that no subordinated incentive fee on income would be accrued and payable in any of the indicated time periods, performance will vary and may result in a return greater or less than 5%. If FSK or FSKR were to achieve sufficient returns on its investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, its expenses, and returns to its investors, would be higher. In addition, while the example assumes reinvestment of all distributions at NAV, reinvestment of distributions under the distribution reinvestment plans may occur at a price per share that differs from the then-current NAV per share of common stock of the respective company.

The example and the expenses in the table above should not be considered a representation of FSK’s, FSKR’s, or, following the Merger, the combined company’s, future expenses, and actual expenses may be greater or less than those shown.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This joint proxy statement/prospectus contains statements that constitute forward-looking statements, which relate to each of the Fund Parties or, following the Merger, the combined company, regarding future events or the future performance or future financial condition of each of the Fund Parties or, following the Merger, the combined company. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about each of the Fund Parties or, following the Merger, the combined company, their industry and their respective beliefs and assumptions. The forward-looking statements contained in this joint proxy statement/prospectus involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including:

 

   

the ability of the Fund Parties to consummate the Merger described in this joint proxy statement/prospectus on the expected timeline, or at all;

 

   

the failure of FSK stockholders to approve (1) the FSK Merger Proposal, (2) the Merger Stock Issuance Proposal or (3) the FSK Advisory Agreement Amendment Proposal;

 

   

the failure of FSKR stockholders to approve the FSKR Merger Proposal;

 

   

the ability to the Fund Parties to realize the anticipated benefits of the proposed Merger;

 

   

the effects of disruption on the business of the Fund Parties from the proposed Merger;

 

   

the effect that the announcement, pendency or consummation of the Merger may have on the trading price of FSK Common Stock;

 

   

the effect that the announcement or pendency of the Merger may have on the trading price of FSKR Common Stock;

 

   

the combined company’s plans, expectations, objectives and intentions as a result of the Merger;

 

   

any potential termination of the Merger Agreement;

 

   

the pursuit by either of the Fund Parties of an alternative transaction upon the termination of the Merger Agreement;

 

   

changes in either of the Fund Parties’ NAVs in the future;

 

   

the Fund Parties’ future operating results;

 

   

the Fund Parties’ business prospects and the prospects of the companies in which it may invest;

 

   

the impact of the investments the Fund Parties expect to make and the competition for those investments;

 

   

the ability of the Fund Parties’ portfolio companies to achieve their objectives;

 

   

the Fund Parties’ current and expected financings and investments;

 

   

the Fund Parties receiving and maintaining corporate credit ratings and changes in the general interest rate environment;

 

   

the adequacy of the Fund Parties’ cash resources, financing sources and working capital;

 

   

the timing and amount of cash flows, distributions and dividends, if any, from the Fund Parties’ portfolio companies;

 

   

the Fund Parties’ contractual arrangements and relationships with third parties;

 

   

actual and potential conflicts of interest of the Fund Parties with the Advisor or future investment advisers or any of their respective affiliates;

 

   

the dependence of the Fund Parties’ future success on the general economy and its effect on the industries in which the Fund Parties may invest;

 

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the Fund Parties use of financial leverage;

 

   

the ability of the Advisor or any future investment adviser to the Fund Parties to locate suitable investments for the Fund Parties and to monitor and administer the Fund Parties’ investments;

 

   

the ability of the Advisor or any future investment adviser to the Fund Parties to attract and retain highly talented professionals;

 

   

the Fund Parties’ ability to maintain its qualification as RICs and as BDCs;

 

   

the effect of changes to tax legislation on the Fund Parties and the portfolio companies in which the Fund Parties may invest and their respective tax positions;

 

   

the tax status of the enterprises in which Fund Parties may invest; and

 

   

other factors described from time to time in each of the Fund Parties’ filings with the SEC.

In addition, words such as “anticipate,” “believe,” “expect,” “intend,” “seek,” “plan,” “estimate,” “pro forma” and similar expressions indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this joint proxy statement/prospectus involve risks and uncertainties. Actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including those factors set forth in “Risk Factors” and elsewhere in this joint proxy statement/prospectus. Other factors that could cause actual results to differ materially include:

 

   

changes in the economy;

 

   

risks associated with possible disruption in each of the Fund Parties’ operations or the economy generally due to terrorism, natural disasters or pandemics, such as COVID-19;

 

   

future changes in laws or regulations and conditions in each of the Fund Parties’ operating areas; and

 

   

the price at which shares of FSK Common Stock or FSKR Common Stock may trade on the NYSE.

The forward-looking statements included in this joint proxy statement/prospectus have been based on information available to the Fund Parties on the date of this joint proxy statement/prospectus. Except as required by the federal securities laws, neither of the Fund Parties undertakes any obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.

You are advised to consult any additional disclosures that the Fund Parties may make directly to you or through reports that they may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

The forward-looking statements and projections in this joint proxy statement/prospectus, any prospectus supplement or in periodic reports either of the Fund Parties may file under the Exchange Act are excluded from the safe harbor protection provided by Section 27A of the Securities Act and Section 21E of the Exchange Act.

 

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CAPITALIZATION

The following table sets forth (1) FSK’s and FSKR’s actual capitalization at September 30, 2020 and (2) FSK’s capitalization as adjusted to reflect the effects of the Merger. You should read this table together with FSK’s and FSKR’s condensed consolidated financial data and the pro forma financial information included elsewhere in this joint proxy statement/prospectus.

 

     As of September 30, 2020 (unaudited, dollar
amounts in millions, except per share data)
 
     Actual FSK     Actual
FSKR
    Pro Forma
Adjustments(1)
    Pro Forma
FSK
Combined
 

Cash and cash equivalents

   $ 136     $ 140     $ (21   $ 255  

Debt

        

Total Debt (principal outstanding)

   $ 3,957     $ 3,288     $       $ 7,245  

Stockholders’ Equity

        

Common stock

     —         —         $ —    

Capital in excess of par value

   $ 3,995     $ 5,842         8,750  

Accumulated undistributed net realized gain/loss on investments and gain/loss on foreign currency

     (1,069     (1,074       (1,069

Accumulated undistributed net investment income

     244       8         244  

Net unrealized appreciation (depreciation) on investments

   $ (143   $ (569       (712
  

 

 

   

 

 

     

 

 

 

Total stockholders’ equity

   $ 3,027     $ 4,207     $ (21   $ 7,213  
  

 

 

   

 

 

     

 

 

 

Total Capitalization

   $ 7,120     $ 7,635       $ 14,713  
  

 

 

   

 

 

     

 

 

 

Total shares outstanding

     123,755,965       170,597,301         295,677,965  

Net assets per share

   $ 24.46     $ 24.66       $ 24.39  

 

(1)

Pro forma adjustments related to estimated expenses associated with the Merger, and the distribution of undistributed income of FSKR prior to the Merger.

 

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THE SPECIAL MEETINGS

Date, Time and Place of the Special Meetings

The FSK Special Meeting will be held at [•] [a.m. / p.m.], Eastern Time, on [•], 2021, at 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112.

The FSKR Special Meeting will be held at [•] [a.m. / p.m.], Eastern Time, on [•], 2021, at 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112.

Purpose of the Special Meetings

FSK

At the FSK Special Meeting, FSK stockholders will be asked to approve (1) the FSK Merger Proposal, (2) the Merger Stock Issuance Proposal and (3) the FSK Advisory Agreement Amendment Proposal.

The FSK Board, including the independent directors, unanimously recommends that the FSK stockholders vote “FOR” the FSK Merger Proposal, “FOR” the Merger Stock Issuance Proposal and “FOR” the FSK Advisory Agreement Amendment Proposal.

FSKR

At the FSKR Special Meeting, FSKR stockholders will be asked to approve the FSKR Merger Proposal.

The FSKR Board, including the independent directors, unanimously recommends that the FSKR stockholders vote “FOR” the FSKR Merger Proposal.

Record Date

The Record Date is [•], 2021. The Record Date for each of the Fund Parties is established by the board of directors of such Fund Party, and only holders of record of shares of the applicable Fund Party’s common stock at the close of business on the Record Date are entitled to receive notice of the applicable special meeting and vote at the applicable special meeting. As of the Record Date, there were [•] shares of FSK Common Stock outstanding and [•] shares of FSKR Common Stock outstanding.

Quorum and Adjournments

Under each of the Fund Parties’ charter and bylaws, stockholders of such Fund Party entitled to cast one-third of the number of votes entitled to be cast, present in person or by proxy, constitutes a quorum for the transaction of business.

Abstentions will be treated as shares of common stock of such Fund Party that are present for purposes of determining the presence of a quorum for transacting business at each Special Meeting.

In the event that a quorum is not present a Special Meeting, the chairman of the applicable Special Meeting shall have the power to adjourn such Special Meeting from time to time to a date not more than 120 days after the Record Date originally fixed for the Special Meeting without notice, other than the announcement at the applicable Special Meeting, to permit further solicitation of proxies. Any business that might have been transacted at the applicable Special Meeting originally called may be transacted at any such adjourned session(s) at which a quorum is present.

 

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If it appears that there are not enough votes to approve the FSK Merger Proposal, the Merger Stock Issuance Proposal or the FSK Advisory Agreement Amendment Proposal at the FSK Special Meeting, the chairman of the FSK Special Meeting may adjourn the FSK Special Meeting from time to time to a date not more than 120 days after the Record Date originally fixed for the FSK Special Meeting without notice, other than announcement at the FSK Special Meeting, to permit further solicitation of proxies.

If it appears that there are not enough votes to approve the FSKR Merger Proposal at the FSKR Special Meeting, the chairman of the FSKR Special Meeting may adjourn the FSKR Special Meeting from time to time to a date not more than 120 days after the Record Date originally fixed for the FSKR Special Meeting without notice, other than announcement at the FSKR Special Meeting, to permit further solicitation of proxies.

Vote Required

Each share of common stock held by a holder of record of the Fund Parties as of the Record Date has one vote on each matter considered at the applicable Special Meeting.

FSK

The FSK Merger Proposal

Pursuant to the Merger Agreement, the approval of the FSK Merger Proposal requires the affirmative vote of holders of (1) a majority of the outstanding shares of FSK Common Stock entitled to vote at the FSK Special Meeting and (2) a majority of the outstanding shares of FSK Common Stock unaffiliated with the Advisor and its affiliates entitled to vote at the FSK Special Meeting. Abstentions will have the same effect on the outcome of the proposal as votes against the proposal.

The Merger Stock Issuance Proposal

The approval of the Merger Stock Issuance Proposal requires the affirmative vote of holders of a majority of the votes cast by holders of FSK Common Stock at a meeting at which a quorum is present. Abstentions will have no effect on the outcome of the proposal.

The FSK Advisory Agreement Amendment Proposal

The approval of the FSK Advisory Agreement Amendment Proposal requires the approval of a majority of the outstanding shares of FSK Common Stock. Under the 1940 Act, a majority of the outstanding shares of FSK Common Stock may be the lesser of: (1) 67% of the FSK Common Stock at the FSK Special Meeting if the holders of more than 50% of the outstanding shares of FSK Common Stock are present or represented by proxy or (2) more than 50% of the outstanding shares of FSK Common Stock. Abstentions will not count as affirmative votes cast and will therefore have the same effect as votes against the FSK Advisory Agreement Amendment Proposal.

FSKR

The FSKR Merger Proposal

Pursuant to the Merger Agreement, the approval of the FSKR Merger Proposal requires the affirmative vote of holders of (1) a majority of the outstanding shares of FSKR Common Stock entitled to vote at the FSKR Special Meeting and (2) a majority of the outstanding shares of FSKR Common Stock unaffiliated with the Advisor and its affiliates entitled to vote at the FSKR Special Meeting. Abstentions will have the same effect on the outcome of the proposal as votes against the proposal.

 

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Voting of Management

On the Record Date, FSK’s officers and directors owned and were entitled to vote [•] shares of FSK Common Stock, representing [less than 1%] of the outstanding shares of FSK Common Stock on the Record Date. FSKR’s officers and directors owned and were entitled to vote [•] shares of FSKR Common Stock, representing less than 1% of the outstanding shares of FSKR Common Stock on the Record Date.

Voting of Proxies

A Fund Party stockholder may vote in person at the applicable Special Meeting or by proxy in accordance with the instructions provided below. A Fund Party stockholder may also authorize a proxy by telephone or through the Internet using the toll-free telephone number or web address printed on the proxy card. Authorizing a proxy by telephone or through the Internet requires Fund Party stockholders to input the control number located on the proxy card. After inputting the control number, Fund Party stockholders will be prompted to direct their proxy to vote on each proposal. Fund Party stockholders will have an opportunity to review their directions and make any necessary changes before submitting their directions and terminating the telephone call or Internet link.

 

   

By Internet: www.proxyvote.com

 

   

By telephone: (800) 690-6903

 

   

By mail: Fund Party stockholders may vote by proxy by indicating their instructions on the enclosed proxy card, dating and signing the proxy card, and promptly returning the proxy card in the envelope provided, which requires no postage if mailed in the United States. Please allow sufficient time for the proxy card to be received on or prior to 5:00 p.m., Eastern Time, on the last business day before the Special Meetings.

 

   

In person: Fund Party stockholders may vote in person at the applicable Special Meeting by a requesting a ballot when they arrive. Fund Party stockholders will need to bring photo identification in order to be admitted to the applicable Special Meeting. To obtain directions to the Special Meetings, please call (877) 628-8575. If your shares of common stock are held through a broker and you attend the applicable Special Meeting in person, please bring a letter from your broker identifying you as the beneficial owner of the shares and authorizing you to vote your shares at the applicable Special Meeting.

Important notice regarding the availability of proxy materials for the FSK Special Meeting.

The Fund Parties’ joint proxy statement and the prospectus of FSK and the Fund Parties’ proxy cards are available at www.proxyvote.com.

Under Maryland law and each of the Fund Parties’ Bylaws, only the matters stated in the Fund Parties’ applicable Notice of Special Meeting of Stockholders will be presented for action at the applicable Special Meeting or at any adjournment or postponement of the applicable Special Meeting.

Revocability of Proxies

Submitting a proxy on the enclosed proxy card, by telephone, the Internet or any other permissible method does not preclude a Fund Party stockholder from voting in person at the applicable Special Meeting. Any Fund Party stockholder may change his, her or its vote using the Internet or telephone methods described herein, prior to the applicable cutoff time before the applicable Special Meeting, in which case only such Fund Party stockholder’s latest Internet or telephone proxy will be counted. Alternatively, a Fund Party stockholder may revoke his, her or its proxy and change his, her or its vote by signing and returning a new proxy dated as of a later date, or by attending the applicable Special Meeting and voting in person.

 

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However, an Fund Party stockholder’s attendance at the applicable Special Meeting will not automatically revoke his, her or its proxy, unless such Fund Party stockholder properly votes at the applicable Special Meeting, or specifically requests that his, her or its prior proxy be revoked by delivering a written notice of revocation to such Fund Party prior to the applicable Special Meeting at the following address: 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112, Attention: Stephen S. Sypherd, General Counsel and Secretary.

Solicitation of Proxies

The Fund Parties will each bear their own costs for the solicitation of proxies for their respective Special Meetings, provided that the costs and expenses of printing and mailing this joint proxy statement/prospectus will be borne equally by the Fund Parties. The Fund Parties have requested that brokers, nominees, fiduciaries and other persons holding shares of FSK Common Stock and FSKR Common Stock, as applicable, in their names, or in the name of their nominees, which are beneficially owned by others, forward the proxy materials to, and obtain proxies from, such beneficial owners.

In addition to the solicitation of proxies by mail, proxies may be solicited in person and by telephone or facsimile transmission by directors, officers or employees of Fund Parties and their respective affiliates (without special compensation therefor). Each of the Fund Parties has also retained Broadridge to assist in the solicitation of proxies, and it is expected that FSK will pay an estimated fee of approximately $[•] and FSKR will pay an estimated fee of approximately $[•], plus out-of-pocket expenses.

For more information regarding expenses related to the Merger, see “Questions and Answers about the Merger—Who is responsible for paying the expenses relating to completing the Merger?”

Dissenters’ and Appraisal Rights

Fund Party stockholders do not have the right to exercise dissenters’ or appraisal rights with respect to any matter to be voted upon at the Special Meetings.

Principal Accountants of the Fund Parties

The Fund Parties expect that a representative of Deloitte & Touche LLP will be present at each of the Special Meetings, who will have an opportunity to make a statement if he or she so chooses.

Stockholders Who Hold Their Shares in a Brokerage Account

If you are a beneficial owner whose shares are held of record by a broker, you must instruct the broker how to vote your shares. All of the proposals to be considered at the Special Meetings are non-routine matters. As a result, if you hold shares of common stock of the Fund Parties in street name through a broker, your broker will not be permitted to exercise voting discretion with respect to your shares of common stock for such proposals. For this reason, it is imperative that stockholders of the Fund Parties vote or provide instructions to their brokers as to how to vote with respect to each proposal to be considered at the applicable Special Meeting.

 

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THE MERGER

The discussion in this joint proxy statement/prospectus, which includes the material terms of the Merger and the principal terms of the Merger Agreement, is subject to, and is qualified in its entirety by reference to, the Merger Agreement, a copy of which is attached as Annex A to this joint proxy statement/prospectus.

General Description of the Merger

Pursuant to the terms of the Merger Agreement, at the Effective Time, Merger Sub will be merged with and into FSKR. FSKR will be the surviving corporation and will continue its existence as a corporation under the laws of the State of Maryland. As of the Effective Time, the separate corporate existence of Merger Sub will cease. Immediately after the occurrence of the Effective Time, in the Subsequent Combination, the surviving corporation will merge with and into FSK in accordance with the MGCL, with FSK as the surviving corporation.

If the Merger is consummated, each FSKR stockholder will be entitled to receive, for each share of FSKR Common Stock, that number of shares of FSK Common Stock with a NAV equal to the NAV of one share of FSKR Common Stock, in each case calculated as of the same date within 48 hours (excluding Sundays and holidays) prior to the closing of the Merger.

Following the Merger, FSK will continue its operations as conducted before the Merger.

Background of the Merger

The Fund Boards meet regularly to provide governance and oversight for the ongoing operation of the business of the Fund Parties, with a focus on investor protection and maximizing stockholder value. As part of that review and the Fund Boards’ ongoing evaluation of business opportunities, the Fund Boards have periodically considered and engaged in discussions concerning possible strategic options for the Fund Parties, including potential mergers, acquisitions, joint ventures and other similar transactions. A potential combination of FSK and FSKR was preliminarily discussed by the Fund Boards in connection with the merger of FSKR (f/k/a FS Investment Corporation II), FS Investment Corporation III, FS Investment Corporation IV and Corporate Capital Trust II in December 2019, and the subsequent listing of FSKR Common Stock on the NYSE in June 2020.

On June 30, 2020, the Fund Boards held a regular joint meeting. Representatives of each of the Advisor, Dechert LLP (“Dechert”), counsel to the Advisor and the Fund Parties, Stradley Ronon Stevens & Young, LLP (“Stradley”), independent legal counsel to the independent directors on the Fund Boards (the “Independent Directors”) and Miles & Stockbridge P.C. (“Miles & Stockbridge”), special counsel to the Fund Parties with regard to Maryland law issues, were also in attendance. Representatives of the Advisor gave an update on the Fund Parties, the industry and the recent listing of FSKR Common Stock on the NYSE. Representatives of the Advisor discussed the Advisor’s belief that there was an expectation in the market that the Fund Parties would merge. In addition, the Boards and representative of the Advisor discussed the benefits of reviewing strategic alternatives to determine the best strategic option to pursue at the time. Representatives of each of J.P. Morgan, RBCCM and two other nationally-recognized investment banks each presented to the Fund Boards regarding potentially serving as a financial advisor to one or both of the Fund Parties in connection with the Fund Boards’ potential review of strategic alternatives involving one or more of the Fund Parties. Representatives of Dechert, with support from representatives of each of Miles & Stockbridge and Stradley, reviewed governance matters with respect to the various strategic options, including the duties of the Fund Boards and process under Maryland law and the 1940 Act. The Independent Directors were tasked with considering the discussion and following up with management of the Fund Parties to facilitate responses to any additional questions or information requests in order to select which, if any, financial advisors they would like to engage if they wanted to embark on a review of strategic alternatives.

 

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On July 17, 2020 the Independent Directors met in executive session with representatives of Stradley to discuss the Fund Boards’ strategic options review and the presentations made by prospective financial advisors. The Independent Directors discussed the various strategic options presented to them and determined that pursuing a strategic review of the options available to the Fund Parties would be beneficial to shareholders of the Fund Parties. In addition, the Independent Directors narrowed the financial advisors to three from the four investment banks that had presented to them on strategic options of the Fund Parties and determined that a subset of the Independent Directors would meet with the remaining three investment banks to further investigate which, if any, would be chosen as financial advisor to the Fund Parties.

On July 23, 2020, the subset of Independent Directors, along with representatives of Stradley, met separately with representatives of each of the three remaining investment banks and discussed the presentations in executive session after the meetings. Following those presentations and related executive session, the Fund Boards held a regular joint meeting, at which representatives of each of the Advisor, Dechert and Stradley were also present. After the regular board meeting, the Independent Directors met in executive session with representatives of Stradley to discuss the financial advisor presentations. Following such executive session, representatives of each of the Advisor and Dechert joined the meeting. The Independent Directors discussed with representatives of the Advisor each of the financial advisors that had presented to the Fund Boards. The Independent Directors and representatives of the Advisor noted J.P. Morgan’s extensive experience in the types of transactions under consideration by the Fund Boards, and J.P. Morgan’s recent engagements (1) by FSKR in connection with the listing of FSKR Common Stock on the NYSE in June 2020, (2) by FSKR (then known as FS Investment Corporation II), FS Investment Corporation III, FS Investment Corporation IV and Corporate Capital Trust II in connection with their four-way merger in December 2019 and (3) and by FSK (then known as FS Investment Corporation) in connection with its merger with Corporate Capital Trust, Inc. in December 2018. The Independent Directors and representatives of the Advisor also discussed the strengths of RBCCM and the expected service level and attention from RBCCM. The Fund Boards then discussed qualifications and experience of all of the financial advisors, noting that all of the investment banks that presented were extremely qualified. The Fund Boards also discussed the differences in the proposed fees among the proposals by the prospective financial advisors. Management and representatives of Dechert then left the meeting and the executive session continued. Following further discussion, the Independent Directors approved engaging RBCCM as the financial advisor for the FSK Independent Directors and J.P. Morgan as the financial advisor for the FSKR Independent Directors, in each case with respect to a review of strategic alternatives, subject to receipt and review of conflicts disclosure.

Between July 23, 2020 and late August 2020, representatives of each of FSK, FSKR, Dechert, Stradley, RBCCM and J.P. Morgan negotiated engagement letters in connection with a review of strategic alternatives and a potential transaction.

On August 27, 2020, at a special telephonic meeting of the Fund Boards, the Fund Boards approved the engagement letters with RBCCM and J.P. Morgan, along with their related fees.

Following the August 27, 2020 meeting of the Fund Boards, the FSK Independent Directors entered into the engagement letter with RBCCM. On August 28, 2020, FSKR and the FSKR Independent Directors entered into the engagement letter with J.P. Morgan.

On August 28, 2020, representatives of RBCCM provided the Fund Boards with a presentation regarding, among other things, a BDC sector update and a deeper review of various strategic options. Following a review of certain financial information of FSK, representatives of RBCCM reviewed with the Fund Boards the following strategic alternatives: (1) continuation as a standalone business, (2) a potential business combination or merger transaction with a third-party, (3) a merger of FSK and FSKR and (4) potential bolt-on acquisitions.

On August 31, 2020, representatives of J.P. Morgan presented to the Fund Boards regarding BDC sector updates and a more in-depth review of the transaction alternatives available to FSKR. Following a review of

 

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certain financial information of FSKR and an analysis of FSKR’s stock performance following the listing of the FSKR Common Stock on the NYSE in June 2020, representatives of J.P. Morgan reviewed with the Fund Boards the following strategic alternatives: (1) continuation as a standalone business, (2) changes to FSKR’s business model proposed by the Advisor that would differentiate FSKR from its competitors or strategically position FSKR within its sector in a manner different than its current position; (3) a potential combination or merger transaction with a third-party and (4) a merger of FSK and FSKR.

On September 1, 2020, the Fund Boards met in executive session to discuss the latest presentations of RBCCM and J.P. Morgan. Following a discussion regarding the merits of all of the strategic options, the Fund Boards directed RBCCM and J.P. Morgan to present further financial analysis of a potential combination of FSK and FSKR.

On September 17, 2020, the Fund Boards held a special meeting, at which representatives of each of the Advisor, Dechert, Stradley and RBCCM were also present, to discuss the further financial analysis of the potential combination of FSK and FSKR. Representatives of RBCCM presented on certain strategic and financial implications of the potential transaction from FSK’s perspective. After the meeting, the Fund Boards along with representatives of each of the Advisor, Dechert and Stradley, met in executive session to discuss the market’s expectations with respect to the strategic options, preliminary thoughts on third quarter financials, and RBCCM’s presentation, among other things.

On September 21, 2020, the Fund Boards held a special meeting, at which representatives of each of the Advisor, Dechert, Stradley and J.P. Morgan were also present, to discuss J.P. Morgan’s further analysis of the potential combination of FSK and FSKR. At the meeting, representatives of J.P. Morgan presented on certain strategic and financial implications of the potential transaction from FSKR’s perspective.

On September 22, 2020, the Independent Directors met in executive session with representatives of Stradley to discuss the financial advisors’ presentations and analyses, the various strategic options considered and, in particular, the pros and cons for each of FSK and FSKR of a Merger between FSK and FSKR, including considerations such as the current and combined portfolios’ leverage, scale and diversification, ratings outlook, cost, funding and investment income synergies and fee structure. The Independent Directors determined to direct the financial advisors to continue their analyses of the potential Merger of the companies, specifically including analyses of appropriate fee structures for the combined entity.

On October 27, 2020, the Fund Boards held a special meeting, at which representatives of each of the Advisor, Dechert and Stradley were also present, and at which representatives of the Advisor presented on certain proposed amendments to the Existing FSK Investment Advisory Agreement and a potential Advisor fee waiver in connection with the potential combination of FSK and FSKR. In particular, representatives of the Advisor presented on the Advisor’s proposal to (1) reduce FSK’s income incentive fee rate from 20% to 17.5%, (2) reduce FSK’s incentive fee hurdle rate from 7% to 6%, (3) remove the total return lookback provision applicable to the subordinated incentive fee on income from the FSK advisory agreement and (4) waive $75 million of income incentive fees over the first five full quarters of operations following the closing of the Merger. Representatives of the Advisor presented on the anticipated consequences of the Merger and the proposed amendments to the Existing FSK Investment Advisory Agreement. The Independent Directors met in executive session following the meeting with representatives of each of the Advisor, Dechert and Stradley to discuss the specific amendments to the Existing FSK Investment Advisory Agreement.

On October 29, 2020, the Independent Directors met with representatives of Stradley prior to a regularly scheduled board meeting to discuss the Advisor’s proposal with respect to the proposed terms of the new FSK investment advisory agreement including, specifically, the removal of the lookback provisions.

On November 5, 2020, the Fund Boards held a special meeting, at which representatives of each of the Advisor, Dechert, Stradley, RBCCM and J.P. Morgan were also present. Representatives of each of RBCCM and

 

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J.P. Morgan presented on the financial implications of the proposed amendments to the Existing FSK Investment Advisory Agreement and proposed income incentive fee waiver and provided analysis comparing the financial terms of the proposed FSK investment advisory agreement to the Existing FSK Investment Advisory Agreement and to the fee structures of other BDCs. In addition, at the specific request of the Boards, RBCCM and J.P. Morgan discussed the removal of the look-back provision from the agreement and the potential financial effect of that removal to the shareholders of the proposed combined entity.

On November 9, 2020, representatives of Stradley, on behalf of the Independent Directors, provided comments on the Merger Agreement to Dechert.

On November 10, 2020, following discussion among the Independent Directors, the Independent Directors informed representatives of the Advisor of their general agreement to the Advisor’s proposed amendment to the Existing FSK Investment Advisory Agreement, provided that the 7% incentive fee hurdle rate remain unchanged and that the Advisor increase the size of its incentive fee waiver from $75 million to $90 million in order to help offset the effects of the removal of the lookback on the shareholders of the combined entity at least for the next few years.

On November 11, 2020, a representative of the management of the Fund Parties sent to the Fund Boards a draft of the merger agreement, and a summary of its principal terms, prepared by representatives of Dechert. On such date, the Fund Boards held a special meeting at which representatives of each of the Advisor, Dechert and Stradley were also present. Representatives of the Advisor confirmed the Advisor’s agreement to the Independent Directors’ proposal with respect to the FSK investment advisory agreement and increased the proposed fee waiver from $75 million to $90 million and representatives of Dechert presented on the principal terms of the Merger Agreement to the Fund Boards.

On November 13, 2020, management of the Fund Parties distributed to the Fund Boards an updated draft of the merger agreement, an updated summary of the merger agreement prepared by representatives of Dechert, and a draft of the Proposed FSK Investment Advisory Agreement.

On November 18, the Fund Boards held a special meeting with representatives of each of the Advisor, Dechert, Stradley and J.P. Morgan at which representatives of J.P. Morgan presented to the FSKR Independent Directors J.P. Morgan’s preliminary financial analysis of the Merger, taking into account the proposed changes to the Existing FSK Investment Advisory Agreement and the proposed Incentive Fee Waiver (as defined below). The Fund Boards and representatives of each of the Advisor, Dechert and Stradley then met with RBCCM, which presented to the FSK Independent Directors RBCCM’s preliminary financial analysis of the Merger, taking into account the proposed changes to the Existing FSK Investment Advisory Agreement and the proposed Incentive Fee Waiver (as defined below). The members of the Fund Boards discussed the analyses with the financial advisors in detail.

On November 19, the Fund Boards held a special meeting. All of FSK’s directors were present. Representatives of each of the Advisor, RBCCM, J.P. Morgan, Dechert and Stradley were also in attendance. Following a discussion and a presentation by representatives of RBCCM, RBCCM rendered an oral opinion, which was subsequently confirmed by delivery of a written opinion, dated November 19, 2020, to the FSK Independent Directors that, as of the date of such opinion, and based on and subject to the assumptions, qualifications, limitations and other matters set forth therein, the RBCCM September Exchange Ratio was fair, from a financial point of view, to FSK, as more fully described in the section entitled “The Merger – Opinion of FSK’s Financial Advisor.” Thereafter, the FSK Independent Directors and the FSK Board (following the unanimous recommendation of the FSK Independent Directors), by the unanimous vote of the directors present, (1) approved and adopted the Merger Agreement, (2) determined that the Merger, the Merger Agreement and the transactions contemplated thereby, including the issuance of shares of FSK Common Stock thereunder, are advisable and in the best interest of FSK and its stockholders, (3) determined that the merger transaction would satisfy the requirements of Rule 17a-8 under the 1940 Act and (4) approved a Proposed FSK Investment Advisory Agreement to become effective upon the closing of the Merger and subject to FSK stockholder approval. The FSK Board then directed that such matters be submitted to FSK stockholders for approval and recommended that the FSK stockholders vote to approve the Merger, the Merger Agreement and the transactions contemplated thereby.

 

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At the same meeting (at which all of FSKR’s directors were present), following a discussion and a presentation by representatives of J.P. Morgan of its financial analyses with respect to the fairness to the FSKR stockholders of the J.P. Morgan September Exchange Ratio, J.P. Morgan rendered to the FSKR Independent Directors its oral opinion, which was subsequently confirmed by delivery of its written opinion, dated November 19, 2020, to the effect that, as of such date and based upon and subject to the factors and assumptions set forth in its opinion, the J.P. Morgan September Exchange Ratio was fair, from a financial point of view, to the holders of FSKR Common Stock other than the Advisor and its other affiliates, as more fully described in the section entitled “The Merger—Opinion of FSKR’s Financial Advisor.” Thereafter, the FSKR Independent Directors and the FSKR Board (following the unanimous recommendation of the FSKR Independent Directors), by the unanimous vote of the directors present, (1) approved and adopted the Merger Agreement, (2) determined that the Merger, the Merger Agreement and the transactions contemplated thereby are advisable and in the best interest of FSKR and its stockholders and (3) determined that the merger transaction would satisfy the requirements of Rule 17a-8 under the 1940 Act. The FSKR Board then directed that such matters be submitted to FSKR stockholders for approval and recommended that FSKR stockholders vote to approve the Merger, the Merger Agreement and the transactions contemplated thereby.

On November 23, 2020, FSK, FSKR and the Advisor executed and delivered the Merger Agreement. On November 24, 2020 the Advisor issued a press release announcing the execution of the Merger Agreement.

Reasons for the Merger

At the request of the Fund Boards, representatives of each of the Advisor and RBCCM presented to the FSK Board, and representatives of each of the Advisor and J.P. Morgan presented to the FSKR Board, information regarding strategic alternatives available to FSK and FSKR, respectively, at various telephonic meetings of the Fund Boards and executive sessions. In connection with these meetings, representatives of the Advisor provided to the Fund Boards extensive information regarding financial information of FSK and FSKR that could be relevant to the potential strategic alternatives including the potential Merger, and the anticipated effect of each of the strategic alternatives, both in the short term and over the longer term. Over the course of their review of the materials and information provided and their consideration of the Merger, the Fund Boards consulted with management of the Fund Parties and representatives of each of the Advisor, the Fund Parties’ legal counsel and their respective financial advisors. In addition, the Independent Directors were advised by Stradley regarding the nature and adequacy of the information provided, including the terms of the Merger Agreement and their duties under federal and state law in considering the strategic alternatives and ultimately approving the Merger. The Fund Boards considered numerous factors, including but not limited to those described below, in connection with their consideration and approval of the Merger Agreement and the transactions contemplated thereby, including the Merger. On November 19, 2020, each Fund Board, including all of the Independent Directors, unanimously determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are in the best interests of the applicable Fund Party and are advisable and in the best interests of the applicable Fund Party’s stockholders, and that the interests of the applicable Fund Party’s existing stockholders will not be diluted as a result of the Merger.

In considering the Merger Agreement and the transactions contemplated thereby, including the Merger, the Fund Boards reviewed detailed comparative information about the Fund Parties provided by the Advisor including, among other items: (1) their investment goals, strategies, policies and restrictions; (2) their individual holdings, the asset mix of each Fund Party’s portfolio and the quality of such holdings; (3) their existing leverage facilities; (4) their short-term and long-term investment performance history; (5) their net investment income and quality of earnings and the anticipated effect of the Merger on future net investment income and quality of earnings; (6) the amount of past distributions and distribution coverage and the anticipated effect of the Merger on future distributions and distribution coverage; (7) their respective expense ratios and (8) the current and historical discount at which the shares of each Fund Party trades. In addition, the Fund Boards reviewed comprehensive information provided by the Advisor regarding the anticipated immediate benefits and possible risks to each of the Fund Parties as a result of the Merger, and the anticipated investment, market and financial

 

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synergies to be experienced by the combined company in the short term and over the longer term. With respect to the potential impacts to FSK and its stockholders as a result of the Merger, the FSK Board also considered information and analysis from RBCCM, including its opinion to the FSK Independent Directors that the RBCCM September Exchange Ratio (as defined below) was fair, from a financial point of view, to FSK. With respect to the potential impacts to FSKR and its stockholders as a result of the Merger, the FSKR Board also considered information and analysis from J.P. Morgan, including its opinion to the FSKR Independent Directors that the J.P. Morgan September Exchange Ratio was fair, from a financial point of view, to the holders of FSKR Common Stock other than the Advisor and its other affiliates.

Each Fund Board, including all of the Independent Directors, weighed various anticipated benefits and possible risks in considering the Merger, both with respect to the immediate effects of the Merger on each Fund Party and its stockholders and with respect to the potential benefits that could be experienced by the combined company after the Merger. In weighing these various benefits and risks, each Fund Board considered the benefits and risks related to the participation of each Fund Party in the Merger on a Fund Party-by-Fund Party basis. Some of the material factors considered by the Fund Boards that assisted it in concluding that the Merger is advisable and in the best interests of the Fund Parties and their stockholders included, among others:

Increased Scale and Operating Leverage

The Fund Boards recognized that, following the Merger, the combined company would be the second largest BDC by assets under management and the largest BDC by NAV, each as of September 30, 2020. In addition, the Fund Boards noted the advice of the Advisor that, as a result of the Merger, the combined company would have $3 billion of committed capital available for new investment opportunities. The Fund Boards noted that the combined company would be able to benefit from its increased size and investable capital, and would be well positioned to harvest the benefits of scale going forward following the Merger.

Portfolio Diversification and Asset Mix

The Fund Boards noted the Fund Parties’ holdings overlap to a large extent. The Fund Boards considered that, despite this overlap, the combined company would have a portfolio that is more diversified than the portfolio of either Fund Party on a standalone basis. The Fund Boards noted that the combined company would continue to have a portfolio primarily focused on senior secured debt.

Reduction in Fees and Expenses.

The Fund Boards considered that, as a result of the Merger Agreement, the ratio of the combined company’s fixed costs (e.g., printing and mailing of periodic reports and proxy statements, legal expenses, insurance, audit fees and other expenses) to assets is expected to be lower than the current expense ratio of either of the Fund Parties on a standalone basis. The Fund Boards noted that, if the Merger is approved, the fixed costs and expenses would be spread across a larger asset base and duplicative fixed costs would be eliminated. As a result, although certain one-time costs would be borne by the Fund Parties’ stockholders in connection with the Merger, the annual operating expenses borne by the Fund Parties’ stockholders on a pro rata basis is expected to be reduced in part by the reduction in general and administrative expenses. The Fund Boards and their respective Independent Directors found that the expected decrease in the expense ratio of the combined company would benefit the stockholders of each Fund Party if the Merger is consummated. In addition, the Fund Boards carefully considered the proposed changes to the Existing FSK Investment Advisory Agreement, including the proposed reduction in the income incentive fee rate, $90 million fee waiver and the removal of the look-back provisions, and the anticipated net effect of those changes on the combined company based on management’s projections. See “FSK Proposal 3: Approval of the FSK Advisory Agreement Amendment Proposal” for a discussion of the proposed amendments to the Existing FSK Investment Advisory Agreement.

 

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Enhanced Stock Liquidity and Analyst Coverage.

As the Merger contemplates an equity issuance that will significantly increase FSK’s market capitalization, the FSK Board considered that there is a potential for greater secondary market liquidity for FSK Common Stock, which may result in tighter bid ask spreads and increased trading volume. The Fund Boards noted that FSK’s increased profile could result in additional market coverage of FSK by financial analysts and, potentially, an increased focus by current and potential investors on FSK, including institutional investors. In addition, the Fund Boards considered the discount at which the FSK Common Stock and FSKR Common Stock each trade as compared to its respective NAV and considered that the increased profile and coverage could potentially result in a narrowing or reversal of that discount.

Deleveraging and Improved Access to Lower-Cost Debt Financing

The Fund Boards considered that the Merger is expected unlock capital for deployment, and provide the surviving corporation with the opportunity to take advantage of attractive near-term investment opportunities. Moreover, the Fund Boards considered that the Merger is expected to provide greater access to debt financing, including unsecured debt financing, at more attractive pricing, should the surviving corporation elect to increase its borrowings, and is expected to allow FSK, in addition to reducing the percentage of its capital structure financed by debt, to also reduce the complexity of its capital structure, while also increasing the flexibility and efficiency of its debt financing facilities. The FSK Board noted that, as a result of the Merger, the annual operating expenses borne by FSK stockholders on a pro rata basis are expected to be reduced in part due to improved access to lower-cost debt financing. The FSKR Board noted that, while the surviving corporation would have more leverage as a result of the Merger, the leverage profile of the surviving corporation would be appropriate for FSKR and would be outweighed by the overall benefits to be derived by FSKR as a result of the Merger.

Investment Strategies and Risks

The Fund Boards reviewed the Fund Parties’ investment programs and noted that they have substantially identical investment objectives, strategies and risks and that each focuses primarily on making senior secured credit investments in privately-held middle-market companies. The Fund Boards considered that the Fund Parties are each managed by the Advisor and, after the Merger, the stockholders of each Fund Party would be invested in a similarly structured investment vehicle and that the Advisor would continue to advise the surviving corporation with the same investment philosophy.

Advisor

The Fund Boards considered that the combined company would have the same Advisor and management team. The Fund Boards believed that, because there would be no change in the investment adviser, the combined company and the Fund Parties’ stockholders would receive the same quality of services from the Advisor as they are currently receiving and would continue to benefit from the experience and expertise of its current portfolio management and credit team. In this regard, the Fund Boards viewed favorably the overall investment and operational performance of the Advisor since taking over the management of the Fund Parties in April 2018, as well as the Advisor’s demonstrated competence in evaluating the Merger for the benefit of stockholders of each of the Fund Parties. The Fund Boards also considered the benefits of the Advisor’s understanding of the underlying familiarity with the entire pro forma portfolio.

 

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No Dilution and Opinion of the Financial Advisors

The Fund Boards considered that the Merger will be executed on a NAV-for-NAV basis (determined shortly before the Closing Date on the basis of methodologies that were considered and approved by the Fund Boards) and therefore the Fund Parties’ existing stockholders will not be diluted on a NAV basis as a result of the Merger. The FSK Board considered RBCCM’s oral opinion as rendered to the FSK Independent Directors on November 19, 2020, which was subsequently confirmed by delivery of a written opinion, dated November 19, 2020, that, as of the date of such opinion, and based on and subject to the assumptions, qualifications, limitations and other matters set forth therein, the RBCCM September Exchange Ratio, was fair, from a financial point of view to FSK, as more fully described in the section entitled “The Merger—Opinion of FSK’s Financial Advisor.” Additionally, the FSKR Board considered J.P. Morgan’s oral opinion as rendered to the FSKR Independent Directors on November 19, 2020, which was subsequently confirmed by delivery of a written opinion, dated November 19, 2020, that, as of the date of such opinion and based on and subject to the assumptions made, matters considered and limitations set forth therein, the J.P. Morgan September Exchange Ratio, was fair, from a financial point of view, to the holders of FSKR Common Stock other than the Advisor and its other affiliates, as more fully described in the section entitled “The Merger—Opinion of FSKR’s Financial Advisor.”

Positioning of Combined Company Following the Merger and Future Optionality

The Fund Boards considered the positioning of the combined company as compared to each Fund Party on a standalone basis, as compared to standalone differentiated portfolios and as compared to bolt-on acquisitions by each of the Fund Parties. The Fund Boards also considered that the Merger does not limit the strategic alternatives available for the combined company following the Merger and may enhance the optionality the combined company would have as compared to either individual Fund Party, including with respect to future bolt-on acquisitions.

Tax-Free Reorganization

The Fund Boards considered that the Merger is anticipated to be treated as a tax-free reorganization for U.S. federal income tax purposes and the Fund Parties’ stockholders are not expected to recognize any gain or loss for U.S. federal income tax purposes as a result of the Merger, except with respect to any cash received in lieu of fractional shares.

Other Considerations

The Fund Boards noted that the Merger is not expected to affect the ability of each of the Fund Parties to comply with its respective regulatory obligations, including its ability to maintain appropriate leverage and continue to operate in compliance with the asset coverage requirements set forth in the 1940 Act and to pay dividends required of RICs.

When considering the information described above, including all of the anticipated effects of the Merger on each Fund Party and its respective stockholders and the related pro forma information, the Fund Boards noted that information based on projections and assumptions may be incorrect, is subject to change, and may fluctuate over time. The Fund Boards acknowledged that the pro forma information and the projections and assumptions on which the potential expenses, earnings, yield and dividend information, among others, is based depends on many factors and variables, including among other things, asset mix, the performance of individual investments, changing cost of service providers, portfolio turnover level, leverage, the cost of leverage, changes in interest rates and general market conditions. The Fund Boards noted that there is no assurance that any of the potential benefits to the Fund Parties or their respective stockholders as a result of the Merger will be realized, including any anticipated synergies, and that the combined company could experience detrimental effects that had not been anticipated.

In the course of their deliberations, the Fund Boards also considered a variety of risks and other potentially negative factors, including, but not limited to (and which are not in any relative order of importance): (1) that it

 

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would be possible that the Merger may not be completed or may be delayed; (2) that certain restrictions may be imposed on the conduct of the Fund Parties’ businesses prior to completion of the Merger, requiring the Fund Parties to conduct their respective businesses only in the ordinary course of business in all material respects, subject to specific limitations, which could delay or prevent the Fund Parties from undertaking business opportunities that may arise pending completion of the Merger; (3) the existing relationship between the Fund Parties and the Advisor and potential conflicts of interest in connection with the Merger; (4) in general, each Fund Party will be responsible for expenses incurred by such Fund Party in connection with the Merger and the completion of the transactions contemplated by the Merger Agreement, whether or not the Merger is consummated, including such Fund Party’s allocated portion of costs and expenses of any filing and other fees payable by the Fund Parties to the SEC in connection with the Merger; (5) the possibility that demands on management resources during the period prior to completion of the Merger may adversely affect the Fund Parties businesses; (6) that FSKR stockholders are not entitled to appraisal rights under Maryland law; and (7) various other risks, including those described in the section entitled “Risk Factors” and in the section entitled “Special Note Regarding Forward-Looking Statements.”

This discussion of the information and factors that the Fund Boards considered in making their decision is not intended to be exhaustive, but includes the material factors considered by the Fund Boards. Because of the wide variety of factors considered in connection with its evaluation of the Merger and Merger Agreement and the complexity of those matters, the Fund Boards did not find it useful to, and did not attempt to, quantify, rank or otherwise assign relative weights to these factors. In addition, the individual members of the Fund Boards may have given different weights to different factors.

Each of the Fund Boards, including the Independent Directors of each Fund Board, considered all of these factors and others as a whole and, on balance, determined that the Merger is advisable and in the best interests of such Fund Party’s stockholders and unanimously approved the Merger and the Merger Agreement.

FSK Board Recommendation

The FSK Board, including the FSK Independent Directors, has unanimously approved the Merger, the Merger Agreement and the transactions contemplated thereby, the issuance of shares of FSK Common Stock in connection with the Merger and the Proposed FSK Investment Advisory Agreement, and declared the Merger, the Merger Agreement and the transactions contemplated thereby to be advisable and in the best interests of FSK and the FSK stockholders, and unanimously recommends that FSK stockholders vote (1) “FOR” the FSK Merger Proposal, (2) “FOR” the FSK Stock Issuance Proposal and (3) the “FOR” the FSK Advisory Agreement Amendment Proposal.

FSKR Board Recommendation

The FSKR Board, including the FSKR Independent Directors, has unanimously approved the Merger, the Merger Agreement and the transactions contemplated thereby, and determined them to be advisable and in the best interests of FSKR and the FSKR stockholders, and unanimously recommends that the FSKR stockholders vote “FOR” the FSKR Merger Proposal.

Opinion of FSK’s Financial Advisor

On November 19, 2020, RBCCM rendered an oral opinion, which was subsequently confirmed by delivery of a written opinion, dated November 19, 2020, to the FSK Independent Directors that, as of the date of such opinion, and based on and subject to the assumptions, qualifications, limitations and other matters set forth therein, the RBCCM September Exchange Ratio was fair, from a financial point of view, to FSK. The full text of RBCCM’s written opinion, dated November 19, 2020, is attached to this joint proxy statement/prospectus as Annex B and constitutes part of this joint proxy statement/prospectus. For the avoidance of doubt, RBCCM

 

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expressed no opinion as to the Merger Consideration or as to the Exchange Ratio, as calculated as of the Determination Date. RBCCM’s opinion was approved by RBCCM’s Fairness Opinion Committee. This summary of RBCCM’s opinion is qualified in its entirety by reference to the full text of the opinion. FSK urges holders of FSK Common Stock to read RBCCM’s opinion carefully in its entirety for a description of the assumptions made, procedures followed, matters considered and limitations and qualifications of the review undertaken by RBCCM.

RBCCM’s advice (written or oral) and opinion were provided for the benefit, information and assistance of the FSK Independent Directors (in their capacity as such) in connection with their evaluation of the Merger. RBCCM’s opinion did not address the underlying business decision of FSK to engage in the Merger or the relative merits of the Merger compared to any alternative business strategy or transaction that may be available to FSK or in which FSK might engage. RBCCM’s opinion does not constitute an opinion or recommendation to any holder of FSK Common Stock as to how any such holder should vote or act with respect to the Merger or any proposal to be voted upon in connection with the Merger or otherwise.

RBCCM’s opinion addressed the fairness, from a financial point of view and as of the date thereof, of the RBCCM September Exchange Ratio (to the extent expressly specified therein), without regard to individual circumstances of specific holders that may distinguish such holders or the securities of FSK held by such holders. RBCCM’s opinion did not in any way address any other terms, conditions, implications or other aspects of the Merger or the Merger Agreement, including, without limitation, the form or structure of the Merger or any other agreement, arrangement or understanding to be entered into in connection with, or contemplated by, the Merger or otherwise, including the Proposed FSK Investment Advisory Agreement. RBCCM did not express any opinion or view with respect to, and relied upon the assessments of, FSK and its representatives regarding, legal, regulatory, tax, accounting and similar matters, as to which RBCCM understood that FSK had obtained such advice as it deemed necessary from qualified professionals. In rendering its opinion, RBCCM did not express any view on, and its opinion did not address, the fairness of the amount or nature of the compensation (if any) or other consideration to any officers, directors or employees of any party, or class of such persons, relative to the value implied by the RBCCM September Exchange Ratio or otherwise. In connection with its opinion, RBCCM was not requested to, and did not, undertake a third-party solicitation process on FSK’s behalf with respect to the acquisition of all or part of FSK.

In rendering its opinion, RBCCM assumed and relied upon the accuracy and completeness of all information that was reviewed by RBCCM, including all financial, legal, tax, accounting, operating and other information provided to, or discussed with, RBCCM by, or on behalf of, FSK or FSKR (including, without limitation, financial statements and related notes), and upon the assurances of management of FSK and FSKR and other representatives of FSK and FSKR that they were not aware of any relevant information that had been omitted or that remained undisclosed to RBCCM. RBCCM did not assume responsibility for independently verifying, and did not independently verify, such information. RBCCM also assumed that the financial projections and other estimates and data that it was directed to utilize in its analyses, including the potential cost savings, revenue enhancements and other benefits anticipated by management of FSK and FSKR to be realized from the Merger, including the benefits resulting from the revisions to the Existing FSK Investment Advisory Agreement and the Incentive Fee Waiver (as defined below) (referred to collectively as, the “Synergies”), were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of management of FSK and FSKR as to the future financial performance of, and were a reasonable basis upon which to evaluate, FSK, FSKR, the potential Synergies, potential pro forma effects of the Merger and the other matters covered thereby. RBCCM further assumed that the financial results reflected therein, including the Synergies, will be realized in the amounts and at the times projected. RBCCM did not express any opinion as to any such financial projections and other estimates and data or the assumptions upon which they were based. RBCCM assumed that there will be no developments with respect to any of the foregoing that would have an adverse effect on FSK, FSKR or the Merger (or the contemplated benefits thereof) or that otherwise would be meaningful in any respect to its analyses or opinion.

 

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In connection with its opinion, RBCCM did not assume any responsibility to perform, and did not perform, an independent valuation or appraisal of any of the assets or liabilities (contingent, off-balance sheet, accrued, derivative or otherwise) of or relating to FSK, FSKR or any other entity and RBCCM was not furnished with any such valuations or appraisals. RBCCM did not assume any obligation to conduct, and did not conduct, any physical inspection of the property or facilities of FSK, FSKR or any other entity. RBCCM did not investigate, and made no assumption regarding, any litigation or other claims affecting FSK, FSKR or any other entity. RBCCM did not evaluate the solvency or fair value of FSK, FSKR or any other entity under any state, federal or other laws relating to bankruptcy, solvency or similar matters.

RBCCM assumed that the Merger will be consummated in accordance with the terms of the Merger Agreement and in compliance with all applicable laws, documents and other requirements, without waiver, modification or amendment of any material term, condition or agreement, and that, in the course of obtaining the necessary governmental, regulatory or third party approvals, consents, releases, waivers and agreements for the Merger, no delay, limitation, restriction or condition will be imposed or occur, including any divestiture or other requirements, that would have a material adverse effect on FSK, FSKR or the Merger (including the contemplated benefits thereof) or that otherwise would be meaningful in any respect to its analyses or opinion. RBCCM also assumed that the Merger will qualify for the intended tax treatment contemplated by the Merger Agreement. In addition, RBCCM assumed that the final executed Merger Agreement would not differ, in any respect meaningful to its analyses or opinion, from the draft that it reviewed.

RBCCM’s opinion speaks only as of the date thereof, is based on the conditions as they existed and information supplied or reviewed as of the date thereof, and is without regard to any market, economic, financial, legal, or other circumstances or event of any kind or nature which may exist or occur or may have existed or occurred after such date. RBCCM did not undertake any obligation to update, revise or reaffirm its opinion for events occurring after the date thereof. RBCCM’s opinion, as set forth therein, relates to the relative values of FSK and FSKR. RBCCM did not express any opinion as to the actual value of FSK Common Stock when issued or distributed in the Merger or the price or range of prices at which FSK Common Stock, or any other securities of FSK may trade or otherwise be transferable at any time, including following announcement or consummation of the Merger. As the FSK Independent Directors were aware, the credit, financial and stock markets, and the industries in which FSK and FSKR operate have experienced, and continue to experience, volatility and RBCCM expressed no opinion or view as to any potential effects of such volatility on FSK or FSKR (or their respective businesses) or the Merger (including the contemplated benefits thereof).

For the purposes of rendering its opinion, RBCCM undertook such review, inquiries, and analyses as it deemed necessary or appropriate under the circumstances, including the following:

 

   

RBCCM reviewed the financial terms of a draft of the Merger Agreement;

 

   

RBCCM reviewed certain publicly available financial and other information, and certain historical operating data, relating to FSK made available to it from published sources and internal records of FSK;

 

   

RBCCM reviewed certain publicly available financial and other information, and certain historical operating data, relating to FSKR made available to it from published sources and internal records of FSKR;

 

   

RBCCM reviewed financial projections and other estimates and data relating to (1) the FSK Projections and (2) the FSKR Projections, each prepared by management of FSK and FSKR, which projections and other estimates and data RBCCM was directed to utilize for purposes of its analyses and opinion;

 

   

RBCCM conducted discussions with members of management relating to the respective businesses, prospects and financial outlook of FSK and FSKR as well the Synergies;

 

   

RBCCM reviewed the reported prices and trading activity for FSK Common Stock and FSKR Common Stock;

 

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RBCCM compared certain financial metrics of FSK and FSKR with those of selected publicly traded companies in lines of businesses that it considered generally relevant in evaluating FSK and FSKR;

 

   

RBCCM reviewed the potential pro forma financial impact of the Merger on FSK after taking into account potential Synergies; and

 

   

RBCCM considered other information and performed other studies and analyses as it deemed appropriate.

In connection with RBCCM’s fairness determination, management of FSK and FSKR directed RBCCM to base its analyses and its opinion on (1) financial information, dated as of September 30, 2020, regarding the NAVs of each of FSK (which value was approximately $3,027,000,000) and FSKR (which value was approximately $4,207,000,000) and (2) the number of issued and outstanding shares, as of September 30, 2020, of FSK Common Stock (which number was 123,755,965) and FSKR Common Stock (which number was 170,597,301). If those were the NAVs and shares outstanding as of the Determination Date (which would result in an NAV per share of FSK Common Stock of $24.46 and an NAV per share of FSKR Common Stock of $24.66), each share of FSKR Common Stock entitled to be converted into the right to receive shares of FSK Common Stock, would be converted into the right to receive 1.0082 shares of FSK Common Stock (the “RBCCM September Exchange Ratio”). No adjustments were made to the NAVs described above to account for estimated transaction expenses for each of FSKR and FSK and in the case of FSKR, a pre-Merger tax distribution.

Set forth below is a summary of the material financial analyses performed by RBCCM in connection with rendering its opinion, as delivered to the FSK Independent Directors in connection with their meeting on November 19, 2020. The order of analyses described does not represent relative importance or weight given to those analyses by RBCCM. Some of the summaries of the financial analyses include information presented in tabular format. To fully understand the summary of the analyses used by RBCCM, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the analysis.

For purposes of its analyses, RBCCM reviewed a number of financial and operating metrics, including:

 

   

Book value (referred to in this section as “Book Value” or “BV”), which means a company’s NAV as of September 30, 2020 (unless otherwise indicated);

 

   

Dividend yield (referred to in this section as “Dividend Yield”), which means a company’s annual dividend divided by its current stock price; and

 

   

Net investment income (referred to in this section as “NII”), which means the difference between income from interest, dividends fees and other investment income and operating and other expenses.

Unless the context indicates otherwise, the analyses described below were calculated using the following: (1) closing price of FSK Common Stock and FSKR Common Stock, and the closing prices of selected BDCs as of November 17, 2020; (2) historical balance sheet data for (a) FSK and FSKR as of September 30, 2020, and (b) the selected public companies based on publicly available information for each company as of the most recent quarter for which such information was available as of November 17, 2020; (3) estimated 2021 (“2021E”) dividend estimates for the selected public companies (and, where indicated, each of FSK and FSKR) based on median consensus Wall Street analyst estimates (“Consensus”), publicly available as of November 17, 2020. Financial and operating data for the respective parties to the Merger Agreement derived from the selected transactions analysis described below were calculated as of the announcement date of the relevant transaction based, in part, on the implied purchase prices announced on such date for the selected transactions, and otherwise based on publicly available information for each company as of the most recent quarter prior to the announcement of the applicable transaction for which such information was available or as otherwise subsequently publicly disclosed by the relevant merger parties. Accordingly, this information may not reflect current or future market conditions.

 

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FSK Financial Analysis

Public Company Analysis. RBCCM reviewed certain financial and operating information and implied trading multiples and implied Dividend Yields for selected publicly traded companies as compared to the corresponding information and implied trading multiples and implied Dividend Yields for FSK. In choosing the selected companies, RBCCM considered publicly traded BDCs that are externally managed with greater than $2.5 billion of total investments. In this analysis, RBCCM compared, among other things, (1) multiple of price per share of common stock to Book Value and (2) 2021E Dividend Yield. The results of this analysis are summarized in the following table:

 

Selected Publicly Traded Companies

   Price/BV      2021E Dividend Yield  

Ares Capital Corporation

     0.98x        9.9

Owl Rock Capital Corporation

     0.93x        9.1

Prospect Capital Corporation

     0.62x        13.9

Golub Capital BDC, Inc. (1)

     0.96x        8.4

Goldman Sachs BDC, Inc. (2)

     1.12x        11.2

New Mountain Finance Corporation

     0.92x        10.7

Apollo Investment Corporation

     0.67x        12.0

FSKR (Consensus)

     0.64x        14.0

FSKR (Management)

     0.64x        14.6

High

     1.12x        14.6

Median

     0.92x        10.9

Low

     0.62x        8.4

FSK (Consensus)

     0.69x        14.2

FSK (Management)

     0.69x        15.7

 

(1)

Price/BV multiple reflects midpoint of preliminary financial results released on October 19, 2020.

(2)

Reflects recent acquisition of Goldman Sachs Middle Market Lending Corp., for which limited public disclosure was available.

This analysis produced implied per share value reference ranges for FSK Common Stock consisting of Book Value multiples ranging from 0.62x to 1.12x and 2021E Dividend Yields ranging from 8.4% to 14.6%, which indicated the following implied per share value reference ranges for FSK Common Stock, compared to the closing price of FSK Common Stock on November 17, 2020:

 

Implied Per Share Value Reference Range for FSK Common Stock based on:

  FSK Common Stock Closing
Price on November 17, 2020
Price/BV   2021E Dividend Yield    

 

 

Management

 

Consensus

 

 

$15.11 - $27.37

  $18.09 - $31.48   $16.40 - $28.53   $16.88

Dividend Discount Analysis. RBCCM performed a dividend discount analysis (“DDA”) of FSK, on a standalone basis (“FSK DDA”), by calculating the estimated net present value, as of September 30, 2020, of the after-tax free cash flows of FSK available for dividends from September 30, 2020 through December 31, 2025 (using mid-year convention), based on the FSK Projections.

RBCCM used discount rates ranging from 10.0% to 12.0%, based on an estimated cost of equity using CAPM, as well as applying a size premium, and a terminal value at the end of the forecast period, using terminal multiples ranging from 0.60x to 1.00x based on estimated Book Value per share of common stock as of December 31, 2025. RBCCM selected the terminal multiples based on a review of the price per Book Value multiples for the selected companies referred to above under “FSK Financial Analysis — Public Company

 

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Analysis”. The FSK DDA indicated the following implied per share value reference range as compared to the closing price of FSK Common Stock on November 17, 2020 and to the NAV per share of FSK Common Stock as of September 30, 2020:

 

Implied Per Share Value
Reference Range For FSK Common Stock

 

FSK Common Stock
Closing Price on November 17, 2020

 

NAV Per Share as of September 30, 2020

$18.08 - $25.54

  $16.88   $24.46

FSKR Financial Analysis

Public Company Analysis. RBCCM reviewed certain financial and operating information and implied trading multiples and implied Dividend Yields for selected publicly traded companies as compared to the corresponding information and implied trading multiples and implied Dividend Yields for FSKR. In choosing the selected companies, RBCCM considered publicly traded BDCs that are externally managed with greater than $2.5 billion in investments. In this analysis, RBCCM compared, among other things, (a) multiple of price per share of common stock to Book Value and (b) 2021E Dividend Yield. The results of this analysis are summarized in the following table:

 

Selected Publicly Traded Companies

   Price/BV      2021E Dividend Yield  

Ares Capital Corporation

     0.98x        9.9

Owl Rock Capital Corporation

     0.93x        9.1

Prospect Capital Corporation

     0.62x        13.9

Golub Capital BDC, Inc. (1)

     0.96x        8.4

Goldman Sachs BDC, Inc. (2)

     1.12x        11.2

New Mountain Finance Corporation

     0.92x        10.7

Apollo Investment Corporation

     0.67x        12.0

FSK (Consensus)

     0.69x        14.2

FSK (Management)

     0.69x        15.7

High

     1.12x        15.7

Median

     0.92x        10.9

Low

     0.62x        8.4

FSKR (Consensus)

     0.64x        14.0

FSKR (Management)

     0.64x        14.6

 

(1)

Price/BV multiple reflects midpoint of preliminary financial results released on October 19, 2020.

(2)

Reflects recent acquisition of Goldman Sachs Middle Market Lending Corp., for which limited public disclosure was available.

This analysis produced implied per share value reference ranges for FSKR Common Stock consisting of Book Value multiples ranging from 0.62x to 1.12x and 2021E Dividend Yields ranging from 8.4% to 15.7%, which indicated the following implied per share value reference ranges for FSKR Common Stock, compared to the closing price of FSKR Common Stock on November 17, 2020:

 

Implied Per Share Value Reference Range for FSKR Common Stock based on:

  FSKR Common Stock Closing
Price on November 17, 2020
Price/BV   2021E Dividend Yield    

 

 

Management

 

Consensus

 

 

$15.24 - $27.59

  $14.62 - $27.26   $14.03 - $26.15   $15.67

Dividend Discount Analysis. RBCCM performed a DDA of FSKR, on a standalone basis (“FSKR DDA”), by calculating the estimated net present value, as of September 30, 2020, of the after-tax free cash flows of FSKR available for dividends from September 30, 2020 through December 31, 2025 (using mid-year convention), based on the FSKR Projections.

 

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RBCCM used discount rates ranging from 10.0% to 12.0%, based on an estimated cost of equity using CAPM, as well as applying a size premium, and a terminal value at the end of the forecast period, using terminal multiples ranging from 0.60x to 1.00x based on estimated Book Value per share of common stock as of December 31, 2025. RBCCM selected the terminal multiples based on a review of the price per Book Value multiples for the selected companies referred to above under “FSKR Financial Analysis — Public Companies Analysis.” The FSKR DDA indicated the following implied per share value reference range as compared to the closing price of FSKR Common Stock on November 17, 2020 and to the NAV per share of FSKR Common Stock as of September 30, 2020:

 

Implied Per Share Value Reference Range
For FSKR Common Stock

 

FSKR Common Stock Closing Price on

November 17, 2020

 

FSKR Common Stock NAV Per Share as
of September 30, 2020

$18.44 - $25.98

  $15.67   $24.66

Implied Exchange Ratio Analysis

 

RBCCM calculated certain implied exchange ratio reference ranges for the Merger.

Selected Public Companies Exchange Ratio Analysis. Based on the per share value reference ranges for FSK Common Stock and FSKR Common Stock implied by the selected publicly traded companies analyses described above for which the same financial metrics were applied, and the corresponding assumptions underlying each such analysis, RBCCM calculated implied exchange ratio reference ranges. In each case, the low end of each implied ratio reference range was calculated by dividing the low end of the applicable FSKR Common Stock implied per share value reference range by the high end of the applicable FSK Common Stock implied per share value reference range, and the high end of each implied exchange ratio reference range was calculated by dividing the high end of the applicable FSKR Common Stock implied per share value reference range by the low end of the applicable FSK Common Stock implied per share value reference range. The analysis indicated the following implied reference ranges as compared to the RBCCM September Exchange Ratio in the Merger:

 

Implied Exchange Ratio Reference Range

   RBCCM September
Exchange Ratio
Price/BV    2021E Dividend Yield     

 

  

Management

  

Consensus

  

 

0.5568x - 1.8256x    0.4645x - 1.5071x    0.4916x - 1.5949x    1.0082x

Dividend Discount Analysis. Based on the per share value reference ranges for FSK Common Stock and FSKR Common Stock implied by the DDAs described above, and the corresponding assumptions underlying each such DDA, RBCCM calculated implied exchange ratio reference ranges. RBCCM calculated such implied exchange ratio reference range as follows: the low end of the implied exchange ratio reference range was calculated by dividing the low end of the FSKR Common Stock standalone implied per share value reference range by the high end of the FSK Common Stock implied per share value reference range, and the high end of the implied exchange ratio reference range was calculated by dividing the high end of the FSKR Common Stock standalone implied per share value reference range by the low end of the FSK Common Stock implied per share value reference range. The analysis indicated the following implied reference range, as compared to the RBCCM September Exchange Ratio in the Merger:

 

Implied Exchange Ratio Reference Range

 

RBCCM September Exchange Ratio

0.7220x - 1.4369x

  1.0082x

 

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Other Matters

RBCCM also noted for the FSK Independent Directors the following additional analyses and factors that were not considered part of RBCCM’s financial analyses with respect to its opinion, but were provided for informational purposes:

Pro Forma Cash Flow Valuation Analysis. RBCCM performed a cash flow valuation analysis on the combined company, based on the standalone equity value of each of FSK and FSKR, based upon the midpoints of the FSK DDA and FSKR DDA, respectively, as described above, to arrive at an implied equity value for the combined company. At the direction of management of FSK and FSKR, RBCCM (1) assumed Synergies consisting of (a) G&A cost savings of approximately $4.9 million annually from the second half of 2021 through 2025, (b) revenue and funding synergies from the second half of 2021 through 2025 and (c) savings resulting from the adjustments to the Existing FSK Investment Advisory Agreement, as described in “FS KKR Capital Corp. Proposal 3: Approval of FSK Advisory Agreement Amendment Proposal”, and (2) adjusted for transaction costs of approximately $20.7 million, including associated tax distributions, in arriving at such implied equity value. For purposes of this analysis, the estimated Synergies values were capitalized so as to reflect pro forma value creation beyond December 31, 2025 (as contrasted with the “—Pro Forma Dividend Discount Analysis” described below).

RBCCM then derived implied equity value per share from the implied equity value for the combined company using projected share information for the combined company, assuming the RBCCM September Exchange Ratio. This analysis indicated the following implied equity value per share for the combined company as compared to the midpoint of FSK DDA and the closing price of FSK Common Stock on November 17, 2020:

 

Combined Company Implied Equity
Value Per Share

 

Midpoint of FSK DDA

 

FSK Common Stock Closing Price on

November 17, 2020

$23.00

  $21.65   $16.88

Pro Forma Dividend Discount Analysis. RBCCM performed a DDA of the combined company, pro forma for the Merger (“Pro Forma DDA”), by calculating the estimated net present value, as of September 30, 2020, of the after-tax free cash flows of the combined company available for dividends from June 30, 2021 through December 31, 2025 (using mid-year convention) and FSK dividends paid or expected to be paid from September 30, 2020 through June 30, 2021, in each case, based on the Pro Forma Projections (as defined below). This analysis assumed the expected Synergies as described above under “Other Matters — Pro Forma Cash Flow Valuation Analysis” through December 31, 2025.

RBCCM used the assumptions referred to above under “FSK Financial Analysis — Dividend Discount Analysis” and “FSKR Financial Analysis — Dividend Discount Analysis”. The Pro Forma DDA indicated the following implied per share value reference range, as compared to the November 17, 2020 closing price of FSK Common Stock:

 

Pro Forma Implied Per Share Value Reference
Range for FSK Common Stock

 

FSK Common Stock Closing Price on

November 17, 2020

$18.62 - $26.08

  $16.88

Has/Gets Analysis. RBCCM performed a has/gets analysis to compare certain NII and dividend metrics for each of holders of FSK Common Stock and FSKR Common Stock based on their pro forma ownership of the combined company, as compared with such metrics as implied by their ownership in FSK and FSKR on a standalone basis. RBCCM reviewed, for each of FSK and FSKR on a standalone basis, (1) NII per share of common stock, (2) dividend per share of common stock and (3) NII return on NAV, each estimated for (a) the second half of 2021 (“2021E H2”), (b) 2022 (“2022E”) and (c) 2023 (“2023E”). RBCCM then calculated the estimated pro forma amounts for each of the above categories by adding together the standalone FSK and standalone FSKR amounts and adjusting for Synergies. RBCCM then calculated the difference between such pro

 

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forma amounts for the combined company and the standalone FSK and standalone FSKR amounts, respectively, which analyses indicated the following implied changes for holders of FSK Common Stock and FSKR Common Stock based on their pro forma ownership of the combined company as compared with their ownership in the standalone companies:

 

     FSK      FSKR  
     2021E H2      2022E      2023E      2021E H2      2022E      2023E  

NII per Share

     (0.6%)        13.1%        7.8%        9.6%        (10.8%)        4.5%  

Dividend per Share

     (0.6%)        13.1%        7.8%        9.6%        (10.8%)        4.5%  

NII Return on NAV

     (1)bps        126bps        77bps        89bps        (126)bps        44bps  

Selected Transactions/Contribution Analysis. RBCCM reviewed certain transaction information for a set of precedent BDC transactions as compared to the corresponding information for the Merger. In selecting these precedent transactions, RBCCM considered certain transactions involving BDCs since the beginning of 2018 that RBCCM in its professional judgement deemed relevant.

In this analysis, RBCCM compared, among other things, (1) relative contributions of each merger party based on: (a) NAV, (b) market capitalization (as of immediately prior to announcement of the applicable transaction) and (c) NII, and (2) pro forma equity ownership, implied by the applicable transaction. The list of selected transactions and related implied percentages for such selected precedent transactions were as follows:

 

         Contribution     

Transactions

  Announce Date    NAV    Market
Capitalization
   NII    Pro Forma
Equity
Ownership
Oaktree Specialty Lending Corporation / Oaktree Strategic Income Corporation   October 29,
2020
   77% / 23%    73% / 27%    84% / 16%    77% / 23%
Barings BDC, Inc. / MVC Capital, Inc.   August 10,
2020
   73% / 27%    77% / 23%    65% / 35%    74% / 26%
Portman Ridge Finance Corporation / Garrison Capital Inc.   June 24, 2020    53% / 47%    53% / 47%    54% / 46%    59% / 41%
Goldman Sachs BDC, Inc. / Goldman Sachs Middle Market Lending Corp.   December 9,
2019
   39% / 61%    — / —    41% / 59%    41% / 59%
Golub Capital BDC, Inc. / Golub Capital Investment Corporation   November 28,
2018
   47% / 53%    — / —    47% / 53%    48% / 52%
FSK (f/k/a FS Investment Corporation) / Corporate Capital Trust, Inc.   July 23, 2018    47% / 53%    47% / 53%    51% / 49%    47% / 53%
FSK / FSKR   —      42% / 58%    44% / 56%    46% / 54%    42% / 58%

Trading Range Analysis for FSK. RBCCM reviewed certain historical stock price information based on stock price information over the one year period ended November 17, 2020, for FSK Common Stock. This

 

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review indicated the following historical stock price information for FSK Common Stock as compared to the closing price of FSK Common Stock on November 17, 2020:

 

Trading Period Prior to November 17, 2020

   Stock Price  

52 Week High

   $ 25.44  

52 Week Low

   $ 9.44  

Closing price of FSK Common Stock on November 17, 2020

   $ 16.88  

Trading Range Analysis for FSKR. RBCCM reviewed certain historical stock price information based on stock price information for FSKR since its listing on the NYSE on June 17, 2020 through November 17, 2020. This review indicated the following historical stock price information for FSKR Common Stock as compared to the closing price of FSKR Common Stock on November 17, 2020:

 

Trading Period Prior to November 17, 2020

   Stock Price  

High since NYSE listing

   $ 15.75  

Low since NYSE listing

   $ 12.25  

Closing price of FSKR Common Stock on November 17, 2020

   $ 15.67  

Historical Exchange Ratio Analysis. RBCCM reviewed the average implied exchange ratio for certain periods over the five-month period immediately prior to November 17, 2020, calculated by dividing the price per share of FSKR Common Stock by the price per share of FSK Common Stock for each day during the applicable period, using a volume weighted average price (“VWAP”) for each such day. RBCCM reviewed such implied exchange ratios based on (1) VWAP for November 17, 2020, (2) 5-day VWAP, (3) 10-day VWAP, (4) 30-day VWAP, (5) 60-day VWAP and (6) 90-day VWAP. These implied exchange ratios ranged from 0.9266x to 0.9627x, with corresponding implied premiums based on the RBCCM September Exchange Ratio ranging from 4.7% to 8.8%.

Overview of Analyses; Other Considerations

No single company or transaction used in the above analyses as a comparison was identical to FSK, FSKR, or the Merger, and an evaluation of the results of those analyses is not entirely mathematical. Rather, the analyses involved complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, businesses or transactions analyzed.

The preparation of a fairness opinion is a complex process that involves the application of subjective business judgment in determining the most appropriate and relevant methods of financial analysis and the application of those methods to particular circumstances. Several analytical methodologies were used by RBCCM, and no one method of analysis should be regarded as critical to the overall conclusion reached. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques. The overall conclusions of RBCCM were based on all the analyses and factors presented herein taken as a whole and also on application of RBCCM’s own experience and judgment. Such conclusions may involve significant elements of subjective judgment and qualitative analysis. RBCCM therefore believes that its analyses must be considered as a whole and that selecting portions of the analyses and the factors considered, without considering all factors and analyses, could create an incomplete or misleading view of the processes underlying its opinion.

RBCCM, as part of its investment banking services, is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, corporate restructurings, underwritings, secondary distributions of listed and unlisted securities, private placements, and valuations for corporate and other purposes. In the ordinary course of business, RBCCM and/or certain of its affiliates may act as a market maker and broker in the publicly traded securities of FSK, FSKR and/or other entities involved in the Merger, or their respective

 

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affiliates, and receive customary compensation in connection therewith, and may also actively trade securities of FSK, FSKR and/or other entities involved in the Merger, or their respective affiliates, for its or its affiliates’ own account or for the account of customers and, accordingly, RBCCM and its affiliates may hold a long or short position in such securities. RBCCM and certain of its affiliates in the past have provided, currently are providing, and in the future may provide, investment banking, commercial banking and financial advisory services to FSK, FSKR and certain of their respective affiliates unrelated to the Merger, for which services RBCCM and its affiliates have received and expect to receive customary compensation, including, between November 1, 2018 and the delivery of RBCCM’s opinion, (1) having acted as a lender under a credit facility with each of FSK and FSKR; (2) with respect to FSK, having provided (a) cash management and deposit services, (b) debt issuance and debt related sales and trading services, including having acted as joint bookrunner for two senior notes offerings and (c) lending and loan syndication services, having received an aggregate compensation of approximately $3,150,000; (3) with respect to FSKR, having provided (a) debt issuance and debt related sales and trading services and (b) equity related sales and trading services, including having acted as co-advisor in connection with the direct listing of FSKR Common Stock on the NYSE, having received an aggregate compensation of approximately $2,000,000; and (4) with respect to affiliates of FSK and FSKR, having provided (a) lending and loan syndication services, including acting as a lender under seven credit facilities, (b) cash management and deposit services, (c) equity issuance and equity related sales and trading services, including equity-linked derivative products, (d) debt issuance and debt related sales and trading services and (e) mergers and acquisitions and other financial advisory services, having received an aggregate compensation of approximately $25,065,000. In addition, an affiliate of RBCCM is an investor in three private equity investment funds affiliated with FSK and FSKR; which investment in each such investment fund represents an ownership stake of less than 2% in each such fund.

Under its engagement agreement with FSK, RBCCM became entitled to a fee of $1,000,000 which became payable on or before the delivery of RBCCM’s written opinion in connection with the Merger, without regard to whether such opinion was accepted or the Merger is consummated. In addition, if FSK consummates the Merger, RBCCM will receive a transaction fee of $5,500,000 paid upon the closing of the Merger, regardless of any escrow, earn-out or other contingency, and against which the fee RBCCM received for delivery of its opinion will be credited. FSK has also agreed to indemnify RBCCM for certain liabilities that may arise out of its engagement. The terms of RBCCM’s engagement letter were negotiated at arm’s-length between FSK and RBCCM, and the FSK Independent Directors were aware of this fee arrangement at the time they reviewed and approved the Merger Agreement.

Opinion of FSKR’s Financial Advisor

Pursuant to an engagement letter, dated August 28, 2020, FSKR and the FSKR Independent Directors retained J.P. Morgan as financial advisor to the FSKR Independent Directors in connection with the proposed Merger and to deliver a fairness opinion in connection with the proposed Merger.

In connection with J.P. Morgan’s fairness determination, the FSKR Independent Directors directed J.P. Morgan to base its opinion on publicly available financial information, dated as of September 30, 2020, regarding the NAV per share of FSKR and FSK, respectively, and to adjust such values using estimated transaction expenses of approximately $8,000,000 for FSKR and approximately $8,000,000 for FSK and, in the case of FSKR, a pre-Merger tax distribution estimated as approximately $5,000,000, in each case as provided by the Advisor. As of September 30, 2020, based on the above, FSKR’s adjusted NAV per share would be $24.59 and FSK’s adjusted NAV per share would be $24.39. If these were the adjusted NAVs per share on the Determination Date (as defined in the Merger Agreement), FSKR stockholders would receive 1.00802 shares of FSK Common Stock for each share of FSKR Common Stock (the “J.P. Morgan September Exchange Ratio”).

At the meeting of the FSKR Board on November 19, 2020, J.P. Morgan rendered its oral opinion to the FSKR Independent Directors that, as of such date and based upon and subject to the factors and assumptions set forth in its opinion, the J.P. Morgan September Exchange Ratio was fair, from a financial point of view, to the

 

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holders of FSKR Common Stock other than the Advisor and its other affiliates. J.P. Morgan has confirmed its November 19, 2020 oral opinion by delivering its written opinion to the FSKR Independent Directors, dated November 19, 2020, that, as of such date, and subject to the factors and assumptions set forth in its opinion, the J.P. Morgan September Exchange Ratio was fair, from a financial point of view, to the holders of FSKR Common Stock, other than the Advisor and its other affiliates. For the avoidance of doubt, J.P. Morgan expressed no opinion as to the Merger Consideration or as to the Exchange Ratio as calculated as of the Determination Date.

The full text of the written opinion of J.P. Morgan, dated November 19, 2020, which sets forth the assumptions made, matters considered and limits on the review undertaken, is attached as Annex C to this joint proxy statement/prospectus and is incorporated herein by reference. The summary of the opinion of J.P. Morgan set forth in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of such opinion. FSKR stockholders are urged to read the opinion in its entirety. J.P. Morgan’s written opinion was addressed to the FSKR Independent Directors (in their capacity as such) in connection with and for the purposes of their evaluation of the proposed Merger, was directed only to the J.P. Morgan September Exchange Ratio in the Merger and did not address any other aspect of the Merger. J.P. Morgan expressed no opinion as to the fairness of the J.P. Morgan September Exchange Ratio to the Advisor or its other affiliates or to the holders of any class of securities, creditors or other constituencies of FSKR or as to the underlying decision by FSKR to engage in the proposed Merger. The issuance of J.P. Morgan’s opinion was approved by a fairness committee of J.P. Morgan. J.P. Morgan’s opinion did not constitute a recommendation to the FSKR Board or the FSKR Independent Directors in connection with the Merger, and does not constitute a recommendation to any stockholder of FSKR or of any other entity as to how such stockholder should vote with respect to the proposed Merger or any other matter.

In arriving at its opinion, J.P. Morgan, among other things:

 

   

reviewed a draft dated November 19, 2020 of the Merger Agreement;

 

   

reviewed certain publicly available business and financial information concerning FSKR and FSK and the industries in which they operate;

 

   

compared the financial and operating performance of FSKR and FSK with publicly available information concerning certain other companies J.P. Morgan deemed relevant and reviewed the current and historical market prices of FSKR Common Stock and FSK Common Stock and certain publicly traded securities of such other companies;

 

   

reviewed certain internal financial analyses and forecasts prepared by or at the direction of the Advisor, as investment adviser to both FSKR and FSK, relating to the respective businesses of FSKR and FSK, as well as the estimated amount and timing of the cost savings and related expenses and synergies expected to result from the Merger, including Synergies; and

 

   

performed such other financial studies and analyses and considered such other information as J.P. Morgan deemed appropriate for the purposes of its opinion.

In addition, J.P. Morgan held discussions with the Advisor, as investment adviser to both FSKR and FSK, and the FSKR Board (including the FSKR Independent Directors) with respect to certain aspects of the Merger, and the past and current business operations of FSKR and FSK, the financial condition and future prospects and operations of FSKR and FSK, the effects of the Merger on the financial condition and future prospects of FSKR and FSK, and certain other matters J.P. Morgan believed necessary or appropriate to its inquiry.

In giving its opinion, J.P. Morgan relied upon and assumed the accuracy and completeness of all information that was publicly available or was furnished to or discussed with J.P. Morgan by the Advisor, FSKR and FSK or otherwise reviewed by or for J.P. Morgan. J.P. Morgan did not independently verify (and did not assume responsibility or liability for independent verifying) any such information or its accuracy or completeness

 

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and, pursuant to its engagement letter with FSKR and the FSKR Independent Directors, J.P. Morgan did not assume any obligation to undertake any such independent verification. J.P. Morgan did not conduct and was not provided with any valuation or appraisal of any assets or liabilities, including the respective investment portfolios of FSKR and FSK, nor did J.P. Morgan evaluate the solvency of FSKR or FSK under any state or federal laws relating to bankruptcy, insolvency or similar matters. In relying on financial analyses and forecasts provided to J.P. Morgan or derived therefrom (including the FSKR Projections, the FSK Projections, the Pro Forma Projections, the Synergies, the capital and debt structures of FSKR and FSK, and the cost of capital and interest rates applicable to FSKR and FSK), J.P. Morgan assumed that they were reasonably prepared based on assumptions reflecting the best currently available estimates and judgments by the Advisor as to the expected future results of operations and financial condition of FSKR and FSK to which such analyses or forecasts relate. J.P. Morgan expressed no view as to such analyses or forecasts (including the FSKR Projections, the FSK Projections, the Pro Forma Projections, the Synergies, the capital and debt structures of FSKR and FSK, and the cost of capital and interest rates applicable to FSKR and FSK), or the assumptions on which they were based. J.P. Morgan also assumed that the Merger and the other transactions contemplated by the Merger Agreement will qualify as a tax-free reorganization for United States federal income tax purposes, and will be consummated as described in the Merger Agreement, and that the definitive Merger Agreement would not differ in any material respects from the draft thereof furnished to J.P. Morgan. J.P. Morgan also assumed that the representations and warranties made by the Advisor, FSKR and FSK in the Merger Agreement and the related agreements were and will continue to be true and correct in all respects material to its analysis. J.P. Morgan is not a legal, regulatory or tax expert and relied on the assessments made by advisors to FSKR with respect to such issues. J.P. Morgan further assumed that all material governmental, regulatory or other consents and approvals necessary for the consummation of the Merger will be obtained without any adverse effect on FSKR or FSK or on the contemplated benefits of the Merger.

J.P. Morgan’s opinion was necessarily based on economic, market and other conditions as in effect on, and the information made available to J.P. Morgan as of, the date of such opinion. J.P. Morgan’s opinion noted that subsequent developments may affect J.P. Morgan’s opinion, and that J.P. Morgan does not have any obligation to update, revise, or reaffirm such opinion. J.P. Morgan’s opinion is limited to the fairness, from a financial point of view, to the holders of the FSKR Common Stock, other than the Advisor and its other affiliates, of the J.P. Morgan September Exchange Ratio in the proposed Merger, and J.P. Morgan has expressed no opinion as to the fairness of the J.P. Morgan September Exchange Ratio to any other holders of FSKR Common Stock or as to the fairness of any consideration to be paid in connection with the Merger to the holders of any other class of securities, creditors or other constituencies of FSKR or as to the underlying decision by FSKR to engage in the Merger. Furthermore, J.P. Morgan expressed no opinion with respect to the amount or nature of any compensation to any officers, directors, or employees of any party to the proposed Merger, or any class of such persons relative to the J.P. Morgan September Exchange Ratio in the proposed Merger or with respect to the fairness of any such compensation. J.P. Morgan expressed no opinion as to the price at which FSKR’s Common Stock or FSK’s Common Stock will trade at any future time. Additionally, J.P. Morgan expressed no opinion as to any other transactions undertaken in connection with the Merger, or any other agreement, arrangement or understanding, including without limitation, the Proposed FSK Investment Advisory Agreement and the proposed advisory fee waivers by the Advisor contemplated by the Merger, any related transactions or otherwise, or any terms, aspects or implications of such transactions, agreements, arrangements or understandings.

The decision to enter into the Merger Agreement was solely that of the FSKR Board and the FSK Board and J.P. Morgan’s opinion and financial analysis were only one of the many factors considered by the FSKR Independent Directors in its evaluation of the proposed Merger and should not be viewed as determinative of the views of the FSKR Board (including the FSKR Independent Directors) with respect to the proposed Merger or the J.P. Morgan September Exchange Ratio. J.P. Morgan was not authorized to and did not solicit any expressions of interest from any other parties with respect to the sale of all or any part of FSKR or any other alternative transaction.

 

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In accordance with customary investment banking practice, J.P. Morgan employed generally accepted valuation methodologies in rendering its opinion to the FSKR Independent Directors on November 19, 2020 and contained in the presentation delivered to the FSKR Independent Directors on such date in connection with the rendering of such opinion. The following is a summary of the material financial analyses utilized by J.P. Morgan in connection with rendering its opinion to the FSKR Independent Directors and does not purport to be a complete description of the analyses or data presented by J.P. Morgan. Some of the summaries of the financial analyses include information presented in tabular format. The tables are not intended to stand alone, and in order to more fully understand the financial analyses used by J.P. Morgan, the tables must be read together with the full text of each summary. Considering the data set forth below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of J.P. Morgan’s analyses.

FSKR Analysis

FSKR Public Trading Multiples Analysis. Using publicly available information, J.P. Morgan compared selected financial data of FSKR with similar data for selected publicly traded companies engaged in businesses which J.P. Morgan judged to be analogous to the business of FSKR. The companies selected by J.P. Morgan are set forth in the table below. J.P. Morgan calculated and analyzed (1) the ratio of each selected company’s per share market price to NAV per share and (2) each selected company’s 2021E dividend yield. In all instances, share prices were based on publicly available data as of November 18, 2020 and NAV was based on publicly available data as of September 30, 2020, except for Oaktree Specialty Lending Corporation and Golub Capital BDC, Inc. which are as of June 30, 2020. The following presents the results of this analysis:

 

Company

   Price/NAV      2021E Dividend Yield  

Ares Capital Corporation

     0.98x        9.9

Owl Rock Capital Corporation

     0.93x        9.1

FSK

     0.68x        14.3

Prospect Capital Corporation

     0.63x        13.7

Golub Capital BDC, Inc.

     0.98x        8.3

Goldman Sachs BDC, Inc.,

     1.11x        11.3

New Mountain Finance Corporation

     0.92x        10.7

Apollo Investment Corporation

     0.67x        12.2

Bain Capital Specialty Finance

     0.69x        12.0

Sixth Street Specialty Lending, Inc.

     1.17x        9.4

TCG BDC, Inc.,

     0.70x        13.5

Solar Capital Ltd.

     0.85x        9.6

Blackrock TCP Capital Corporation

     0.88x        10.7

Oaktree Specialty Lending Corporation

     0.85x        8.1

Based on the results of this analysis, the consensus Price/NAV multiple and 2021E dividend yield for FSKR of 0.63x and 14.1%, respectively, and on other factors J.P. Morgan considered appropriate, J.P. Morgan selected a range of Price/NAV multiples from 0.60x to 1.00x. J.P. Morgan then applied this range to FSKR’s NAV per share on September 30, 2020 of $24.66. The analysis resulted in an implied per share range for FSKR Common Stock, rounded to the nearest $0.25, of approximately $14.75 to $24.75, as compared to (1) the implied offer price per share of FSKR Common Stock of $16.88 (based on the J.P. Morgan September Exchange Ratio of 1.00802x and the closing price per share of FSK Common Stock of $16.75 on November 18, 2020) and (2) the closing price per share of FSKR Common Stock of $15.56 on November 18, 2020.

Based on the results of the above analysis and on other factors J.P. Morgan considered appropriate, J.P. Morgan then selected a range of 2021E dividend yields of 9.0% to 14.5%. J.P. Morgan then applied this range to the FSKR Projections for FSKR’s 2021E dividend per share of $2.29. The analysis resulted in an implied per share range for FSKR Common Stock, rounded to the nearest $0.25, of approximately $15.75 to $25.50, as

 

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compared to (1) the implied offer price per share of FSKR Common Stock of $16.88 (based on the J.P. Morgan September Exchange Ratio of 1.00802x and the closing price per share of FSK Common Stock of $16.75 on November 18, 2020) and (2) the closing price per share of FSKR Common Stock of $15.56 on November 18, 2020.

No company used in these analyses is identical or directly comparable to FSKR. Accordingly, an evaluation of the results of these analyses necessarily involves complex considerations and judgments concerning differences in financial, operating, and business sector characteristics, and other factors that could affect the public trading or other values of the companies to which FSKR is compared.

FSKR Dividend Discount Analysis. J.P. Morgan conducted a dividend discount analysis of FSKR Common Stock for the purpose of determining the fully diluted equity value per share. In performing its analysis, J.P. Morgan used, among others, the following assumptions, which were reviewed and approved by the Advisor and the FSKR Independent Directors:

 

   

a September 30, 2020 valuation date;

 

   

a range for cost of equity of 11.0% to 12.0%;

 

   

a range of terminal values based on fourth quarter 2028 estimated NAV per share and calculated by applying a Price/NAV multiple range of 0.60x to 1.00x; and

 

   

earnings and asset assumptions based on the long term FSKR Projections for the last three months of 2020 through 2028.

These calculations resulted in an implied range of equity values per share for FSKR Common Stock, rounded to the nearest $0.25, of approximately $19.50 to $24.75 on a standalone basis (i.e., without Synergies), as compared to (1) the implied offer price per share of FSKR Common Stock of $16.88 (based on the J.P. Morgan September Exchange Ratio of 1.00802x and the closing price per share of FSK Common Stock of $16.75 on November 18, 2020) and (2) the closing price per share of FSKR Common Stock of $15.56 on November 18, 2020.

Other Information.

FSKR 52-Week Historical Trading Range. For reference only and not as a component of its fairness analysis, J.P. Morgan reviewed the trading range for FSKR Common Stock for the 52-week period ended November 18, 2020, which was $11.64 per share to $16.00 per share, and compared that range to (1) the implied offer price per share of FSKR Common Stock of $16.88 (based on the J.P. Morgan September Exchange Ratio of 1.00802x and the closing price per share of FSK Common Stock of $16.75 on November 18, 2020) and (2) the closing price per share of FSKR Common Stock of $15.56 on November 18, 2020.

FSKR Analyst Price Target. For reference only and not as a component of its fairness analysis, J.P. Morgan reviewed the publicly available equity research analyst price target for FSKR Common Stock and noted that the range of such price targets was $14.25 per share to $19.00 per share, with a consensus median of $17.13 per share, and compared that price target range to (1) the implied offer price per share of FSKR Common Stock of $16.88 (based on the J.P. Morgan September Exchange Ratio of 1.00802x and the closing price per share of FSK Common Stock of $16.75 on November 18, 2020) and (2) the closing price per share of FSKR Common Stock of $15.56 on November 18, 2020.

FSK Analysis

FSK Public Trading Multiples Analysis. Using publicly available information, J.P. Morgan compared selected financial data of FSK with similar data for selected publicly traded companies engaged in businesses which J.P. Morgan judged to be analogous to the business of FSK. The companies selected by J.P. Morgan are

 

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set forth in the table below. J.P. Morgan calculated and analyzed (1) the ratio of each selected company’s per share market price to NAV per share and (2) each selected company’s 2021E dividend yield. In all instances, share prices were based on publicly available data as of November 18, 2020 and NAV was based on publicly available data as of September 30, 2020, except for Oaktree Specialty Lending Corporation and Golub Capital BDC, Inc. which are as of June 30, 2020. The following presents the results of this analysis:

 

Company

   Price/NAV      2021E Dividend Yield  

Ares Capital Corporation

     0.98x        9.9

Owl Rock Capital Corporation

     0.93x        9.1

FSKR

     0.63x        14.1

Prospect Capital Corporation

     0.63x        13.7

Golub Capital BDC, Inc.

     0.98x        8.3

Goldman Sachs BDC, Inc.,

     1.11x        11.3

New Mountain Finance Corporation

     0.92x        10.7

Apollo Investment Corporation

     0.67x        12.2

Bain Capital Specialty Finance

     0.69x        12.0

Sixth Street Specialty Lending, Inc.

     1.17x        9.4

TCG BDC, Inc.,

     0.70x        13.5

Solar Capital Ltd.

     0.85x        9.6

Blackrock TCP Capital Corporation

     0.88x        10.7

Oaktree Specialty Lending Corporation

     0.85x        8.1

Based on the results of this analysis, the consensus Price/NAV multiple and 2021E dividend yield for FSK of 0.68x and 14.3%, respectively, and on other factors J.P. Morgan considered appropriate, J.P. Morgan selected a range of Price/NAV multiples from 0.60x to 1.00x. J.P. Morgan then applied this range to FSK’s NAV per share on September 30, 2020 of $24.46. The analysis resulted in an implied per share range for FSK Common Stock, rounded to the nearest $0.25, of approximately $14.75 to $24.50, as compared to the closing price per share of FSK Common Stock of $16.75 on November 18, 2020.

Based on the results of the above analysis and on other factors J.P. Morgan considered appropriate, J.P. Morgan then selected a range of 2021E dividend yields of 9.0% to 14.5%. J.P. Morgan then applied this range to the FSK Projections for FSK’s 2021 dividend per share of $2.65. The analysis resulted in an implied per share range for FSK Common Stock, rounded to the nearest $0.25, of approximately $18.25 to $29.50, as compared to the closing price per share of FSK Common Stock of $16.75 on November 18, 2020.

For reference only and not as a component of its fairness analysis, J.P. Morgan also applied the selected range of 2021E dividend yields to the FSK Projections for FSK’s 2021 dividend per share of $2.16, adjusted to exclude the impact of the lookback with respect to the subordinated income incentive fee, which resulted in an implied share range for FSK Common Stock of approximately $15.00 to $24.00, as compared to the closing price per share of FSK Common Stock of $16.75 on November 18, 2020.

No company used in these analyses is identical or directly comparable to FSK. Accordingly, an evaluation of the results of these analyses necessarily involves complex considerations and judgments concerning differences in financial, operating, and business sector characteristics, and other factors that could affect the public trading or other values of the companies to which FSK is compared.

FSK Dividend Discount Analysis. J.P. Morgan conducted a dividend discount analysis of FSK Common Stock for the purpose of determining the fully diluted equity value per share. In performing its analysis, J.P. Morgan used, among others, the following assumptions, which were reviewed and approved by FSK management:

 

   

a September 30, 2020 valuation date;

 

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a range for cost of equity of 11.0% to 12.0%;

 

   

a range of terminal values based on fourth quarter 2028 estimated NAV per share and calculated by applying a Price/NAV multiple range of 0.60x to 1.00x; and

 

   

earnings and asset assumptions based on the long term FSK Projections for the last three months of 2020 through 2028.

These calculations resulted in an implied range of equity values per share for FSK Common Stock, rounded to the nearest $0.25, of approximately $19.75 to $25.25 on a standalone basis (i.e., without Synergies), as compared to the closing price per share of FSK Common Stock of $16.75 on November 18, 2020.

Other Information.

FSK 52-Week Historical Trading Range. For reference only and not as a component of its fairness analysis, J.P. Morgan reviewed the trading range for FSK Common Stock for the 52-week period ended November 18, 2020, which was $7.60 per share to $25.52 per share, and compared that range to the closing price per share of FSK Common Stock of $16.75 on November 18, 2020.

FSK Analyst Price Target. For reference only and not as a component of its fairness analysis, J.P. Morgan reviewed the publicly available equity research analyst price targets for FSK Common Stock and noted that the range of such price targets was $15.50 per share to $22.00 per share with a consensus median of $17.25 per share, and compared that price target range to the closing price per share of FSK Common Stock of $16.75 on November 18, 2020.

Relative Valuation Analysis

Based upon the implied equity values per share for FSKR and FSK calculated above in “— Analysis of FSKR — FSKR Public Trading Multiples Analysis,” “— Analysis of FSKR — FSKR Dividend Discount Analysis,” “— Analysis of FSKR — FSKR 52-Week Historical Trading Range,” “— Analysis of FSKR — FSKR Analyst Price Target,” “— Analysis of FSK — FSK Public Trading Multiples Analysis,” “— Analysis of FSK — FSK Dividend Discount Analysis,” “— Analysis of FSK — FSK 52-Week Historical Trading Range,” and “— Analysis of FSK — FSK Analyst Price Target,” J.P. Morgan derived a range of implied exchange ratios based on a comparison of a share of FSK common stock to a share of FSKR common stock, as shown in the table below. For each comparison, J.P. Morgan divided the highest equity value per share for FSKR by the lowest equity value per share for FSK to derive the highest exchange ratio implied by each set of reference ranges. J.P. Morgan also divided the lowest equity value per share for FSKR by the highest equity value per share for FSK to derive the lowest exchange ratio implied by each set of reference ranges. The implied exchange ratios resulting from J.P. Morgan’s analysis were:

 

Range of Implied Exchange Ratios

 
     Low      High  

Public Trading Multiples Analysis

     

P/NAV

     0.60x        1.68x  

2021E dividend yield1

     0.54x        1.40x  

Dividend Discount Analysis

     0.77x        1.26x  

52-Week Historical Trading Range2

     0.46x        2.11x  

Analyst Price Target3

     0.65x        1.23x  

 

1  

For reference only, J.P. Morgan also calculated the range using the implied value for FSK excluding the impact of the lookback as 0.66x to 1.71x.

2 

For reference only.

3 

For reference only.

 

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The implied exchange ratios for FSK and FSKR were compared to the J.P. Morgan September Exchange Ratio of 1.00802x of a share of FSK common stock for a share of FSKR common stock. J.P. Morgan noted that the relative implied exchange ratio analyses based on the 52-week historical trading range and based on the analyst price targets are not valuation methodologies and that such analyses were presented for reference purposes only and not as a component of its fairness analysis.

Intrinsic Value Creation Analysis.

J.P. Morgan conducted an analysis of the theoretical value creation to the existing holders of FSKR Common Stock that compared the implied equity value per share of FSKR Common Stock derived from a dividend discount analysis on a standalone basis to the pro forma combined company implied equity value per share, taking into account the estimated Synergies. The pro forma combined company equity value per share was equal to (1) the sum of (a) the implied equity value of FSK using the midpoint value of 11.5% and a midpoint Price/NAV terminal value multiple of 0.80x, plus (b) the implied equity value of FSKR using the midpoint value of 11.5% and a midpoint Price/NAV terminal value multiple of 0.80x, plus (c) the total value of the Synergies other than the Net Incentive Fee Reduction (as defined in clause (d)), plus (d) the anticipated net reduction in incentive fees due to changes to FSK’s advisory fee structure (including the reduction in subordinated income incentive fees, waiver of $90 million of subordinated income incentive fees and elimination of the lookback with respect to the subordinated income incentive fees) based on management’s projections, partially offset by increased incentive fees from additional earnings resulting from the Merger, (the “Net Incentive Fee Reduction”) minus (e) the estimated transaction expenses of $16 million, minus (f) the value of the $5 million tax distribution to be paid to current FSKR stockholders prior to the Merger divided by (2) the pro forma diluted number of shares outstanding of FSK based on the J.P. Morgan September Exchange Ratio of 1.00802. The total value of the Synergies was assessed using (1) a midpoint cost of equity of 11.5% for incremental net investment income, general and administrative savings, interest expense savings and net of incremental tax expense and Advisor management fees, (2) a terminal value assessed using a 0.0% growth rate applied to estimated 2028 synergies and (3) an assumed 100% dividend payout of incremental net investment income resulting from the Synergies. The intrinsic value creation analysis indicated that at the J.P. Morgan September Exchange Ratio of 1.00802, the Merger would create hypothetical incremental implied value for the holders of FSKR Common Stock.

Miscellaneous.

The foregoing summary of certain material financial analyses does not purport to be a complete description of the analyses or data presented by J.P. Morgan. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. J.P. Morgan believes that the foregoing summary and its analyses must be considered as a whole and that selecting portions of the foregoing summary and these analyses, without considering all of its analyses as a whole, could create an incomplete view of the processes underlying the analyses and its opinion. As a result, the ranges of valuations resulting from any particular analysis or combination of analyses described above were merely utilized to create points of reference for analytical purposes and should not be taken to be the view of J.P. Morgan with respect to the actual value of FSKR or FSK. The order of analyses described does not represent the relative importance or weight given to those analyses by J.P. Morgan. In arriving at its opinion, J.P. Morgan did not attribute any particular weight to any analyses or factors considered by it and did not form an opinion as to whether any individual analysis or factor (positive or negative), considered in isolation, supported or failed to support its opinion. Rather, J.P. Morgan considered the totality of the factors and analyses performed in determining its opinion.

Analyses based upon forecasts of future results are inherently uncertain, as they are subject to numerous factors or events beyond the control of the parties and their advisors. Accordingly, forecasts and analyses used or made by J.P. Morgan are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by those analyses. Moreover, J.P. Morgan’s analyses are not and do not purport to be appraisals or otherwise reflective of the prices at which businesses actually could be acquired or sold. None of the selected

 

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companies reviewed as described in the above summary is identical to FSKR or FSK. However, the companies selected were chosen because they are publicly traded companies with operations and businesses that, for purposes of J.P. Morgan’s analysis, may be considered similar to those of FSKR and FSK. The analyses necessarily involve complex considerations and judgments concerning differences in financial and operational characteristics of the companies involved and other factors that could affect the companies compared to FSKR and FSK.

As a part of its investment banking business, J.P. Morgan and its affiliates are continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, and valuations for corporate and other purposes. J.P. Morgan was selected to advise FSKR with respect to the Merger and deliver an opinion to the FSKR Board with respect to the Merger on the basis of, among other things, such experience and its qualifications and reputation in connection with such matters and its familiarity with FSKR, FSK and the industries in which they operate. For services rendered in connection with the Merger (including the delivery of J.P. Morgan’s opinion), J.P. Morgan will receive a fee from FSKR of $6.0 million, of which $3.0 million became payable to J.P. Morgan upon delivery of the J.P. Morgan opinion ($500,000 of the $3.0 million became payable on August 31, 2020, upon presentation by J.P. Morgan to the FSKR Independent Directors of J.P. Morgan’s initial analysis of strategic alternatives), and the balance of which will become payable only if the proposed Merger is consummated. In addition, FSKR has agreed to reimburse J.P. Morgan for its expenses incurred in connection with its services, including the fees and disbursements of counsel, and will indemnify J.P. Morgan against certain liabilities arising out of J.P. Morgan’s engagement. During the two years preceding the date of J.P. Morgan’s opinion, J.P. Morgan and its affiliates have had commercial or investment banking relationships with FSKR, FSK, Franklin Square Holding, L.P. (“FS”), an affiliate of the Advisor, and certain other affiliates of KKR & Co. L.P. (“KKR”), an affiliate of the Advisor, for which J.P. Morgan and such affiliates have received customary compensation. Such services during such period have included acting as lead arranger and bookrunner on a joint credit facility for FSKR and FSK amended in November 2019 and May 2020, acting as bookrunner on debt securities offerings by FSK in July 2019, November 2019 and December 2019, acting as lead arranger and bookrunner on a credit facility for FS amended in December 2019, providing financial advisory services to FSK (then known as FS Investment Corporation) in connection with its merger with Corporate Capital Trust, Inc. in December 2018, providing financial advisory services to FSKR (then known as FS Investment Corporation II), FS Investment Corporation III, FS Investment Corporation IV and Corporate Capital Trust II in connection with their four-way merger in December 2019, acting as sole arranger and lead manager of a securitization of certain loans owned by KKR Credit Advisors (US) LLC in July 2019 and providing capital raising and financial advisory services to portfolio companies of KKR. In addition, J.P. Morgan’s commercial banking affiliate is an agent bank and a lender under the outstanding joint credit facility of FSKR and FSK referred to above and outstanding credit facilities of FS and certain affiliates and portfolio companies of KKR, for which it receives customary compensation or other financial benefits. In addition, J.P. Morgan and its affiliates hold, on a proprietary basis, less than 1% of the outstanding common stock of each of FSKR, FSK and KKR. During the two year period preceding October 31, 2020, the aggregate fees recognized by J.P. Morgan from FSKR were approximately $5.0 million, the aggregate fees recognized by J.P. Morgan from FSK were approximately $4.4 million, the aggregate fees recognized by J.P. Morgan from FS were approximately $8.45 million, the aggregate fees recognized by J.P. Morgan from KKR and certain of its affiliates were approximately $163.6 million and the aggregate fees recognized by J.P. Morgan from KKR Credit Advisors (US) LLC were approximately $0.37 million. In the ordinary course of their businesses, J.P. Morgan and its affiliates may actively trade the debt and equity securities or financial instruments (including derivatives, bank loans or other obligations) of FSKR, FSK, FS, KKR or their respective affiliates for their own accounts or for the accounts of customers and, accordingly, they may at any time hold long or short positions in such securities or other financial instruments.

Financial Forecasts and Estimates

FSK and FSKR do not as a matter of course make public forecasts as to future performance, earnings or other prospective financial information beyond the current fiscal year, and FSK and FSKR are especially

 

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reluctant to make forecasts for extended periods due to the unpredictability of the underlying assumptions and estimates. However, in connection with the transactions contemplated by the Merger Agreement, FSK and FSKR management prepared and provided to the Fund Boards in connection with its evaluation of the transactions contemplated by the Merger Agreement and to RBCCM and J.P. Morgan, respectively, who were directed to use and rely upon such information for purposes of their financial analyses and opinions, certain non-public, internal financial forecasts regarding FSK’s and FSKR’s anticipated future operations for the fiscal years ending December 31, 2021 through December 31, 2028 (the “Standalone Forecasts”) as well as pro forma combined company forecasts for fiscal years ending December 31, 2021 through December 31, 2028 (the “Pro Forma Forecasts”). The Standalone Forecasts of FSK are referred to herein as the “FSK Forecasts” and the Standalone Forecasts of FSKR are referred to herein as the “FSKR Forecasts.” FSK and FSKR have included below a summary of the Standalone Forecasts and Pro Forma Forecasts for the purpose of providing FSK and FSKR stockholders access to certain non-public information that was considered by the Fund Boards for purposes of evaluating the Merger and was also provided to FSK’s and FSKR’s respective financial advisors. Such information may not be appropriate for other purposes.

The Standalone Forecasts and the Pro Forma Forecasts were not prepared with a view toward public disclosure, nor were they prepared with a view toward compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial forecasts or in accordance with GAAP. FSK’s and FSKR’s independent public accountants have not examined, compiled or performed any procedures with respect to the accompanying prospective financial information and, accordingly, such accountants do not express an opinion or any other form of assurance with respect thereto. The reports of such accountants incorporated by reference to this joint proxy statement/prospectus relate only to FSK’s and FSKR’s respective historical financial information. They do not extend to the prospective financial information and should not be read to do so. The summary of these internal financial forecasts included below is not being included to influence your decision whether to vote for the merger but because the Standalone Forecasts were provided by each of FSK and FSKR to their respective financial advisors.

While presented with numeric specificity, the Standalone Forecasts and Pro Forma Forecasts were based on numerous variables and assumptions, including (but not limited to):

 

   

the expected closing of the Merger on June 30, 2021;

 

   

the performance of investment assets;

 

   

the amount and timing of share repurchases and dividend payments;

 

   

the degree and methods of portfolio leverage;

 

   

industry performance and competition;

 

   

general business, economic, market and financial conditions; and

 

   

additional specific matters to FSK’s and FSKR’s respective businesses.

Many of these assumptions are inherently subjective and uncertain and are beyond the control of FSK’s and FSKR’s management. Important factors that may affect actual results and cause uncertainties relating to FSK’s and FSKR’s respective businesses (including their respective abilities to achieve strategic goals, objectives and targets over applicable periods), industry performance, general business and economic conditions and other factors discussed in the sections entitled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” in this joint proxy statement/prospectus. The Standalone Forecasts and the Pro Forma Forecasts also reflect numerous variables, expectations and assumptions available at the time they were prepared as to certain business decisions that are subject to change. As a result, actual results may differ materially from those contained in the Standalone Forecasts and the Pro Forma Forecasts. Accordingly, there can be no assurance that the forecasted results summarized below will be realized.

The inclusion of a summary of the Standalone Forecasts and the Pro Forma Forecasts in this document should not be regarded as an indication that any of FSK, FSKR or their respective affiliates, advisors or

 

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representatives considered the Standalone Forecasts or the Pro Forma Forecasts to be predictive of actual future events, and the Standalone Forecasts and the Pro Forma Forecasts should not be relied upon as such nor should the information contained in the Standalone Forecasts or the Pro Forma Forecasts be considered appropriate for other purposes. None of FSK, FSKR or their respective affiliates, advisors, officers, directors or representatives can give you any assurance that actual results will not differ materially from the Standalone Forecasts or the Pro Forma Forecasts, and none of them undertakes any obligation to update or otherwise revise or reconcile the Standalone Forecasts or the Pro Forma Forecasts to reflect circumstances existing after the date the Standalone Forecasts or the Pro Forma Forecasts were relied upon by the Fund Boards in reviewing the terms of the Merger and by the respective financial advisors in undertaking their respective financial analyses or to reflect the occurrence of future events, even in the event that any or all of the assumptions underlying the Standalone Forecasts or Pro Forma Forecasts are shown to be in error. Since the Standalone Forecasts and the Pro Forma Forecasts cover multiple years, such information by its nature becomes less meaningful and predictive with each successive year. Neither FSK nor FSKR intend to make publicly available any update or other revision to the Standalone Forecasts or the Pro Forma Forecasts. None of FSK, FSKR, their affiliates (including Advisor), advisors, officers, directors or representatives has made or makes any representation to any stockholder or other person regarding FSK’s or FSKR’s respective ultimate performance compared to the information contained in the Standalone Forecasts or the Pro Forma Forecasts or that the forecasted results will be achieved. Neither Fund Party has made any representation to the other Fund Party, in the Merger Agreement or otherwise, concerning the Standalone Forecasts or the Pro Forma Forecasts. The Standalone Forecasts do not give effect to the Merger, whereas the Pro Forma Forecasts give effect to the Merger. FSK and FSKR each urge all of their respective stockholders to review FSK’s and FSKR’s respective financial statements and notes thereto appearing elsewhere in this document for a description of FSK’s and FSKR’s respective reported financial results.

Standalone Projections

The following is a summary of the Standalone Forecasts. The Standalone Forecasts were prepared by FSK’s and FSKR’s management based solely on the information available to FSK and FSKR management at that time. The Standalone Forecasts were finalized in November 2020.

Values in millions except per share data.

FSK Projections

 

     1/1/21
to
6/30/21
     7/1/21
to
12/31/21
     12/31/22      12/31/23      12/31/24      12/31/25  

Total Dividends

   $ 170.6      $ 157.1      $ 292.6      $ 292.1      $ 289.6      $ 297.5  

Ordinary Dividends Per Share

   $ 1.38      $ 1.27      $ 2.36      $ 2.36      $ 2.34      $ 2.40  

FSKR Projections

 

    1/1/21
to
6/30/21
    7/1/21
to
12/31/21
    12/31/22     12/31/23     12/31/24     12/31/25     12/31/26     12/31/27      12/31/28  

Total Dividends

  $ 187.6     $ 194.2     $ 506.1     $ 411.2     $ 400.1     $ 390.9     $ 389.0     $ 394.6      $ 399.8  

Ordinary Dividends Per Share

  $ 1.13     $ 1.17     $ 3.04     $ 2.47     $ 2.40     $ 2.35     $ 2.34     $ 2.37      $ 2.40  

Pro Forma Projections

The following is a summary of the Pro Forma Forecasts. The Pro Forma Forecasts were prepared by FSK’s and FSKR’s management based solely on the information available to FSK and FSKR management at that time to give effect to the Merger. The Pro Forma Forecasts were finalized in November 2020.

 

    1/1/21
to
6/30/21
    7/1/21
to
12/31/21
    12/31/22     12/31/23     12/31/24     12/31/25     12/31/26     12/31/27     12/31/28  

Total Dividends

  $ 358.7     $ 369.1     $ 782.4     $ 744.6     $ 735.2     $ 742.4     $ 735.5     $ 745.1     $ 754.1  

Ordinary Dividends Per Share

  $ 1.24     $ 1.26     $ 2.68     $ 2.55     $ 2.51     $ 2.54     $ 2.51     $ 2.55     $ 2.58  

 

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Regulatory Approvals Required for the Merger

The obligations of the Fund Parties to complete the Merger are subject to the satisfaction or, where permissible, waiver of certain conditions, including the condition that all regulatory approvals required by law to consummate the transactions contemplated by the Merger Agreement, including the Merger, have been obtained and remain in full force and effect, and all statutory waiting periods required by applicable law in respect thereof have expired (including expiration of the applicable waiting period under the HSR Act). The Fund Parties have agreed to cooperate with each other and use their reasonable best efforts to obtain all consents, authorizations, approvals, exemptions or nonobjections from any governmental or regulatory authority necessary to consummate the Merger.

There can be no assurance that such regulatory approvals will be obtained, that such approvals will be received on a timely basis or that such approvals will not impose conditions or requirements that, individually or in the aggregate, would or could reasonably be expected to have a material adverse effect on the financial condition, results of operations, assets or business of the combined company following completion of the Merger.

Third-Party Consents Required for the Merger

The Fund Parties have agreed to cooperate with each other and use their reasonable best efforts to take, or cause to be taken, in good faith, all actions, and to do, or cause to be done, all things necessary, including to obtain as promptly as practicable all consents, approvals, confirmations and authorizations of all third parties, in each case, that are necessary or advisable, to consummate the transactions contemplated by the Merger Agreement, including the Merger, in the most expeditious manner practicable. There can be no assurance that any consents, approvals, confirmations or authorizations will be obtained or that such consents, approvals, confirmations or authorizations will not impose conditions or requirements that, individually or in the aggregate, would or could reasonably be expected to have a material adverse effect on the financial condition, results of operations, assets or business of the combined company following the Merger.

 

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DESCRIPTION OF THE MERGER AGREEMENT

The following summary, which includes the material terms of the Merger Agreement, is qualified by reference to the complete text of the Merger Agreement, which is attached as Annex A to this joint proxy statement/prospectus and is incorporated by reference in this joint proxy statement/prospectus. This summary does not purport to be complete and may not contain all of the information about the Merger Agreement that is important to you. FSK and FSKR encourage you to read the Merger Agreement carefully and in its entirety.

Structure of the Merger

Pursuant to the terms of the Merger Agreement, at the Effective Time, Merger Sub will be merged with and into FSK. FSK will be the surviving corporation and will continue its existence as a corporation under the laws of the State of Maryland. As of the Effective Time, the separate corporate existence of Merger Sub will cease. Immediately after the occurrence of the Effective Time, in the Subsequent Combination, the surviving corporation will merge with and into FSK in accordance with the MGCL, with FSK as the surviving corporation.

Closing; Completion of the Proposed Merger

It is currently expected that the Merger will be completed promptly following receipt of the required stockholder approvals at the FSK Special Meeting and the FSKR Special Meeting and satisfaction of the other closing conditions set forth in the Merger Agreement. The Subsequent Combination will occur immediately after the Merger is completed.

The Merger will occur no later than five business days after the satisfaction or waiver of the conditions to closing set forth in the Merger Agreement or at another time as may be agreed to in writing by FSK and FSKR. The Subsequent Combination will occur immediately after the Merger is completed. If the applicable stockholder approvals are obtained at the FSK Special Meeting and the FSKR Special Meeting, and the other conditions to closing the Merger are satisfied or waived, FSK and FSKR expect to complete the Merger in the second or third quarter of 2021.

Merger Consideration

If the Merger is consummated, each FSKR stockholder will be entitled to receive for each share of FSKR Common Stock, that number of shares of FSK Common Stock equal to the quotient of the NAV per share of FSKR Common Stock divided by the NAV per share of FSK Common Stock (the “Exchange Ratio”), subject to adjustment pursuant to the terms of the Merger Agreement and, at the election of FSK, the payment of cash in lieu of fractional shares. The Exchange Ratio is calculated based on the NAV per share of FSK Common Stock and the NAV per share of FSKR Common Stock, each as of an agreed upon a date no less than 48 hours (excluding Sundays and holidays) prior to the closing. The Exchange Ratio will be appropriately adjusted if, between the date of the Determination Date and the Effective Time, either (1) the respective outstanding shares of FSK Common Stock or FSKR Common Stock have been increased or decreased or changed into or exchanged for a different number or kind of shares or securities as a result of any reclassification, recapitalization, stock split, reverse stock split, split-up, combination or exchange of shares, or (2) if a stock dividend or dividend payable in any other securities shall be authorized and declared with a record date within such period. At the election of FSK, each holder of shares of FSKR Common Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of FSK Common Stock will receive, in lieu thereof, cash (without interest) in an amount equal to the product of (1) such fractional part of a share of FSK Common Stock multiplied by (2) the volume-weighted average trading price of a share of FSK Common Stock on the NYSE for the five consecutive trading days ending on the third (3rd) trading day preceding the Closing Date.

 

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Dividends and Distributions

No dividends or other distributions with respect to the FSK Common Stock will be paid to the holder of any unsurrendered shares of FSKR Common Stock with respect to the shares of the FSK Common Stock represented thereby. Following the closing of the Merger, the record holders of shares of FSK Common Stock shall be entitled to receive, without interest, (1) the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to the whole shares of FSK Common Stock formerly represented by such shares of FSKR Common Stock and not paid and/or (2) at the appropriate payment date, the amount of dividends or other distributions payable with respect to shares of FSK Common Stock represented by former shares of FSKR Common Stock with a record date after the Effective Time (but before the issuance of FSK Common Stock issuable with respect to such shares of FSKR Common Stock) and with a payment date subsequent to the issuance of the FSK Common Stock issuable with respect to such shares of FSKR Common Stock.

Conversion of Shares; Exchange of Shares

At the Effective Time, each share of FSKR Common Stock issued and outstanding immediately prior to the Effective Time, will be converted into the right to receive the Merger Consideration (excluding treasury stock and shares held by FSK and its consolidated subsidiaries, including Merger Sub). Each such share of FSKR Common Stock will no longer be outstanding and will be automatically canceled and cease to exist, with the holders of such shares ceasing to have any rights with respect to any FSKR Common Stock other than the right to receive the Merger Consideration upon the surrender of such shares of FSKR Common Stock in accordance with the terms of the Merger Agreement.

After the Effective Time, no registration of transfers on the stock transfer books of FSKR, other than to settle transfers that occurred prior to the Effective Time, will occur. If shares of FSKR Common Stock are presented for transfer to the exchange agent, such shares will be cancelled against delivery of the applicable Merger Consideration.

Withholding

FSK or the exchange agent, as applicable, will be entitled to deduct and withhold from any amounts payable to any FSKR stockholder such amounts as each determines in good faith are required to be deducted and withheld with respect to the making of such payment under applicable tax laws. If any amounts are withheld and paid over to the appropriate governmental entity, such withheld amounts will be treated as having been paid to the FSKR stockholders from whom they were withheld.

Representations and Warranties

The Merger Agreement contains representations and warranties of FSK, FSKR and the Advisor relating to their respective businesses. With the exception of certain representations that must be true and correct in all or virtually all respects, or in all material respects, no representation or warranty will be deemed untrue, and neither party will be deemed to have breached a representation or warranty, as a consequence of the existence of any fact, circumstance or event unless such fact, circumstance or event, individually or when taken together with all other facts, circumstances and events inconsistent with any representation made by such party (without considering “materiality” or “material adverse effect” qualifications), has had or is reasonably expected to have a material adverse effect (as defined below). The representations and warranties in the Merger Agreement will not survive after the Effective Time.

The Merger Agreement contains representations and warranties by each of FSK and FSKR, subject to specified exceptions and qualifications, relating to, among other things:

 

   

corporate organization, including incorporation, qualification and subsidiaries;

 

   

capitalization;

 

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power and authority to execute, deliver and perform obligations under the Merger Agreement;

 

   

the absence of violations of (1) organizational documents, (2) laws or orders or (3) permits, contracts or other obligations;

 

   

required government filings and consents;

 

   

SEC reports and financial statements;

 

   

internal controls and disclosure controls and procedures;

 

   

broker’s fees;

 

   

absence of certain changes and actions since December 31, 2019;

 

   

compliance with applicable laws and permits;

 

   

state takeover laws;

 

   

the accuracy and completeness of information supplied for inclusion in this document and other governmental filings in connection with the Merger;

 

   

tax matters;

 

   

absence of certain litigation, orders or investigations;

 

   

employment and labor matters, including with respect to any employee benefit plans;

 

   

material contracts and certain other types of contracts;

 

   

insurance coverage;

 

   

intellectual property matters;

 

   

environmental matters;

 

   

owned and leased properties;

 

   

investment assets;

 

   

absence of appraisal rights (with respect to FSKR stockholders); and

 

   

the value of certain investment assets.

The Merger Agreement contains representations and warranties by the Advisor, subject to specified exceptions and qualifications, relating to:

 

   

corporate organization, including incorporation and qualification;

 

   

power and authority to execute, deliver and perform obligations under the Merger Agreement;

 

   

the absence of violations of (1) organizational documents, (2) laws or orders or (3) permits, contracts or other obligations;

 

   

compliance with applicable laws and permits;

 

   

absence of certain litigation, orders or investigations;

 

   

the value of investment assets owned by FSK and FSKR;

 

   

the accuracy of information supplied or to be supplied by the Advisor for inclusion in this joint proxy statement/prospectus;

 

   

the participation in the Merger by FSK and FSKR and the impact of the Merger on the existing stockholders of FSK and FSKR;

 

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the financial resources of the Advisor;

 

   

the forbearances applicable to FSK and FSKR set forth in the Merger Agreement; and

 

   

the representations and warranties made by FSK and FSKR in the Merger Agreement.

These representations and warranties were made as of specific dates, may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating the terms of the Merger Agreement and may have been included in the Merger Agreement for the purpose of allocating risk between the parties rather than to establish matters as facts. The Merger Agreement is described in, and included as Annex A to, this document only to provide you with information regarding its terms and conditions and not to provide any other factual information regarding the parties or their respective businesses. Accordingly, the representations and warranties and other provisions of the Merger Agreement should not be read alone, but instead, should be read only in conjunction with the information provided elsewhere in this document.

For purposes of the Merger Agreement, “material adverse effect” with respect to FSK, FSKR or the Advisor, as applicable, means, any event, development, change, effect or occurrence that is, or would reasonably be expected to be, individually or in the aggregate, materially adverse to (1) the business, operations, condition (financial or otherwise) or results of operations of such party and its subsidiaries, taken as a whole or (2) the ability of such party to timely perform its material obligations under the Merger Agreement or consummate the Merger and the transactions contemplated thereby. None of the following events, developments, changes, effects or occurrences, among others, will constitute or be taken into account in determining whether a material adverse effect has occurred or is reasonably expected to occur with respect to clause (1) in the immediately preceding sentence:

 

   

changes in general economic, social or political conditions or financial markets in general;

 

   

general changes or developments in the industries in which such party and its subsidiaries operate, including general changes in law across such industries or geographic areas;

 

   

the COVID-19 pandemic or the related responses of governmental entities with respect thereto;

 

   

the announcement of the Merger Agreement or the transactions contemplated thereby or the identities of the parties to the Merger Agreement; and

 

   

any failure to meet internal or published projections or forecasts for any period, or, in the case of FSK, any decline in the price of shares of FSK Common Stock on the NYSE or trading volume of FSK Common Stock, or, in the case of FSKR, any decline in the price of shares of FSKR Common Stock on the NYSE or trading volume of FSKR Common Stock (provided that the underlying cause of such failure or decline will be considered in determining whether there is a material adverse effect).

The events, developments, changes, effects and occurrences set forth in the first two bullets in the immediately preceding paragraph will otherwise be taken into account in determining whether a material adverse effect has occurred to the extent such events, developments, changes, effects or occurrences have a materially disproportionate adverse impact on such party and its subsidiaries taken as whole relative to other participants in the same industries in which such party conducts its businesses.

Conduct of Business Pending Completion of the Merger

Each of FSK and FSKR has undertaken customary covenants that place restrictions on it and certain of its subsidiaries until completion of the Merger. In general, FSK and FSKR have each agreed that before the completion of the Merger, except as may be required by law, as expressly contemplated by the Merger Agreement, or with the prior written consent of the other parties to the Merger Agreement (which prior written consent shall not be unreasonably delayed, conditioned or withheld), it will, and will cause each of its subsidiaries to, conduct its business in the ordinary course of business consistent with past practice and use

 

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reasonable best efforts to maintain and preserve intact its business organization and existing business relationships, provided, that in response to the COVID-19 pandemic, each of FSK and FSKR may take any commercially reasonable actions that such party determines are necessary or prudent.

In addition, before the completion of the Merger, FSK and FSKR have each agreed that, except as may be required by law or as expressly contemplated by the Merger Agreement, such party will not, and will not permit any of its subsidiaries to, directly or indirectly, without the prior written consent of the other parties to the Merger Agreement:

 

   

other than pursuant to the such party’s distribution reinvestment plan, issue, deliver, sell or grant, or encumber or pledge, or authorize the creation of (1) any shares of its capital stock, (2) any voting securities or (3) any securities convertible into or exercisable or exchangeable for, or any other rights to acquire, any such shares or other securities;

 

   

(1) make, authorize, declare, pay or set aside any dividend (other than a Tax Dividend) in respect of, or declare or make any distribution on, any shares of its capital stock, except for (a) the authorization, announcement and payment of regular quarterly cash distributions payable on a quarterly basis consistent with past practices and such party’s investment objectives and policies as publicly disclosed, (b) the authorization and payment of any dividend or distribution necessary for to such party to maintain its qualification as a RIC or avoid the imposition of any income or excise tax, (c) dividends payable by any direct or indirect wholly owned subsidiary of such party to such party or another direct or indirect wholly owned subsidiary of such party or (d) a final Tax Dividend for the period beginning on January 1, 2020 and ending on the date the transactions contemplated by the Merger Agreement are consummated as required by law; (2) adjust, split, combine, reclassify or take similar action with respect to any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock; or (3) purchase, redeem or otherwise acquire, any shares of its capital stock or any rights, warrants or options to acquire, or securities convertible into, such capital stock. “Tax Dividend” means a dividend or dividends, with respect to a tax year, which is deductible pursuant to the dividends paid deduction under Section 562 of the Code, and shall have the effect of distributing to FSKR’s stockholders all of its previously undistributed (1) “investment company taxable income” within the meaning of Section 852(b) of the Code (determined without regard to Section 852(b)(2)(D) of the Code), (2) any prior year shortfall as determined under Section 4982(b)(2) of the Code, (3) amounts constituting the excess of (A) the amount specified in Section 852(a)(1)(B)(i) of the Code over (B) the amount specified in Section 852(a)(1)(B)(ii) of the Code, and (4) net capital gain (within the meaning of Section 1222(11) of the Code), if any, in each case recognized either in the applicable tax year or any prior tax year;

 

   

sell, transfer, lease, mortgage, encumber or otherwise dispose of any of its assets or properties, except for sales, transfers, leases, mortgages, encumbrances or other dispositions (1) in the ordinary course of business consistent with past practice and such party’s investment objectives and policies as publicly disclosed, or (2) encumbrances required to secure indebtedness of such party or any of its subsidiaries;

 

   

acquire or agree to acquire all or any portion of the assets, business or properties of any other person or entity, whether by merger, consolidation, purchase or otherwise or make any other investments, except in a transaction conducted in the ordinary course of business consistent such party’s investment objectives and policies as publicly disclosed;

 

   

amend any of its governing documents or governing documents of any of its subsidiaries;

 

   

implement or adopt any material change in its tax or financial accounting principles, practices or methods, other than as required by applicable law, U.S. generally accepted accounting principles, the SEC or applicable regulatory requirements;

 

   

hire any employees or establish, become a party to or commit to adopt any employee benefit plan;

 

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take any action or knowingly fail to take any action that would, or would reasonably be expected to (1) materially delay or materially impede the ability of the parties to consummate the Merger or (2) prevent the Merger from qualifying as a “reorganization” under Section 368(a) of the Code;

 

   

incur any indebtedness or guarantee any indebtedness of another person or entity, except for draw-downs with respect to certain disclosed financing arrangements and obligations to fund commitments to portfolio companies entered into in the ordinary course of business and other specifically permitted indebtedness;

 

   

make or agree to make any new capital expenditure, except for obligations to fund commitments to portfolio companies entered into in the ordinary course of business;

 

   

file or amend any material tax return other than in the ordinary course of business consistent with past practice and such party’s investment objectives and policies as publicly disclosed;

 

   

make, change or revoke any tax election; or settle or compromise any material tax liability or refund;

 

   

take any action, or knowingly fail to take any action, which action or failure to act is reasonably likely to cause such party to fail to qualify or not be subject to tax as a RIC;

 

   

enter into any new line of business (except for any portfolio companies in which such party or any of its subsidiaries has made a debt or equity investment that is, would or should be reflected in such party’s schedule of investments included in its quarterly or annual periodic reports that are filed with the SEC);

 

   

other than in the ordinary course of business consistent with past practice and such party’s investment objectives and policies as publicly disclosed, enter into any material contract;

 

   

other than in the ordinary course of business consistent with past practice and such party’s investment objectives and policies as publicly disclosed, terminate, cancel, renew or agree to any material amendment of, change in or waiver under any material contract;

 

   

settle any proceeding against it, except for proceedings that (1) are settled in the ordinary course of business consistent with past practice and such party’s investment objectives and policies as publicly disclosed in an amount not in excess of $250,000 in the aggregate (after reduction by any insurance proceeds actually received), (2) would not impose any material restriction on the conduct of business of it or any of its subsidiaries or, after the Effective Time, FSK, FSKR, the surviving corporation or any of their subsidiaries, and (3) would not admit liability, guilt or fault;

 

   

other than in the ordinary course of business and consistent with such party’s investment objectives and policies as publicly disclosed, (1) pay, discharge or satisfy any indebtedness for borrowed money, other than the payment, discharge or satisfaction required pursuant to the terms of outstanding debt of such party or its subsidiaries or (2) cancel any material indebtedness;

 

   

merge or consolidate such party or any of its subsidiaries with any person or entity or enter into any other similar extraordinary corporate transaction with any person or entity, or adopt, recommend, propose or announce an intention to adopt a plan of complete or partial liquidation, dissolution, restructuring, recapitalization or other reorganization of such party or any of its subsidiaries; or

 

   

agree to take, make any commitment to take, or adopt any resolutions authorizing, any of the foregoing actions.

Additional Agreements

Further Assurances; Regulatory Matters

The Merger Agreement contains covenants relating to the preparation of this document, the holding of the FSK Special Meeting and the FSKR Special Meeting, access to information of the other party, obtaining certain

 

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regulatory and third party consents, publicity, tax matters and takeover statutes and provisions. The Merger Agreement obligates the parties to cooperate with each other and use reasonable best efforts to take all actions, and to do all things necessary to obtain as promptly as practicable all permits of all governmental entities, to effect all applications, notices, petitions and filings, to obtain as promptly as practicable all permits of all governmental entities and all permits, consents, approvals, confirmations and authorizations of all third parties that are necessary or advisable, to consummate the transactions (including the Merger), and to comply with the terms and conditions of all such permits, consents, approvals and authorizations of all such third parties and governmental entities.

The parties are required to file any required applications, notices or other filings under the HSR Act as promptly as practicable. In connection with such filings, the parties are required to cooperate with one another, to keep the other party informed of any communications received from governmental entities and permit the other party to review such communications. The parties must consult with each other with respect to the obtaining of all permits, consents, approvals and authorizations of all third parties and permits of all governmental entities necessary or advisable to consummate the transactions contemplated by the Merger Agreement (including the Merger) and each party must keep the other reasonably apprised of the status of matters relating to completion of the Merger. The parties are not required to make payments or provide other consideration for the repayment, restructuring or amendment of terms of indebtedness in connection with the Merger.

Stockholder Approval

FSK and FSKR have agreed to hold their respective Special Meetings as promptly as practicable following the effectiveness of this joint proxy statement/prospectus for the purpose of obtaining the approval of such party’s stockholders of the proposal(s) of such party set forth herein. Unless the FSK Board withdraws its recommendation to approve the FSK Merger Proposal, the Merger Stock Issuance Proposal or the FSK Advisory Agreement Amendment Proposal, or unless the FSKR Board withdraws its recommendation to approve the FSKR Merger Proposal, each of FSK and FSKR will be required to use its reasonable best efforts to obtain from its stockholders the vote required to approve such proposal(s), and such obligations will not be affected by the existence of any takeover proposals (in respect of FSKR) or any adverse recommendation change made by FSK or FSKR, respectively.

NYSE Listing

FSK is required to use reasonable best efforts to cause the shares comprising the Merger Consideration to be approved for listing on the NYSE at or prior to the Effective Time.

Directors & Officers’ Indemnification

FSK has agreed to indemnify, defend and hold harmless, and advance expenses, to the present and former directors and officers of FSKR or any of its consolidated subsidiaries (collectively, the “D&O Indemnified Parties”) against all costs or expenses (including, reasonable attorneys’ fees actually incurred, reasonable experts’ fees, reasonable travel expenses, court costs, transcript fees and telecommunications, postage and courier charges), judgments, fines, losses, claims, damages penalties, amounts paid in settlement or other liabilities in connection with any proceeding arising with respect to all acts or omissions in such capacities at any time at or prior to the Effective Time (including any matters arising in connection with the Merger Agreement or the transactions contemplated thereby), to the fullest extent permitted by applicable law. If an indemnification liability arises, (i) FSK has agreed to advance to the applicable D&O Indemnified Party, upon request, reimbursement of documented expenses reasonably and actually incurred so long as such D&O Indemnified Party, or someone on his or her behalf, undertakes to repay such advanced expenses if he or she is ultimately determined to not be entitled to indemnification and such D&O Indemnified Party complies with other applicable provisions imposed under the Investment Company Act and interpretations thereof by the SEC or its staff and (ii) FSK and the applicable D&O Indemnified Party will cooperate in the defense of such matter.

 

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No Solicitation

Each of FSK and FSKR has agreed to, and to cause its affiliates, subsidiaries, and its and each of their respective officers, directors, trustees, managers, employees, consultants, financial advisors, attorneys, accountants and other advisors, representatives and agents to, immediately cease and cause to be terminated all discussions or negotiations with respect to, or that are intended to or could reasonably be expected to lead to, a “Takeover Proposal” (as described below) from a third party and not to directly or indirectly: (1) solicit or take any other action (including by providing information) designed to, or which could reasonably be expected to, facilitate any inquiries or the making or submission or implementation of any proposal or offer (including any proposal or offer to its stockholders) with respect to any Takeover Proposal; (2) approve, publicly endorse or recommend or enter into any agreement, arrangement, discussions or understandings with respect to any Takeover Proposal or enter into any contract or understanding requiring it to abandon, terminate or fail to consummate, or that is intended to or that could reasonably be expected to result in the abandonment of, termination of or failure to consummate, the Merger or any other transaction contemplated by the Merger Agreement; (3) initiate or participate in any way in any negotiations or discussions regarding, or furnish or disclose to any person (other than FSK, FSKR and their respective affiliates) any information with respect to, or take any other action to facilitate or in furtherance of any inquiries or the making of any proposal that constitutes, or could reasonably be expected to lead to, any Takeover Proposal; (4) publicly propose or publicly announce an intention to take any of the foregoing actions; or (5) grant any (a) approval pursuant to any takeover statute to any person (other than FSK, FSKR and or its respective affiliates) or with respect to any transaction (other than the transactions contemplated by the Merger Agreement) or (b) waive or release under any standstill or any similar agreement with respect to equity securities of FSK or FSKR, provided however that each of FSK and FSKR may inform persons of these provisions and are permitted to grant a waiver of, or terminate, any “standstill” or similar obligation of any third party with respect to equity securities of FSK or FSKR, as applicable, in order to allow such third party to confidentially submit a Takeover Proposal. If FSK or FSKR receives a Takeover Proposal or similar request for information, it must notify FSKR or FSK, as applicable, as promptly as reasonably practicable (and in any event within 24 hours), provide the other party with copies of any written materials received by it in connection thereto (including the identity of the potential acquirer), and keep the other party informed on a reasonably current basis of the status (including the status of negotiations) of such Takeover Proposal or similar request for information.

FSK and FSKR Recommendations

If, prior to a Fund Party’s Special Meeting, (1) the applicable Fund Party receives a bona fide unsolicited Takeover Proposal from a third party, (2) the board of directors of such Fund Party determines in good faith, after consultation with its outside legal counsel that (a) failure to consider such Takeover Proposal would reasonably likely be a breach of the standard of conduct applicable to the directors of such party under applicable Law and (b) such Takeover Proposal constitutes or is reasonably likely to result in an “FSK Superior Proposal” or “FSKR Superior Proposal,” as applicable; and (3) such Fund Party gives the other Fund Party at least two Business Days prior written notice of the identity of the third party making such Takeover Proposal, the terms and conditions of such Takeover Proposal and such Fund Party’s intention to furnish information to, or participate in discussions or negotiations with, such third party then such Fund Party may engage in discussions and negotiations with such third party so long as certain notice and other procedural requirements are satisfied, including providing notice to the other Fund Party within 24 hours after determining that a Takeover Proposal constitutes an FSK Superior Proposal or FSKR Superior Proposal, as applicable.

In addition, such Fund Party may take other actions if such Fund Party’s board of directors determines (by a majority of its members), after consultation with its outside counsel, that the continued recommendation of the FSK Merger Proposal, the Merger Stock Issuance Proposal and the FSK Advisory Agreement Amendment Proposal, in the case of FSK, or the FSKR Merger Proposal in the case of FSKR, to its respective stockholders would reasonably likely be a breach of the standard of conduct applicable to the directors of such Fund Party under applicable law as a result of an FSK Superior Proposal or an FSKR Superior Proposal, as applicable,

 

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including withdrawing, qualifying, or modifying the recommendation of the board of directors of such Fund Party that the stockholders of such Fund Party approve the FSK Merger Proposal, the Merger Stock Issuance Proposal and the FSK Advisory Agreement Amendment Proposal, in the case of FSK, or the FSKR Merger Proposal, in the case of FSKR, or taking any other action inconsistent with such recommendation (an “FSK Adverse Recommendation Change” or an “FSKR Adverse Recommendation Change,” as applicable). FSK and FSKR may terminate the Merger Agreement and enter into an agreement with a third party who makes a superior proposal, subject to (1) negotiating in good faith to amend the Merger Agreement so that the superior proposal is no longer deemed a superior proposal and satisfying certain other procedural requirements and (2) the payment by a third-party suitor of such Fund Party of a termination fee to the other Fund Party. Other than in connection with a Takeover Proposal, nothing in the Merger Agreement shall prohibit or restrict the board of directors of the applicable Fund Party from withdrawing or qualifying or publicly proposing to withdraw or qualify the approval, adoption, recommendation or declaration of the FSK Merger Proposal, the Merger Stock Issuance Proposal, the FSK Advisory Agreement Amendment Proposal or the FSKR Merger Proposal, as applicable, in response to an Intervening Event (as defined below), subject to the procedures set forth in the Merger Agreement.

Related Definitions

For purposes of the Merger Agreement:

 

   

“Takeover Proposal” means any inquiry, proposal, discussions, negotiations or offer from any person or group of persons (other than FSK, FSKR or any of their affiliates) (1) with respect to a merger, consolidation, tender offer, exchange offer, stock acquisition, asset acquisition, share exchange, business combination, recapitalization, liquidation, dissolution, joint venture or similar transaction involving FSK or FSKR’s or any of its subsidiaries or (2) relating to any direct or indirect acquisition, in one transaction or a series of transactions, of (a) assets or businesses (including any mortgage, pledge or similar disposition thereof but excluding any bona fide financing transaction) that constitute or represent, or would constitute or represent if such transaction is consummated, 25% or more of the total assets, net revenue or net income of FSK or FSKR, as applicable, and its respective subsidiaries, taken as a whole, or (b) 25% or more of the outstanding shares of capital stock of, or other equity or voting interests in, FSK or FSKR, as applicable, or in any of its subsidiaries, in each case other than the Merger and the other transactions contemplated thereby.

 

   

“FSK Superior Proposal” means a bona fide written Takeover Proposal that was not knowingly solicited by, or the result of any knowing solicitation by, FSK or any of its subsidiaries or by any of their respective affiliates or representatives in violation of the Merger Agreement, made by a third party that would result in such third party becoming the beneficial owner, directly or indirectly, of more than 75% of the total voting power of FSK or more than 75% of the assets FSK on a consolidated basis (1) on terms which the FSK Board determines in good faith to be superior for the stockholders of FSK unaffiliated with the Advisor and its affiliates (in their capacity as stockholders), taken as a group, from a financial point of view as compared to the Merger (after giving effect to the payment of the termination fee to FSK and any alternative proposed by FSKR), (2) that is reasonably likely to be consummated (taking into account, among other things, all legal, financial, regulatory and other aspects of the proposal, including any conditions, and the identity of the offeror) in a timely manner and in accordance with its terms and (3) in respect of which any required financing has been determined by the FSK Board (upon recommendation of the independent directors of FSK) to be reasonably likely to be obtained, as evidenced by a written commitment of a reputable financing source.

 

   

“FSKR Superior Proposal” means a bona fide written Takeover Proposal that was not knowingly solicited by, or the result of any knowing solicitation by, FSKR or any of its subsidiaries or by any of their respective affiliates or representatives in violation of the Merger Agreement, made by a third party that would result in such third party becoming the beneficial owner, directly or indirectly, of more than 75% of the total voting power of FSKR or more than 75% of the assets FSKR on a consolidated basis (1) on terms which the FSKR Board (upon recommendation of the independent

 

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directors) determines in good faith to be superior for the stockholders of FSKR (in their capacity as stockholders), taken as a group, from a financial point of view as compared to the Merger (after giving effect to the payment of the termination fee to FSK and any alternative proposed by FSK), (2) that is reasonably likely to be consummated (taking into account, among other things, all legal, financial, regulatory and other aspects of the proposal, including any conditions, and the identity of the offeror) in a timely manner and in accordance with its terms and (3) in respect of which any required financing has been determined by the FSKR Board (including a majority of the independent directors of FSKR) to be reasonably likely to be obtained, as evidenced by a written commitment of a reputable financing source.

 

   

“Intervening Event” means with respect to any party any event, change or development first occurring or arising after the date hereof that is material to, as applicable, FSKR and its subsidiaries, taken as a whole, or FSK and its subsidiaries, taken as whole, that was not known to, or reasonably foreseeable by, any member of the party’s board of directors, as of or prior to the date hereof and did not result from or arise out of the announcement or pendency of, or any actions required to be taken by such party (or to be refrained from being taken by such party) pursuant to, the Merger Agreement; provided, however, that in no event shall the following events, circumstances, or changes in circumstances constitute an Intervening Event: (1) the receipt, existence, or terms of a Takeover Proposal or any matter relating thereto or consequence thereof or any inquiry, proposal, offer, or transaction from any third party relating to or in connection with a transaction of the nature described in the definition of “Takeover Proposal” (which, for the purposes of the Intervening Event definition, shall be read without reference to the percentage thresholds set forth in the definition thereof); (2) any change in the price, or change in trading volume, of the FSK Common Stock (provided, however, that the exception to this clause (2) shall not apply to the underlying causes giving rise to or contributing to such change or prevent any of such underlying causes from being taken into account in determining whether an Intervening Event has occurred unless such underlying causes are otherwise excluded from the definition of Intervening Event); (3) changes in general economic, social or political conditions or the financial markets in general; (4) any event, change or development related to the coronavirus (COVID-19) pandemic or other related responses of governmental entities with respect thereto; or (5) general changes or developments in the industries in which the applicable party and its consolidated subsidiaries operate, including general changes in law after the date hereof across such industries.

Other than as described herein, neither FSKR nor the FSKR Board may make any FSKR Adverse Recommendation Change, and no FSKR Adverse Recommendation Change will change the approval of the FSKR Merger Proposal or any other approval of the FSKR Board, including in any respect that would have the effect of causing any takeover statue or similar statute to be applicable to the transactions contemplated by the Merger Agreement.

Access to Information

Upon reasonable notice, except as may otherwise be restricted by applicable law, each of FSK and FSKR shall, and shall cause its subsidiaries, to afford to the directors, officers, accountants, counsel, advisors and other representatives of the other party, reasonable access, during normal business hours during the period prior to the Effective Time, to its properties, books, contracts, and records and, during such period, such party shall, and shall cause its subsidiaries to, make available to the other party (including via EDGAR) all other information concerning its business and properties as the other party may reasonably request. Such access may be limited to the extent FSK or FSKR, as applicable, reasonably determines, in light of the COVID-19 pandemic, that such access would jeopardize the health and safety of its employees.

Publicity

FSK, FSKR and the Advisor each shall consult with the other before issuing or causing the publication of any press release or other public announcement with respect to the transactions contemplated by the Merger

 

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Agreement, except as may be required by applicable law, the rules and regulations of the NYSE and, to the extent such press release or disclosure is issued or made, FSK, FSKR or the Advisor, as applicable, shall have used commercially reasonable efforts to advise the other party of, and consult with the other party regarding, the text of such disclosure.

Takeover Statutes and Provisions

Neither FSK nor FSKR will take any action that would cause the transactions contemplated by the Merger Agreement to be subject to the requirements imposed by any takeover statute, and each of FSK and FSKR shall take all necessary steps within its control to exempt such transactions from any applicable takeover statute.

Tax Matters

FSK and FSKR shall each obtain an opinion from Dechert LLP, as counsel to FSK and FSKR, generally to the effect that the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. FSKR shall also declare a Tax Dividend with respect to all taxable years ending prior to the Effective Time, which Tax Dividend shall either have been paid by FSKR prior to the Effective Time or shall be paid by FSK to the former shareholders of FSKR and shall reduce the NAV of FSKR used to calculate the Merger Consideration.

Stockholder Litigation

The parties to the Merger Agreement shall reasonably cooperate and consult with one another in connection with defense and settlement of any proceeding by FSK’s stockholders or FSKR’s stockholders against any of them or any of their respective directors, officers or affiliates with respect to the Merger Agreement or the transactions contemplated thereby, and each of FSK and FSKR shall keep the other party reasonably informed of any material developments in connections with any such proceeding brought by its stockholders and shall not settle any such proceeding without the prior written consent of the other party.

Section 16 Matters

Prior to the Effective Time, each of the FSK Board and the FSKR Board shall take all such steps as may be required to cause any dispositions of FSKR Common Stock or acquisitions of FSK Common Stock resulting from the transactions contemplated by the Merger Agreement by each individual who is subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to FSKR or will become subject to such reporting requirements with respect to FSK, in each case, to be exempt pursuant to Rule 16b-3.

No Other Representations or Warranties

The parties acknowledge and agree that except for the representations contained in the Merger Agreement, none of the Advisor, FSK, FSKR or any of FSK’s or FSKR’s respective subsidiaries or any other person acting on behalf of the foregoing makes any representation or warranty, express or implied.

Merger of the Surviving Corporation

Immediately after the occurrence of the Effective Time and in accordance with the MGCL, the surviving corporation and FSK shall consummate the Subsequent Combination.

Coordination of Dividends

FSK and FSKR shall coordinate with each other in designating the record and payment dates for any quarterly dividends or distributions to its stockholders declared in accordance with the Merger Agreement in any calendar quarter in which the Closing Date might reasonably be expected to occur, and neither FSK nor FSKR

 

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shall authorize or declare any dividend or distributions to stockholders after the Determination Date at any time on or before the Closing Date, other than dividends payable in accordance with the Merger Agreement, including Tax Dividends.

Conditions to Closing the Merger

Conditions to Each Party’s Obligations to Effect the Merger

The obligations of FSK and FSKR to complete the Merger are subject to the satisfaction or waiver at or prior to the Effective Time of the following conditions:

 

   

the required approvals of FSK and FSKR stockholders are obtained at their respective Special Meetings;

 

   

the shares of FSK Common Stock to be issued in the Merger have been authorized for listing on NYSE, subject to official notice of issuance;

 

   

the registration statement, of which this document forms a part, has become effective and no stop order suspending its effectiveness has been issued and no proceedings for that purpose have been initiated by the SEC, and any necessary state securities or “blue sky” authorizations have been received;

 

   

no order issued by any court or agency of competent jurisdiction or other law preventing, enjoining, restraining or making illegal the consummation of the Merger or any of the other transactions contemplated thereby is in effect;

 

   

all regulatory approvals required by applicable law to consummate the Merger have been obtained and remain in full force and effect and all statutory waiting periods required by applicable law in respect thereof have expired (including expiration of the applicable waiting period under the HSR Act);

 

   

no proceeding by any governmental entity of competent jurisdiction is pending that challenges the Merger or any of the other transactions contemplated by the Merger Agreement or that otherwise seeks to prevent, enjoin, restrain or make illegal the consummation of the Merger or any of the other transactions contemplated by the Merger Agreement;

 

   

the determination of the FSK NAV and the FSKR NAV, in each case as of the Determination Date, have been completed in accordance with the Merger Agreement; and

 

   

the representations and warranties of the Advisor contained in the Merger Agreement are true and correct, without giving effect to any materiality or material adverse effect qualifications stated therein, as of the date of the Merger Agreement and as of the Closing Date (except to the extent that any such representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty shall be true and correct as of such earlier date); provided, that this condition shall be deemed satisfied even if any such representations and warranties of the Advisor are not so true and correct, unless the failure of such representations and warranties to be so true and correct, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect with respect to FSK or FSKR.

Conditions to Obligations of FSK and Merger Sub to Effect the Merger

The obligations of FSK and Merger Sub to effect the Merger are also subject to the satisfaction, or waiver by FSK, at or prior to the Effective Time, of the following conditions:

 

   

the representations and warranties of FSKR pertaining to:

 

  (1)

the authorized and outstanding capital stock of FSKR are true and correct in all respects as of the date of the Merger Agreement and the Closing Date other than for de minimis inaccuracies (except to the extent that any such representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty shall be true and correct as of such earlier date);

 

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  (2)

absence of certain changes or events are true and correct in all respects as of the date of the Merger Agreement and the Closing Date (except to the extent that any such representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty shall be true and correct as of such earlier date);

 

  (3)

authority, no violation, brokers, state takeover laws and appraisal rights, in each case, are true and correct in all material respects as of the date of the Merger Agreement and the Closing Date (except to the extent that any such representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty shall be true and correct as of such earlier date); and

 

  (4)

all other representations contained in the Merger Agreement are true and correct, without giving effect to any materiality or material adverse effect qualifications stated therein, as of the date of the Merger Agreement and the Closing Date (except to the extent that any such representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty shall be true and correct as of such earlier date);

 

   

FSKR has performed in all material respects all obligations required to be performed by it under the Merger Agreement at or prior to the Effective Time, and FSK has received a certificate signed on behalf of FSKR by an executive officer of FSKR to such effect;

 

   

since the date of the Merger Agreement, there has not occurred any condition, change or event that, individually or in the aggregate, has had or would reasonably be expected to have, a material adverse effect in respect of FSKR;

 

   

FSKR has delivered within 30 days prior to the Closing Date a duly executed certificate stating that FSKR is not and has not been within five years of the date of the certificate a “United States real property holding corporation” within the meaning of Section 897 of the Code in accordance with Treasury Regulations promulgated under Sections 897 and 1445 of the Code; and

 

   

FSK has received the opinion of its counsel substantially to the effect that, on the basis of facts, representations and assumptions set forth in such opinion that are consistent with the state of facts existing at the Closing Date, the Merger and Subsequent Combination will be treated as a reorganization within the meaning of Section 368(a) of the Code; provided, that if counsel for FSK will not render such an opinion, counsel for FSKR may render such opinion to FSK.

Conditions to Obligations of FSKR to Effect the Merger

The obligation of FSKR to effect the Merger is also subject to the satisfaction, or waiver by FSKR, at or prior to the Effective Time, of the following conditions:

 

   

the representations and warranties of FSK and Merger Sub, pertaining to:

 

  (1)

the authorized and outstanding capital stock of FSK are true and correct in all material respects as of the date of the Merger Agreement and the Closing Date other than for de minimis inaccuracies (except to the extent that any such representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty shall be true and correct as of such earlier date);

 

  (2)

absence of certain changes or events are true and correct in all respects as of the date of the Merger Agreement and the Closing Date (except to the extent that any such representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty shall be true and correct as of such earlier date);

 

  (3)

authority, no violation, brokers and state takeover laws, in each case, are true and correct in all material respects as of the date of the Merger Agreement and the Closing Date (except to the extent that any such representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty shall be true and correct as of such earlier date); and

 

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  (4)

all other representations contained in the Merger Agreement are true and correct, without giving effect to any materiality or material adverse effect qualifications stated therein, as of the date of the Merger Agreement date and the Closing Date (except to the extent that any such representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty shall be true and correct as of such earlier date);

 

   

each of FSK and Merger Sub have performed in all material respects all obligations required to be performed by it under the Merger Agreement at or prior to the Effective Time, and FSKR has received a certificate signed on behalf of FSK by an executive officer of FSK to such effect;

 

   

since the date of the Merger Agreement, there has not occurred any condition, change or event that, individually or in the aggregate, has had or would reasonably be expected to have, a material adverse effect in respect of FSK;

 

   

FSKR has received the opinion of its counsel substantially to the effect that, on the basis of facts, representations and assumptions set forth in such opinion that are consistent with the state of facts existing at the Closing Date, the Merger and Subsequent Combination will be treated as a reorganization within the meaning of Section 368(a) of the Code; provided, that if counsel for FSKR will not render such an opinion, counsel for FSK may render such opinion to FSKR.

Frustration of Closing Conditions

No party to the Merger Agreement may rely on the failure of any condition applicable to the other party to be satisfied to excuse performance by such party of its obligations under the Merger Agreement if such failure was caused by such party’s failure to act in good faith or use its commercially reasonable efforts to consummate the Merger and the transactions contemplated thereby.

Termination of the Merger Agreement

Right to Terminate

The Merger Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the FSKR Merger Proposal by the stockholders of FSKR or the FSK Merger Proposal, the Merger Stock Issuance Proposal or the FSK Advisory Agreement Amendment Proposal by the stockholders of FSK:

 

   

by mutual consent of FSK and FSKR;

 

   

by either FSK or FSKR, if:

 

  (1)

any governmental entity takes any final and non-appealable action that permanently restrains, enjoins or prohibits the transactions contemplated by the Merger Agreement;

 

  (2)

the Merger has not been completed on or before November 23, 2021 (the “Termination Date”), provided that the right to terminate the Merger Agreement on this basis shall not be available to any party whose failure to fulfill in any material respect any of its obligations under the Merger Agreement has been the cause of, or resulted in, the event giving rise to the failure to close prior to the Termination Date;

 

  (3)

the FSK or FSKR requisite stockholder approval is not obtained; or

 

  (4)

provided, however, that the right to terminate the Merger Agreement pursuant to any of the foregoing will not be available to any party that has breached in any material respect its obligations in any manner that has been the principal cause of or resulted in the failure to consummate the transactions contemplated by the Merger Agreement.

 

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by FSKR, if:

 

  (1)

FSK or Merger Sub breach or fail to perform any of their respective representations, warranties and covenants under the Merger Agreement, which breach would result in the failure of certain FSKR closing conditions, and such breach is not curable prior to the Termination Date or if curable prior to the Termination Date, has not been cured within 30 days after the giving of notice thereof by FSKR to FSK (provided that FSKR is not then in material breach so as to result in the failure of an FSK closing condition);

 

  (2)

prior to obtaining approval of the FSK Merger Proposal, the Merger Stock Issuance Proposal and the FSK Advisory Agreement Amendment Proposal by the stockholders of FSK (1) an FSK Adverse Recommendation Change occurs and/or FSK adopts, approves or recommends an FSK Takeover Proposal (or publicly proposes to do any of the foregoing), (2) the FSK Board fails to recommend that FSK’s stockholders vote in favor of (a) the FSK Merger Proposal, (b) the Merger Stock Issuance Proposal and (c) the FSK Advisory Agreement Amendment Proposal, (3) a Takeover Proposal is publicly announced and FSK fails to issue, within ten 10 business days after such Takeover Proposal is announced, a press release that reaffirms the recommendation of the FSK Board that FSK’s stockholders vote in favor of the FSK Merger Proposal, the Merger Stock Issuance Proposal and the FSK Advisory Agreement Amendment Proposal or (4) a tender or exchange offer relating to any shares of FSK Common Stock has been commenced by a third party and FSK did not send to its stockholders, within 10 business days after the commencement of such tender or exchange offer, a statement disclosing that the FSK Board recommends rejection of such tender or exchange offer;

 

  (3)

FSK breaches, in any material respect, its no solicitation obligations relating to the solicitation and administration of Takeover Proposals from third parties;

 

  (4)

prior to obtaining approval of the FSKR Merger Proposal by the stockholders of FSKR, (1) FSKR is not in material breach of any of the terms of the Merger Agreement, and (2) the FSKR Board properly authorizes FSKR to enter into, and FSKR enters into, a definitive contract with respect to an FSKR Superior Proposal and (3) the third party that made such FSKR Superior Proposal, prior to such termination, pays to FSK in immediately available funds a termination fee equal to $126.2 million; or

 

  (5)

a material adverse effect occurs with respect to FSK.

 

   

by FSK, if:

 

  (1)

FSKR breaches or fails to perform any of its representations, warranties and covenants under the Merger Agreement, which breach would result in the failure of FSK closing conditions, and such breach is not curable prior to the Termination Date or if curable prior to the Termination Date, has not been cured within 30 days after the giving of notice thereof by FSK to FSKR (provided that FSK is not then in material breach so as to result in the failure of an FSKR closing condition);

 

  (2)

prior to obtaining approval of the FSKR Merger Proposal by the stockholders of FSKR (1) an FSKR Adverse Recommendation Change occurs and/or FSK adopts, approves or recommends an FSK Takeover Proposal, (2) FSKR fails to recommend that the FSKR’s stockholders vote in favor of the FSKR Merger Proposal, including the Merger, (3) a Takeover Proposal is publicly announced and FSKR fails to issue, within 10 business days after such Takeover Proposal is announced, a press release that reaffirms the recommendation of the FSKR Board that FSKR’s stockholders vote in favor of the FSKR Merger Proposal, including the Merger or (4) a tender or exchange offer relating to any shares FSKR Common Stock has been commenced by a third party and FSKR did not send to its stockholders, within 10 business days after the commencement of such tender or exchange offer, a statement disclosing that the FSKR Board recommends rejection of such tender or exchange offer;

 

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  (3)

FSKR breaches, in any material respect, its no solicitation obligations relating to the solicitation and administration of Takeover Proposals from third parties;

 

  (4)

prior to obtaining approval of the FSK Merger Proposal, the Merger Stock Issuance Proposal and the FSK Advisory Agreement Amendment Proposal by the stockholders of FSK, (1) FSK is not in material breach of any of the terms of the Merger Agreement, and (2) the FSK Board properly authorizes FSK to enter into, and FSK enters into, a definitive contract with respect to an FSK Superior Proposal and (3) the third party that made such FSK Superior Proposal, prior to such termination, pays to FSKR in immediately available funds a termination fee equal to $90.8 million; or

 

  (5)

a material adverse effect occurs with respect to FSKR.

Termination Fees

Set forth below are summaries of the termination fees that may be payable if the Merger Agreement is terminated prior to consummation of the Merger. FSK or FSKR, as applicable, will be the entities entitled to receive any termination fees under the Merger Agreement. The boards of directors of each of FSK and FSKR have approved the amount of the termination fee which may be paid.

FSKR Termination Fee

The Merger Agreement provides for the payment by a third party that makes an FSKR Superior Proposal (or its designee) to FSK of a termination fee of $126.2 million if the Merger Agreement is terminated by FSKR at any time prior to obtaining approval of the requisite stockholder matters by FSKR stockholders and (1) FSKR is not in material breach of any of the terms of the Merger Agreement, and (2) the FSKR Board, including a majority of the FSKR Independent Directors, authorizes FSKR to enter into, and FSKR enters into, a definitive contract with respect to such FSKR Superior Proposal.

The Merger Agreement provides for the payment by a third party that makes the Takeover Proposal described in this paragraph (or its designee) to FSK of a termination fee of $126.2 million if (1) the Merger Agreement is terminated (a) by FSKR or FSK if the Merger is not completed by the Termination Date, or the FSK Stockholders do not approve the requisite stockholder matters at the FSKR Special Meeting, or (b) by FSK if FSKR willfully or intentionally breaches its representations, warranties, covenants or agreements in the Merger Agreement, which breach, either individually or in the aggregate, would result in, if occurring or continuing on the Closing Date, the failure of certain FSK closing conditions, and such breach is not curable prior to the Termination Date or, if curable prior to the Termination Date, has not been cured within 30 days after the giving of notice thereof by FSK to FSKR (provided that FSK is not then in material breach so as to result in the failure of certain FSKR closing conditions), (2) a Takeover Proposal (except that references to 25% in such definition will be deemed to be references to 50%) by the relevant third party is publicly disclosed after the date of the Merger Agreement and has not been withdrawn prior to the FSKR Special Meeting (in the case of a termination due to the failure of the FSKR Stockholders to approve the Merger Stock Issuance Proposal) or termination of the Merger Agreement (in the case of (1)(b) above or the failure to complete the Merger by the Termination Date) and (3) FSKR enters into a definitive agreement with respect to such Takeover Proposal within twelve (12) months after the Merger Agreement is terminated and such Takeover Proposal is subsequently completed (regardless of whether such consummation happens prior to or following such 12-month period).

FSK Termination Fee

The Merger Agreement provides for the payment by a third party that makes an FSK Superior Proposal (or its designee) to FSKR of a termination fee of $90.8 million if the Merger Agreement is terminated by FSK at any time prior to obtaining approval of the requisite stockholder proposals by FSK stockholders and (1) FSK is not in

 

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material breach of any of the terms of the Merger Agreement, and (2) the FSK Board, including a majority of the FSK Independent Directors, authorizes FSK to enter into, and FSK enters into, a definitive contract with respect to such FSK Superior Proposal.

The Merger Agreement provides for the payment by a third party that makes the Takeover Proposal described in this paragraph (or its designee) to FSKR of a termination fee of $90.8 million if (1) the Merger Agreement is terminated (a) by FSKR or FSKR if the Merger is not completed by the Termination Date, or the FSK Stockholders do not approve the Merger Proposal at the FSK Special Meeting, or (b) by FSKR if FSK willfully or intentionally breaches its representations, warranties, covenants or agreements in the Merger Agreement, which breach, either individually or in the aggregate, would result in, if occurring or continuing on the Closing Date, the failure of certain FSK closing conditions, and such breach is not curable prior to the Termination Date or, if curable prior to the Termination Date, has not been cured within 30 days after the giving of notice thereof by FSKR to FSK (provided that FSKR is not then in material breach so as to result in the failure of certain FSK closing conditions), (2) a Takeover Proposal (except that references to 25% in such definition will be deemed to be references to 50%) by the relevant third party is publicly disclosed after the date of the Merger Agreement and has not been withdrawn prior to the FSK Special Meeting (in the case of a termination due to the failure of the FSK stockholders to approve the Merger Proposal) or termination of the Merger Agreement (in the case of (1)(b) above or the failure to complete the Merger by the Termination Date) and (3) FSK enters into a definitive agreement with respect to such Takeover Proposal within twelve (12) months after the Merger Agreement is terminated and such Takeover Proposal is subsequently completed (regardless of whether such consummation happens prior to or following such 12-month period).

Effect of Termination

If the Merger Agreement is terminated, it will become void and have no effect and there will be no liability on the part of FSK, Merger Sub, FSKR, the Advisor or their respective affiliates or subsidiaries or any of their respective directors or officers, except that (1) FSK and FSKR will remain liable to each other for any damages incurred arising out of any willful or intentional breach of the Merger Agreement or a failure or refusal by a party to consummate the Merger when such party was obligated to do so in accordance with the terms of the Merger Agreement and (2) certain designated provisions of the Merger Agreement will survive the termination, including, but not limited to, the termination and termination fee provisions and confidentiality provisions.

Amendment of the Merger Agreement

The Merger Agreement may be amended by the parties, by action taken or authorized by their respective boards of directors, at any time before or after approval of the FSK Merger Proposal, the Merger Stock Issuance Proposal and the FSK Advisory Agreement Amendment Proposal by the stockholders of FSK or the FSKR Merger Proposal by the stockholders of FSKR; provided, that after any approval of the FSK Merger Proposal, the Merger Stock Issuance Proposal and the FSK Advisory Agreement Amendment Proposal by the stockholders of FSK or the FSKR Merger Proposal by the stockholders of FSKR, there may not be, without further approval of such stockholders, any amendment of the Merger Agreement that requires such further approval under applicable law. The Merger Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties.

Expenses and Fees

In general, all fees and expenses incurred in connection with the Merger, the Merger Agreement and the transactions contemplated thereby will be paid by the party incurring such fees or expenses, whether or not the Merger is consummated, subject to any termination fees that may be payable. Notwithstanding the foregoing, (1) costs and expenses of printing and mailing this document and all filing and other fees paid to the SEC in connection with the Merger and (2) all filing and other fees in connection with any filing under the HSR Act, will, in each case, be borne equally by FSK and FSKR.

 

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ACCOUNTING TREATMENT OF THE MERGER

Management has performed an analysis and determined that the Merger is an asset acquisition and that FSK is the accounting survivor. Therefore, the Merger will be accounted for under the asset acquisition method of accounting by FSK in accordance with ASC 805-50, Business Combinations—Related Issues. Under asset acquisition accounting, acquiring assets in groups not only requires ascertaining the cost of the asset (or net assets), but also allocating that cost to the individual assets (or individual assets and liabilities) that make up the group. Per ASC 805-50-30-1, assets are recognized based on their cost to the acquiring entity, which generally includes transaction costs of the asset acquisition, and no gain or loss is recognized unless the fair value of noncash assets given as consideration differs from the assets carrying amounts on the acquiring entity’s records. ASC 805-50-30-2 goes on to say asset acquisitions in which the consideration given is cash are measured by the amount of cash paid. However, if the consideration given is not in the form of cash (that is, in the form of noncash assets, liabilities incurred, or equity interests issued), measurement is based on the cost to the acquiring entity or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measured.

The cost of the group of assets acquired in an asset acquisition is allocated to the individual assets acquired or liabilities assumed based on their relative fair values of net identifiable assets acquired other than “non-qualifying” assets (for example cash) and does not give rise to goodwill.

The final allocation of the purchase price will be determined after the Merger is completed and after completion of a final analysis to determine the estimated relative fair values of FSKR’s assets and liabilities. Increases or decreases in the estimated fair values of the net assets, commitments, and other items of FSKR as compared to the information shown in this joint proxy statement/prospectus may occur.

 

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CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

The following discussion is a general summary of the material U.S. federal income tax consequences of the Merger, including an investment in shares of FSK Common Stock to an FSKR stockholder. This summary does not purport to be a complete description of the income tax consequences of the Merger applicable to an investment in shares of FSK Common Stock. For example, FSK has not described tax consequences that may be relevant to certain types of holders subject to special treatment under U.S. federal income tax laws, including stockholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, dealers in securities, traders in securities that elect to mark-to-market their securities holdings for tax purposes, persons that have a functional currency (as defined in Section 985 of the Code) other than the U.S. dollar, pension plans and trusts, and financial institutions. This summary assumes that investors hold FSK’s Common Stock as capital assets (within the meaning of Section 1221 of the Code). The discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this document and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. For purposes of this discussion, references to “dividends” include dividends within the meaning of the applicable U.S. federal income tax laws and associated regulations, and may include amounts distributed from sources other than listed under Section 19(a) of the 1940 Act.

FSK has not sought and will not seek any ruling from the Internal Revenue Service, or IRS, as to the U.S. federal income tax consequences of the Merger or any related transactions. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S. federal income tax laws that could result if FSK invested in tax-exempt securities or certain other investment assets. You are urged to consult with your own tax advisors and financial planners as to the particular tax consequences of the Merger to you, as applicable, including the applicability and effect of any state, local or foreign laws and the effect of possible changes in applicable tax laws.

Certain Material U.S. Federal Income Tax Consequences of the Merger

Tax Consequences if the Merger Qualifies as a Reorganization

The obligation of FSK to consummate the Merger is contingent upon its receipt of an opinion from Dechert LLP, counsel to FSK, or alternatively from counsel to FSKR, and the obligation of FSKR to consummate the Merger is contingent upon its receipt of an opinion from Dechert LLP, counsel to FSKR, or alternatively from counsel to FSK, generally to the effect that the Merger will qualify as a “reorganization,” within the meaning of Section 368(a) of the Code, with respect to each of the Fund Parties. If the Merger qualifies as a reorganization, then generally for U.S. federal income tax purposes:

 

   

no gain or loss will be recognized by FSK upon receipt of FSKR’s assets in exchange for FSK Common Stock and the assumption by FSK of the liabilities of FSKR;

 

   

FSK’s tax basis in the assets of FSKR transferred to FSK in the Merger will be the same as FSKR’s tax basis in the assets immediately prior to the transfer;

 

   

FSK’s holding periods for the assets of FSKR will include the periods during which such assets were held by FSKR;

 

   

no gain or loss will be recognized by FSKR upon the transfer of FSKR’s assets to FSK in exchange for FSK Common Stock and the assumption by FSK of the liabilities of FSKR or upon the deemed distribution of FSK Common Stock by FSKR to its stockholders;

 

   

no gain or loss will be recognized by FSKR’s stockholders upon the exchange of their FSKR Common Stock for FSK Common Stock, except with respect to cash received instead of a fractional share interest as discussed below;

 

   

the tax basis of FSK Common Stock an FSKR stockholder receives in connection with the Merger will be the same as the tax basis of the FSKR stockholder’s FSKR Common Stock exchanged therefor,

 

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reduced by any tax basis that is properly allocable to any fractional share interest of FSK Common Stock that is redeemed for cash, as discussed below;

 

   

an FSKR stockholder’s holding period for the FSKR stockholder’s FSK Common Stock will include the period for which the FSKR stockholder held the FSKR Common Stock exchanged therefor; and

 

   

FSK will succeed to, and take into account, the items of FSKR described in Section 381(c) of the Code, subject to the conditions and limitations specified in the Code and the U.S. Treasury regulations thereunder.

The tax opinions described above will be based on then-existing law, will be subject to certain assumptions, qualifications and exclusions and will be based in part on the truth and accuracy of certain representations by the Fund Parties.

Cash in lieu of a Fractional Share

If an FSKR stockholder receives cash instead of a fractional share of FSK Common Stock, the FSKR stockholder will be treated as having received the fractional share of FSK Common Stock pursuant to the Merger and then as having sold that fractional share of FSK Common Stock for cash. As a result, each such FSKR stockholder generally will recognize gain or loss equal to the difference between the amount of cash received and the tax basis in his, her or its fractional share of FSK Common Stock. This gain or loss generally will be a capital gain or loss and will be long-term capital gain or loss if, as of the Effective Time, the holding period for the shares (including the holding period of FSKR Common Stock surrendered therefor) is greater than one year. The deductibility of capital losses is subject to limitations. U.S. federal backup withholding tax may be imposed on any cash received instead of a fractional share interest.

Utilization of Loss Carryforwards and Unrealized Losses

Each of the Fund Parties is presently entitled to significant loss carryforwards for U.S. federal income tax purposes.

In general, limitation under the Code potentially will apply to loss carryforwards and unrealized losses of FSKR if FSKR stockholders before the merger hold less than 50% of the outstanding shares of FSK immediately following the Merger. Similarly, limitation under the Code potentially will apply to loss carryforwards and unrealized losses of FSK if FSK stockholders before the merger hold less than 50% of the outstanding shares of FSK immediately following the Merger.

In this regard, the Merger is expected to result in potential limitations on the ability of FSK to use its loss carryforwards and potentially to use unrealized capital losses inherent in the tax basis of the assets acquired, once realized. These potential limitations generally would be imposed on an annual basis. Capital losses in excess of the limitation may be carried forward indefinitely. The limitations as to FSK generally would equal the product of the fair market value of FSK’s equity immediately prior to the Merger and the “long-term tax-exempt rate,” as published quarterly by the IRS, in effect at such time. As of December 2020, the long-term tax-exempt rate is 0.99%. However, no assurance can be given as to what long-term tax-exempt rate will be in effect at the time of the Merger. As of September 30, 2020, for U.S. federal income tax purposes, FSK had capital loss carryforwards of approximately $710 million and net unrealized losses of approximately $390 million plus FSK’s taxable subsidiaries had net operating loss and other carryforwards of approximately $220 million in the aggregate. These figures are likely to change by the date of the Merger and do not reflect the impact of the Merger including, in particular, the application of the loss limitation rules described herein or the materiality of the loss limitation. Due to prior mergers and the loss limitation rules under the Code, some of the loss carryforwards may already be limited in their use.

 

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If it turns out that FSKR stockholders before the merger hold less than 50% of the outstanding shares of FSK immediately following the Merger, the Merger will result in a limitation on the ability of FSK to use FSKR’s capital loss carryforwards and, potentially, to use unrealized capital losses inherent in the tax basis of the assets acquired, once realized. As of September 30, 2020, for U.S. federal income tax purposes, FSKR had capital loss carryforwards of approximately $910 million and net unrealized losses of approximately $660 million plus FSKR’s taxable subsidiaries had net operating loss and other carryforwards of approximately $[●] million in the aggregate. These figures are likely to change by the date of the Merger, and do not reflect the impact of the Merger, including, in particular, the application of the loss limitation rules discussed herein or the materiality of the loss limitation. Due to prior mergers and the loss limitation rules under the Code, some of the loss carryforwards may already be limited in their use.

FSK would be prohibited from using its capital loss carryforwards and unrealized losses (once realized) against the unrealized gains in FSKR’s portfolio at the time of the Merger, if any, to the extent such gains were realized within five years following the Merger, if FSK were to have a net unrealized built in gain at the time of the Merger. The ability of FSK to absorb its losses in the future depends upon a variety of factors that cannot be known in advance. Even if FSK is able to utilize its capital loss carryforwards or unrealized losses, the tax benefit resulting from those losses will be shared by all Fund Party stockholders following the Merger. Therefore, a stockholder of either of the Fund Parties may pay more taxes, or pay taxes sooner, than such stockholder otherwise would have paid if the Merger did not occur.

FSK would also be prohibited from using FSKR’s capital loss carryforwards and unrealized losses (once realized) against the unrealized gains in FSK’s portfolio at the time of the Merger, if any, to the extent such gains were realized within five years following the Merger if FSK were to have a net unrealized built in gain at the time of the Merger. The ability of FSK to use FSKR’s losses in the future depends upon a variety of factors that cannot be known in advance. Even if FSK is able to utilize capital loss carryforwards or unrealized losses of FSKR, the tax benefit resulting from those losses will be shared by all Fund Party stockholders following the Merger. Therefore, an FSKR stockholder may pay more taxes, or pay taxes sooner, than such stockholder otherwise would have paid if the Merger did not occur.

Further, in addition to the other limitations on the use of losses, under Section 381 of the Code, for the tax year of the Merger, only that percentage of FSK’s capital gain net income for such tax year (excluding capital loss carryforwards), if any, equal to the percentage of its tax year that remains following the Merger can be reduced by FSKR’s capital loss carryforwards (as otherwise limited under Sections 382, 383 and 384 of the Code, as described above).

A RIC cannot carry forward or carry back any net operating losses for U.S. federal income tax purposes. Accordingly, FSK cannot use any net operating losses inherited from FSKR in the Merger.

The ability of the taxable subsidiaries of each of FSK and FSKR to use their net operating or capital losses carryforwards, if any, after the Merger may also be limited due to rules similar to those described above. Any pre-2018 net operating losses of a taxable subsidiary may be carried forward 20 years and carried back 2 years, any post-2017 net operating losses of a taxable subsidiary may be carried forward indefinitely. These rules were modified by recent legislation. Certain rules also apply to and capital loss carryovers.

The impact of the rules described above will depend on the relative sizes of, and the losses and gains (both realized and unrealized) in, each of FSK and FSKR (and their taxable subsidiaries) at the time of the Merger and thus cannot be calculated precisely at this time.

Status as a Regulated Investment Company

Each of the Fund Parties believes it has qualified, and expects to continue to qualify, as a RIC. Accordingly, both FSKR and FSK believe that they have not been, and expect to continue not to be, subject to U.S. federal

 

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income tax to the extent that they have made or make distributions treated as dividends for U.S. federal income tax purposes to their stockholders, each tax year, generally of an amount at least 90% of their respective “investment company taxable income,” which is generally net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses and determined without regard to any deduction for dividends paid.

If either of the Fund Parties were unable to qualify for tax treatment as a RIC, they would be subject to tax on all of their taxable income at regular corporate rates, regardless of whether they make any distributions to their stockholders. Distributions would not be required, and any distributions generally would be taxable to stockholders as ordinary dividend income. Subject to certain additional limitations in the Code, such distributions would be eligible for the preferential maximum rate applicable to individual stockholders with respect to qualifying dividends. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excess of current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain.

Moreover, if either of the Fund Parties fail to qualify as a RIC in any tax year, to qualify again to be subject to tax as a RIC in a subsequent tax year, they would be required to distribute their earnings and profits attributable to any of their non-RIC tax years as dividends to their stockholders. In addition, if either fail to qualify as a RIC for a period greater than two consecutive tax years, to qualify as a RIC in a subsequent year they may be subject to regular corporate tax on any net built-in gains with respect to certain assets (that is, the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if they had sold the property at fair market value at the end of the tax year) that they elect to recognize on requalification or when recognized over the next five tax years.

Distribution of Income and Gains

FSKR’s tax year is expected to end as a result of the Merger. FSKR generally will be required to declare to its stockholders of record one or more distributions of all of its previously undistributed net investment income and net realized capital gain (if any), including capital gain realized on any securities disposed of in connection with the Merger, in order to maintain FSKR’s treatment as a RIC during its tax year ending with the date of the Merger and to eliminate any U.S. federal income tax on its taxable income in respect of such tax year.

Moreover, if FSK has net investment income or net realized capital gain, but has not distributed such income or gain prior to the Merger and you acquire shares of FSK Common Stock in the Merger, a portion of your subsequent distributions from FSK may, in effect, be a taxable return of part of your investment. Similarly, if you acquire FSK Common Stock in the Merger when it holds appreciated securities, you may receive a taxable return of part of your investment if and when FSK sells the appreciated securities and distributes the realized gain.

U.S. Federal Income Taxation of an Investment in FSK Common Stock

The following discussion summarizes the U.S. federal income taxation of an investment in FSK Common Stock. This discussion is not intended as a substitute for careful tax planning. You should consult your tax advisor about your specific tax situation.

A “U.S. stockholder” generally is a beneficial owner of shares of FSK Common Stock who is for U.S. federal income tax purposes:

 

   

a citizen or individual resident of the United States;

 

   

a corporation or other entity treated as a corporation, for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any political subdivision thereof;

 

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a trust, if a court in the United States has primary supervision over its administration and one or more United States persons (as defined under the Code) have the authority to control all substantial decisions of the trust, or the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person; or

 

   

an estate, the income of which is subject to U.S. federal income taxation regardless of its source.

A “Non-U.S. stockholder” generally is a beneficial owner of shares of FSK Common Stock that is not a U.S. stockholder nor a partnership (or entity treated like a partnership) for U.S. federal income tax purposes.

If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds shares of FSK Common Stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A prospective stockholder that is a partner in a partnership holding shares of FSK Common Stock should consult his, her or its tax advisers with respect to the purchase, ownership and disposition of shares of FSK Common Stock.

Tax matters are very complicated and the tax consequences to an investor of an investment in shares of FSK Common Stock will depend on the facts of his, her or its particular situation. FSKR stockholders should consult their own tax advisers regarding the specific consequences of the Merger, including tax reporting requirements, the applicability of federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.

Election to be Taxed as a Regulated Investment Company.

FSK has elected to be subject to tax as a RIC under Subchapter M of the Code. As a RIC, FSK generally will not be subject to corporate-level U.S. federal income taxes on any ordinary income or capital gains that it timely distributes each tax year as dividends for U.S. federal income tax purposes to its stockholders. To qualify for and maintain its qualification as a RIC, FSK must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, in order to maintain RIC tax treatment, FSK must distribute to its stockholders, for each tax year, distributions treated as dividends for U.S. federal income tax purposes generally of an amount at least equal to 90% of its “investment company taxable income,” which is generally the sum of FSK’s net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses, determined without regard to any deduction for distributions paid, or the annual distribution requirement.

Taxation as a RIC.

If FSK:

 

   

qualifies as a RIC; and

 

   

satisfies the annual distribution requirement

then it will not be subject to U.S. federal income tax on the portion of its income or capital gains it distributes (or is deemed to distribute) as distributions to its stockholders. FSK will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) as distributions to its stockholders.

As a RIC, FSK will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless it distributes amounts treated as dividends for U.S. federal income tax purposes in a timely manner to its stockholders of an amount at least equal to the sum of (1) 98% of its net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of its capital gain net income, which is the excess of capital gains in excess of capital losses, or “capital gain net income” (as adjusted for certain ordinary losses),

 

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for the one-year period ending October 31 of that calendar year and (3) any net ordinary income and capital gain net income for the preceding years that were not distributed during such years and on which it did not incur any U.S. federal income tax, or the excise tax avoidance requirement. Any distribution treated as dividends for U.S. federal income tax purposes declared by FSK during October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been paid by FSK, as well as received by its U.S. stockholders, on December 31 of the calendar year in which the distribution was declared.

FSK has previously incurred, and may incur in the future, such excise tax on a portion of its income and capital gains. FSK may not be able to, or may choose not to, distribute amounts sufficient to avoid the imposition of the tax entirely. In that event, FSK generally will be liable for the excise tax only on the amount by which it does not meet the excise tax avoidance requirement. Under certain circumstances, however, FSK may, in its sole discretion, determine that it is in FSK’s best interests to retain a portion of its income or capital gains rather than distribute such amount as dividends and accordingly cause FSK to bear the excise tax burden associated therewith.

In order to qualify as a RIC for U.S. federal income tax purposes, FSK must, among other things:

 

   

continue to qualify as a BDC under the 1940 Act at all times during each tax year;

 

   

derive in each tax year at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, net income from certain “qualified publicly traded partnerships,” or other income derived with respect to its business of investing in such stock or other securities, or the 90% Income Test; and

 

   

diversify its holdings so that at the end of each quarter of the tax year:

 

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at least 50% of the value of its assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of its assets or more than 10% of the outstanding voting securities of such issuer; and

 

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no more than 25% of the value of its assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by it and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships,” or the Diversification Tests.

A RIC is limited in its ability to deduct expenses in excess of its investment company taxable income. If FSK’s deductible expenses in a given tax year exceed its investment company taxable income, FSK may incur a net operating loss for that tax year. However, a RIC is not permitted to carry forward net operating losses to subsequent tax years and such net operating losses do not pass through to its stockholders. In addition, deductible expenses can be used only to offset investment company taxable income, not net capital gain. A RIC may not use any net capital losses (that is, the excess of realized capital losses over realized capital gains) to offset its investment company taxable income, but may carry forward such net capital losses, and use them to offset future capital gains, indefinitely. Due to these limits on deductibility of expenses and net capital losses, FSK may for tax purposes have aggregate taxable income for several tax years that it is required to distribute and that is taxable to its stockholders even if such taxable income is greater than the net income FSK actually earns during those tax years.

For U.S. federal income tax purposes, FSK may be required to recognize taxable income in circumstances in which it does not receive a corresponding payment in cash. For example, if FSK holds debt instruments that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, increasing interest rates or debt instruments that were issued with warrants), it must include in

 

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income each tax year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by it in the same tax year. FSK may also have to include in income other amounts that it has not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. FSK anticipates that a portion of its income may constitute original issue discount or other income required to be included in taxable income prior to receipt of cash. Further, FSK elected to amortize market discount and include such amounts in its taxable income in the current tax year, instead of upon their disposition, as an election not to do so would limit FSK’s ability to deduct interest expense for tax purposes.

FSK invests a portion of its net assets in below investment grade instruments. Investments in these types of instruments may present special tax issues for FSK. U.S. federal income tax rules are not entirely clear about issues such as when FSK may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless instruments, how payments received on obligations in default should be allocated between principal and income and whether exchanges of debt instruments in a bankruptcy or workout context are taxable. FSK will address these and other issues to the extent necessary in order to seek to ensure that FSK distributes sufficient income to avoid any material U.S. federal income or excise tax.

Because any original issue discount or other amounts accrued will be included in its investment company taxable income for the tax year of the accrual, FSK may be required to make a distribution to its stockholders in order to satisfy the annual distribution requirement, even though it will not have received any corresponding cash amount. As a result, FSK may have difficulty meeting the annual distribution requirement necessary to maintain RIC tax treatment under Subchapter M of the Code. FSK may have to sell or otherwise dispose of some of its investments at times and/or at prices it would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If FSK is not able to obtain cash from other sources, it may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

If FSK acquires the equity securities of certain non-U.S. entities classified as a corporation for U.S. federal income tax purposes that earn at least 75% of their annual gross income from passive sources (such as interest, dividends, rents, royalties or capital gain) or hold at least 50% of their total assets in investments producing such passive income, FSK could be subject to federal income tax and additional interest charges on “excess distributions” received from such passive foreign investment companies, or PFICs, or gain from the sale of stock in such PFICs, even if all income or gain actually received by FSK is timely distributed to its stockholders. FSK would not be able to pass through to its stockholders any credit or deduction for such a tax. Certain elections may, if available, ameliorate these adverse tax consequences, but any such election could require FSK to recognize taxable income or gain without the concurrent receipt of cash. FSK intends to limit and/or manage its holdings in PFICs to minimize FSK’s liability for any such taxes and related interest charges.

If FSK holds greater than 10% of the interests treated as equity for U.S. federal income tax purposes in a foreign corporation that is treated as a controlled foreign corporation, or CFC, FSK may be treated as receiving a deemed distribution (taxable as ordinary income) each tax year from such foreign corporation in an amount equal to its pro rata share of the corporation’s income for such tax year (including both ordinary earnings and capital gains), whether or not the corporation makes an actual distribution during such tax year. FSK would be required to include the amount of a deemed distribution from a CFC when computing its investment company taxable income as well as in determining whether FSK satisfies the distribution requirements applicable to RICs, even to the extent the amount of its income deemed recognized from the CFC exceeds the amount of any actual distributions from the CFC and its proceeds from any sales or other dispositions of CFC stock during a tax year. In general, a foreign corporation will be considered a CFC if greater than 50% of the shares of the corporation, measured by reference to combined voting power or value, is owned (directly, indirectly or by attribution) by U.S. Stockholders. A “U.S. Stockholder,” for this purpose, is any U.S. person that possesses (actually or constructively) 10% or more of the combined voting power of all classes of shares of a foreign corporation.

 

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Certain income derived by FSK from a CFC or PFIC with respect to which it has made a qualified electing fund, or QEF, election would generally constitute qualifying income for purposes of determining FSK’s ability to be subject to tax as a RIC to the extent such income is derived with respect to FSK’s business of investing in such securities.

FSK’s functional currency, for U.S. federal income tax purposes, is the U.S. dollar. Under the Code, foreign exchange gains and losses realized by FSK in connection with certain transactions involving foreign currencies, or payables or receivables denominated in a foreign currency, as well as certain non-U.S. dollar denominated debt securities, certain foreign currency futures contracts, foreign currency option contracts, foreign currency forward contracts, and similar financial instruments are subject to Code provisions that generally treat such gains and losses as ordinary income and losses and may affect the amount, timing and character of distributions to FSK’s stockholders. Any such transactions that are not directly related to FSK’s investment in securities (possibly including speculative currency positions or currency derivatives not used for hedging purposes) also could, under future U.S. Treasury regulations, produce income not among the types of “qualifying income” for purposes of the 90% Income Test.

Although FSK does not presently expect to do so, it is authorized to borrow funds and to sell or otherwise dispose of assets in order to satisfy distribution requirements. However, under the 1940 Act, FSK is not permitted to make distributions to its stockholders while its debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See “Regulation of the Fund Parties—Senior Securities.” Moreover, FSK’s ability to sell or otherwise dispose of assets to meet the annual distribution requirement may be limited by (1) the illiquid nature of its portfolio and/or (2) other requirements relating to its status as a RIC, including the Diversification Tests. If FSK sells or otherwise disposes of assets in order to meet the annual distribution requirement or the excise tax avoidance requirement, it may make such dispositions at times that, from an investment standpoint, are not advantageous.

A portfolio company in which FSK invests may face financial difficulties that require FSK to work-out, modify or otherwise restructure its investment in the portfolio company. Any such transaction could, depending upon the specific terms of the transaction, result in unusable capital losses and future non-cash income. Any such transaction could also result in FSK receiving assets that give rise to non-qualifying income for purposes of the 90% Income Test or otherwise would not count toward satisfying the Diversification Tests.

Some of the income that FSK might otherwise earn, such as fees for providing managerial assistance, certain fees earned with respect to its investments, income recognized in a work-out or restructuring of a portfolio investment, or income recognized from an equity investment in an operating partnership, may not satisfy the 90% Income Test. To manage the risk that certain income might disqualify FSK as a RIC for failure to satisfy the 90% Income Test, one or more subsidiary entities treated as U.S. corporations for entity-level income tax purposes may be employed to earn such income and (if applicable) hold the related asset. Such subsidiary entities will be subject to entity-level income tax on their earnings, which ultimately will reduce the yield to FSK stockholders on such fees and income.

The remainder of this discussion assumes that FSK maintains its qualification as a RIC and has satisfied the Annual Distribution Requirement.

Taxation of U.S. Stockholders

This subsection applies to U.S. stockholders, only. If you are not a U.S. stockholder, this subsection does not apply to you and you should refer to “Taxation of Non-U.S. Stockholders,” below.

Distributions by FSK, including distributions pursuant to its distribution reinvestment plan or where a stockholder can elect to receive cash or stock, generally are taxable to U.S. stockholders as ordinary income or capital gains. Distributions of FSK’s investment company taxable income (which is generally the sum of its net

 

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ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses) will be taxable as ordinary income to U.S. stockholders to the extent of its current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock. To the extent such distributions paid by FSK to non-corporate stockholders (including individuals) are attributable to dividends from U.S. corporations and certain qualified foreign corporations, such distributions, or qualifying dividends, may be eligible for a maximum tax rate of either 15% or 20%, depending on whether the stockholder’s income exceeds certain threshold amounts. In this regard, it is anticipated that distributions paid by FSK will generally not be attributable to dividends and, therefore, generally will not qualify for the preferential maximum rate applicable to qualifying dividends or for the corporate dividends received deduction. Distributions of FSK’s net capital gains (which is generally its realized net long-term capital gains in excess of realized net short-term capital losses) properly reported by FSK as “capital gain dividends” will be taxable to a U.S. stockholder as long-term capital gains that are currently generally taxable at a maximum rate of either 15% or 20% (depending on whether the stockholder’s income exceeds certain threshold amounts) in the case of individuals, trusts or estates, regardless of the U.S. stockholder’s holding period for his, her or its common stock and regardless of whether paid in cash or reinvested in additional common stock. Distributions in excess of FSK’s earnings and profits first will reduce a U.S. stockholder’s adjusted tax basis in such stockholder’s common stock and, after the adjusted basis is reduced to zero, will constitute capital gains to such U.S. stockholder.

If a U.S. stockholder receives distributions in the form of FSK Common Stock pursuant to FSK’s distribution reinvestment plan, such stockholder generally will be subject to the same U.S. federal, state and local tax consequences as if it received distributions in cash. In that case, a stockholder will be treated as receiving a distribution generally of an amount equal to the fair market value of the shares of FSK Common Stock. Any shares of FSK Common Stock received in a distribution will have a holding period for tax purposes commencing on the day following the day on which the shares of FSK Common Stock are credited to the U.S. stockholder’s account.

FSK may in the future decide to retain some or all of its net capital gains, but report the retained amount as a “deemed distribution.” In that case, among other consequences, FSK will pay tax on the retained amount, each U.S. stockholder will be required to include his, her or its share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit equal to his, her or its allocable share of the tax paid thereon by FSK. The amount of the deemed distribution net of such tax will be added to the U.S. stockholder’s tax basis for his, her or its shares of FSK Common Stock. Since FSK expects to pay tax on any retained capital gains at its regular corporate income tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on long-term capital gains, the amount of tax that individual stockholders will be treated as having paid and for which they will receive a credit will exceed the tax they owe on the retained net capital gain. Such excess generally may be claimed as a credit against the U.S. stockholder’s other U.S. federal income tax obligations or may be refunded to the extent it exceeds a stockholder’s liability for U.S. federal income tax. A stockholder that is not subject to U.S. federal income tax or otherwise required to file a U.S. federal income tax return would be required to file a U.S. federal income tax return on the appropriate form in order to claim a refund for the taxes FSK paid. In order to use the deemed distribution approach, FSK must provide written notice to its stockholders prior to the expiration of 60 days after the close of the relevant tax year. FSK cannot retain any portion of its investment company taxable income as a “deemed distribution.”

For purposes of determining (1) whether the annual distribution requirement is satisfied for any tax year and (2) the amount of distributions paid for that tax year, FSK may, under certain circumstances, elect to treat a distribution that is paid during the following tax year as if it had been paid during the tax year in question. If FSK makes such an election, the U.S. stockholder will still be treated as receiving the distribution in the tax year in which the distribution is made. However, any dividend declared by FSK in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been received by FSK’s U.S. stockholders on December 31 of the calendar year in which the dividend was declared.

 

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If an investor acquires shares of FSK Common Stock shortly before the record date of a distribution, the price of the shares will include the value of the distribution and the investor will be subject to tax on the distribution even though economically it may represent a return of his, her or its investment.

A stockholder generally will recognize taxable gain or loss if the stockholder sells or otherwise disposes of his, her or its shares of FSK Common Stock. The amount of gain or loss will be measured by the difference between such stockholder’s adjusted tax basis in the FSK Common Stock sold and the amount of the proceeds received in exchange. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the stockholder has held his, her or its shares for more than one year. Otherwise, it will be treated as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of FSK Common Stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of FSK Common Stock may be disallowed if other shares of FSK Common Stock are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition.

In general, non-corporate U.S. stockholders currently are generally subject to a maximum U.S. federal income tax rate of either 15% or 20% (depending on whether the stockholder’s income exceeds certain threshold amounts) on their net capital gain (i.e., the excess of realized net long-term capital gains over realized net short-term capital losses), including any long-term capital gain derived from an investment in shares of FSK Common Stock. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from FSK and net gains from redemptions or other taxable dispositions of shares of FSK Common Stock) of U.S. individuals, estates and trusts to the extent that such person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds certain threshold amounts. Corporate U.S. stockholders currently are subject to U.S. federal income tax on net capital gain at the maximum 35% rate also applied to ordinary income. Non-corporate stockholders with net capital losses for a year (i.e., capital losses in excess of capital gains) generally may deduct up to $3,000 of such losses against their ordinary income each year; any net capital losses of a non-corporate stockholder in excess of $3,000 generally may be carried forward and used in subsequent tax years as provided in the Code. Corporate stockholders generally may not deduct any net capital losses for any tax year, but may carry back such losses for three tax years or carry forward such losses for five tax years.

FSK (or if a U.S. stockholder holds shares through an intermediary, such intermediary) will send to each of its U.S. stockholders, as promptly as possible after the end of each calendar year, a notice detailing, on a per share and per distribution basis, the amounts includible in such U.S. stockholder’s taxable income for such year as ordinary income and as long-term capital gain. In addition, the federal tax status of each year’s distributions generally will be reported to the IRS (including the amount of distributions, if any, eligible for the preferential maximum rate). Distributions paid by FSK generally will not be eligible for the corporate dividends received deduction or the preferential tax rate applicable to qualifying dividends because FSK’s income generally will not consist of qualifying dividends. Distributions may also be subject to additional state, local and foreign taxes depending on a U.S. stockholder’s particular situation.

The Code requires reporting of adjusted cost basis information for covered securities, which generally include shares of a RIC acquired after January 1, 2012, to the IRS and to taxpayers. Stockholders should contact their financial intermediaries with respect to reporting of cost basis and available elections for their accounts.

Under U.S. Treasury regulations, if a U.S. stockholder recognizes a loss with respect to shares of FSK Common Stock of $2 million or more in the case of an individual stockholder or $10 million or more in the case of a corporate stockholder in any single tax year (or a greater loss over a combination of tax years), such U.S. stockholder must file with the IRS a disclosure statement on Form 8886. Direct U.S. stockholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, U.S.

 

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stockholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to stockholders of most or all RICs. The fact that a loss is reportable by a taxpayer under these U.S. Treasury regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. U.S. stockholders should consult their tax advisers to determine the applicability of these U.S. Treasury regulations in light of their individual circumstances.

FSK may be required to withhold U.S. federal income tax, or backup withholding, currently at a rate of 24%, from all distributions to any non-corporate U.S. stockholder (1) who fails to furnish FSK with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding or (2) with respect to whom the IRS notifies FSK that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individual’s taxpayer identification number is his or her social security number. Any amount withheld under backup withholding is allowed as a credit against the U.S. stockholder’s U.S. federal income tax liability, provided that proper information is provided to the IRS.

Taxation of Non-U.S. Stockholders

This subsection applies to non-U.S. stockholders, only. If you are a U.S. stockholder, this subsection does not apply to you and you should refer to “Taxation of U.S. Stockholders,” above. Whether an investment in shares of FSK Common Stock is appropriate for a non-U.S. stockholder will depend upon that person’s particular circumstances. An investment in shares of FSK Common Stock by a Non-U.S. stockholder may have adverse tax consequences. Non-U.S. stockholders of FSKR should consult their tax advisers before approving the Merger and the Merger Agreement.

Subject to the discussion in “Foreign Account Tax Compliance Act,” below, distributions of FSK’s investment company taxable income made to non-U.S. stockholders (including interest income and realized net short-term capital gains in excess of realized long-term capital losses, which generally would be free of withholding if paid to non-U.S. stockholders directly) generally will be subject to withholding of U.S. federal tax at a 30% rate (or lower rate provided by an applicable treaty) to the extent of FSK’s current and accumulated earnings and profits unless an applicable exception applies. If the distributions are effectively connected with a U.S. trade or business of the non-U.S. stockholder, FSK will not be required to withhold U.S. federal tax if the Non-U.S. stockholder complies with applicable certification and disclosure requirements, although the distributions will be subject to U.S. federal income tax at the rates applicable to U.S. persons. (Special certification requirements apply to a Non-U.S. stockholder that is a foreign partnership or a foreign trust, and such entities are urged to consult their own tax advisers).

In addition, subject to the discussion in “Foreign Account Tax Compliance Act,” below, distributions of FSK’s investment company taxable income made to non-U.S. stockholders will not be subject to U.S. withholding tax if (1) the distributions are properly reported in a notice timely delivered to Non-U.S. stockholders as “interest-related dividends” or “short-term capital gain dividends,” (2) the distributions are derived from sources specified in the Code for such dividends and (3) certain other requirements are satisfied. No assurance can be given as to whether any amount of FSK’s distributions will be eligible for this exemption from withholding or, if eligible, will be reported as such by us. Moreover, a withholding agent may withhold U.S. federal income tax even if FSK reported the payment as an interest-related dividend or short-term capital gain dividend.

Subject to the discussion in “Foreign Account Tax Compliance Act,” below, actual or deemed distributions of FSK’s net capital gains to a Non-U.S. stockholder, and gains realized by a Non-U.S. stockholder upon the sale of FSK Common Stock, will not be subject to U.S. federal withholding tax and generally will not be subject to U.S. federal income tax unless (1) the distributions or gains, as the case may be, are effectively connected with a U.S. trade or business of the Non-U.S. stockholder and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. stockholder in the United States, or (2) in the case of an individual stockholder, the stockholder is present in the United States for a period or periods aggregating 183

 

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days or more during the year of the sale or the receipt of the distributions or gains and certain other conditions are met.

If FSK distributes its net capital gains in the form of deemed rather than actual distributions, a Non-U.S. stockholder will be entitled to a U.S. federal income tax credit or tax refund equal to the stockholder’s allocable share of the tax FSK pays on the capital gains deemed to have been distributed. In order to obtain the refund, the Non-U.S. stockholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the Non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal income tax return. For a corporate Non-U.S. stockholder, distributions (both actual and deemed), and gains realized upon the sale of FSK Common Stock that are effectively connected to a U.S. trade or business may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate (or at a lower rate if provided for by an applicable treaty). Accordingly, investment in shares of FSK Common Stock may not be appropriate for a Non-U.S. stockholder.

A Non-U.S. stockholder who is a non-resident alien individual, and who is otherwise subject to U.S. federal withholding tax, may be subject to information reporting and backup withholding of U.S. federal income tax on dividends unless the Non-U.S. stockholder provides FSK or the dividend paying agent with a U.S. nonresident withholding tax certificate (e.g., an IRS Form W-8BEN, an IRS Form W-8BEN-E or an acceptable substitute form) or otherwise meets documentary evidence requirements for establishing that it is a Non-U.S. stockholder or otherwise establishes an exemption from backup withholding.

Non-U.S. stockholders may also be subject to U.S. estate tax with respect to their investment in FSK Common Stock.

Non-U.S. persons should consult their own tax advisers with respect to the U.S. federal income tax and withholding tax, and state, local and foreign tax consequences of the Merger.

Foreign Account Tax Compliance Act

FSK is required to withhold U.S. tax (at a 30% rate) on payments of taxable dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. The information required to be reported includes the identity and taxpayer identification number of each account holder and transaction activity within the holder’s account. Stockholders may be requested to provide additional information to FSK to enable FSK to determine whether such withholding is required.

Failure to Qualify as a RIC

If FSK fails to satisfy the 90% Income Test or any Diversification Test in any tax year, FSK may be eligible to avail itself of certain relief provisions under the Code if the failures are due to reasonable cause and not willful neglect, and if a penalty tax is paid with respect to each failure in satisfaction of the applicable requirements. Additionally, relief is provided for certain de minimis failures of the Diversification Tests where FSK corrects a failure within a specified period. If the applicable relief provisions are not available or cannot be met, all of FSK’s income will be subject to U.S. federal corporate-level income tax as described below. FSK cannot provide assurance that it would qualify for any such relief should it fail either the 90% Income Test or any Diversification Test.

If FSK were unable to qualify for treatment as a RIC, it would be subject to tax on all of its taxable income at regular corporate rates, regardless of whether it makes any distributions to its stockholders. Distributions would not be required, and any distributions would generally be taxable to FSK stockholders as ordinary dividend income. Subject to certain additional limitations in the Code, such distributions would be eligible for the preferential maximum rate applicable to individual stockholders with respect to qualifying dividends. Subject to

 

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certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excess of FSK’s current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. Moreover, if FSK fails to qualify as a RIC in any tax year, to qualify again to be subject to tax as a RIC in a subsequent tax year, FSK would be required to distribute its earnings and profits attributable to any of its non-RIC tax years as dividends to its stockholders. In addition, if FSK fails to qualify as a RIC for a period greater than two consecutive tax years, to qualify as a RIC in a subsequent year FSK may be subject to regular corporate income tax on any net built-in gains with respect to certain of its assets (that is, the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if FSK had sold the property at fair market value at the end of the tax year) that it elects to recognize on requalification or when recognized over the next five tax years.

State and Local Taxes

FSK may be subject to state or local taxes in jurisdictions in which it is deemed to be doing business. In those states or localities, FSK’s entity-level tax treatment and the treatment of distributions made to stockholders under those jurisdictions’ tax laws may differ from the treatment under the Code. Accordingly, an investment in shares of FSK Common Stock may have tax consequences for stockholders that are different from those of a direct investment in FSK’s portfolio investments. Stockholders are urged to consult their own tax advisers concerning state and local tax matters.

 

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FS KKR CAPITAL CORP. PROPOSAL 1: APPROVAL OF THE FSK MERGER PROPOSAL

APPROVAL OF THE MERGER AGREEMENT AND THE MERGER

FSK is asking its stockholders to approve the Merger Agreement and the transactions contemplated thereby, including the Merger. Upon completion of the Merger, and subject to the terms and conditions of the Merger Agreement, each share of FSKR Common Stock issued and outstanding immediately prior to the Effective Time will be converted into the right to receive, in accordance with the Merger Agreement, the Merger Consideration as described in the section entitled “Description of the Merger Agreement—Merger Consideration.”

Approval of the FSK Merger Proposal, along with approval of the Merger Stock Issuance Proposal and the FSK Advisory Agreement Amendment Proposal, is required for completion of the Merger.

THE FSK BOARD UNANIMOUSLY RECOMMENDS THAT FSKR STOCKHOLDERS VOTE “FOR” THE FSK MERGER PROPOSAL

FSK stockholders may vote “FOR” or “AGAINST,” or they may “ABSTAIN” from voting on, the FSK Merger Proposal. The affirmative vote “FOR” the FSK Merger Proposal of a majority of the outstanding shares of FSK Common Stock entitled to vote at the FSK Special Meeting and the affirmative vote “FOR” the FSK Merger Proposal of a majority of the outstanding shares of FSK Common Stock unaffiliated with the Advisor and its affiliates entitled to vote at the FSK Special Meeting are necessary for approval of the FSK Merger Proposal. Abstentions will have the same effect on the FSK Merger Proposal as votes “AGAINST” the FSK Merger Proposal. Proxies received will be voted “FOR” the FSK Merger Proposal unless stockholders designate otherwise.

 

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FS KKR CAPITAL CORP. PROPOSAL 2: APPROVAL OF THE MERGER STOCK ISSUANCE

FSK is asking its stockholders to approve the issuance of the shares of FSK Common Stock to be issued pursuant to the Merger Agreement. It is a condition to completion of the Merger that FSK issue shares of FSK Common Stock to FSKR stockholders pursuant to the Merger Agreement. Upon completion of the Merger, and subject to the terms and conditions of the Merger Agreement, each share of FSKR Common Stock issued and outstanding immediately prior to the Effective Time will be converted into the right to receive, in accordance with the Merger Agreement, the Merger Consideration as described in the section entitled “Description of the Merger Agreement—Merger Consideration.”

The issuance of shares of FSK Common Stock to FSKR stockholders is necessary to complete the Merger and the approval of the Merger Stock Issuance Proposal is required for completion of the Merger. The Merger Stock Issuance Proposal is contingent on the approval of the FSK Merger Proposal.

THE FSK BOARD UNANIMOUSLY RECOMMENDS THAT FSK STOCKHOLDERS VOTE “FOR” THE MERGER STOCK ISSUANCE PROPOSAL

FSK stockholders may vote “FOR” or “AGAINST,” or they may “ABSTAIN” from voting on, the Merger Stock Issuance Proposal. The affirmative vote “FOR” the Merger Stock Issuance Proposal of a majority of all of the votes cast at the FSK Special Meeting in which a quorum is present is necessary for approval of the Merger Stock Issuance Proposal. Abstentions will have no effect on the outcome of the Merger Stock Issuance Proposal. Proxies received will be voted “FOR” the approval of the Merger Stock Issuance Proposal unless stockholders designate otherwise.

 

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FS KKR CAPITAL CORP. PROPOSAL 3: APPROVAL OF FSK ADVISORY AGREEMENT AMENDMENT PROPOSAL

Background

FSK is seeking approval of the Proposed FSK Investment Advisory Agreement. The Proposed FSK Investment Advisory Agreement would amend the Existing FSK Investment Advisory Agreement to:

 

   

reduce FSK’s income incentive fee rate from 20% to 17.5%; and

 

   

remove the total return lookback provision applicable to the subordinated incentive fee on income from the Existing FSK Investment Advisory Agreement.

Adoption of the Proposed FSK Investment Advisory Agreement is a condition to the closing of the Merger pursuant to the Merger Agreement. In addition, even if it is approved by FSK’s stockholders, the Proposed FSK Investment Advisory Agreement will not become effective unless and until the Merger closes. If the Proposed FSK Investment Advisory Agreement is adopted and the Merger closes, the Advisor has agreed to waive income incentive fees in the amount of $15 million per quarter for the first six full fiscal quarters of operations following the Merger, for a total waiver of $90 million (the “Incentive Fee Waiver”).

A form of the Proposed FSK Investment Advisory Agreement is attached as Annex D to this joint proxy statement/prospectus and is marked to show the proposed changes against the Existing FSK Investment Advisory Agreement.

Overview of the Existing FSK Investment Advisory Agreement

The Existing FSK Investment Advisory Agreement was most recently approved by the FSK Board at a meeting held on November 19, 2020 and was approved by the FSK stockholders on December 3, 2018 at the Annual Meeting of Stockholders of FSK. The Existing FSK Investment Advisory Agreement became effective on December 20, 2018.

Advisory Services

The Advisor is registered as an investment adviser under the Advisers Act and serves as FSK’s investment adviser pursuant to the Existing FSK Investment Advisory Agreement in accordance with the 1940 Act. As an investment adviser registered under the Advisers Act, the Advisor has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, the Advisor has a fiduciary responsibility for the safekeeping and use of all of FSK’s funds and assets, whether or not in its immediate possession or control. As such, the Advisor may not employ, or permit another to employ, FSK’s funds or assets in any manner except for FSK’s exclusive benefit. The Advisor is prohibited from contracting away the fiduciary obligation owed to FSK and its stockholders under common law.

Subject to the overall supervision of the FSK Board, the Advisor provides FSK with investment advisory services. Under the terms of the Existing FSK Investment Advisory Agreement, the Advisor:

 

   

determines the composition and allocation of FSK’s portfolio, the nature and timing of the changes therein and the manner of implementing such changes;

 

   

identifies, evaluates and negotiates the structure of the investments FSK makes;

 

   

executes, monitors and services the investments FSK makes;

 

   

places orders with respect to, and arranges for, any investments FSK makes;

 

   

determines the securities and other assets that FSK will purchase, retain or sell;

 

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performs due diligence on prospective portfolio companies; and

 

   

provides FSK with such other investment advisory, research and related services as FSK may, from time to time, reasonably request or require for the investment of FSK’s funds.

The Advisor will also seek to ensure that FSK maintains adequate reserves for normal replacements and contingencies (but not for payment of fees payable to it) by causing FSK to retain a reasonable percentage of offering proceeds, revenues or other sources of reserves. The Advisor’s services under the Existing FSK Investment Advisory Agreement may not be exclusive, and it is free to furnish similar services to other entities so long as its services to FSK are not impaired. In addition, the Advisor performs certain administrative services under the Administration Agreement.

Advisory Fees

FSK pays the Advisor a fee for its services under the Existing FSK Investment Advisory Agreement consisting of two components—an annual base management fee based on the average weekly value of FSK’s gross assets and an incentive fee based on FSK’s performance. The cost of both the base management fee payable to the Advisor and any incentive fees it earns are ultimately borne by FSK’s stockholders.

Base Management Fee

The base management fee is calculated at an annual rate of 1.50% of the average weekly value of FSK’s gross assets (equal to total assets set forth on FSK’s consolidated balance sheet, including cash and cash equivalents). The base management fee is payable quarterly in arrears and is calculated based on the average weekly value of FSK’s gross assets during the most recently completed calendar quarter. The base management fee may or may not be taken in whole or in part at the discretion of the Advisor. All or any part of the base management fee not taken as to any quarter will be deferred without interest and may be taken in such other quarter as the Advisor shall determine. The base management fee for any partial month or quarter will be appropriately prorated. For purposes of computing the base management fee, cash and cash equivalents are excluded from gross assets.

Incentive Fee

The subordinated incentive fee on income is subject to a quarterly hurdle rate, expressed as a rate of return on FSK’s net assets for the most recently completed calendar quarter, equal to 1.75% per quarter (7.0% annualized), subject to a “catch up” feature. For this purpose, “pre-incentive fee net investment income” means interest income, dividend income and any other income (including any other fees, other than fees for providing managerial assistance, such as commitment, origination, structuring, diligence and consulting fees or other fees that FSK receives from portfolio companies) accrued during the calendar quarter, minus FSK’s operating expenses for the quarter (including the base management fee, expenses reimbursed to the Advisor under the Administration Agreement and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount debt instruments with payment-in-kind interest and zero coupon securities), accrued income that FSK has not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. The calculation of the subordinated incentive fee on income for each quarter is as follows:

 

   

no subordinated incentive fee is payable to the Advisor in any calendar quarter in which FSK’s pre-incentive fee net investment income does not exceed the hurdle rate of 1.75%;

 

   

100% of FSK’s pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.1875% in any calendar quarter (8.75% annualized) is payable to the Advisor. FSK refers to this portion of its pre-incentive fee net investment income (which exceeds the hurdle rate but

 

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is less than or equal to 2.1875%) as the “catch-up.” The “catch-up” provision is intended to provide the Advisor with an incentive fee of 20% on all of FSK’s pre-incentive fee net investment income when FSK’s pre-incentive fee net investment income reaches 2.1875% in any calendar quarter;

 

   

20.0% of the amount of FSK’s pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized) is payable to the Advisor once the hurdle rate is reached.

The subordinated incentive fee on income is subject to a cap equal to (1) 20.0% of the “per share pre-incentive fee return” for the then-current and eleven preceding calendar quarters (the “look-back period”) minus the cumulative “per share incentive fees” accrued and/or payable for the eleven preceding calendar quarters multiplied by (2) the weighted average number of shares outstanding during the calendar quarter (or any portion thereof) for which the subordinated incentive fee on income is being calculated. The definitions of “per share pre-incentive fee return” and “per share incentive fees” under the Existing FSK Investment Advisory Agreement take into account the historic per share pre-incentive fee return of both the Company and Corporate Capital Trust, Inc., together with the historic per share incentive fees paid by both the Company and Corporate Capital Trust, Inc. For the purpose of calculating the “per share pre-incentive fee return,” any unrealized appreciation or depreciation recognized as a result of the purchase accounting for the merger of the Company and Corporate Capital Trust, Inc. is excluded.

The following is a graphical representation of the calculation of the income-related portion of the incentive fee:

Quarterly Subordinated Incentive Fee on Income

Pre-incentive fee net investment income

(expressed as a percentage of net assets)

 

LOGO

Percentage of pre-incentive fee net investment income allocated to income-related portion of incentive fee

(subject to total return requirement)

These calculations will be appropriately prorated for any period of less than three months and adjusted, if appropriate, for any equity capital raises or repurchases during the applicable calendar quarter. These calculations also assume that the total return requirement described above will not reduce the payment of any subordinated incentive fee on income.

The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). Such fee equals 20.0% of FSK’s incentive fee capital gains, which equals both Corporate Capital Trust, Inc.’s and FSK’s realized capital gains (without duplication) on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation (without duplication) on a cumulative basis, less the aggregate amount of any capital gains incentive fees previously paid by Corporate Capital Trust, Inc. or FSK. On a quarterly basis, FSK accrues for the capital gains incentive fee, which, if earned, will be paid annually. FSK accrues the incentive fee on capital gains based on net realized and unrealized gains; however, under the terms of the Investment Advisory Agreement, the fee payable to the Advisor will be based on realized gains and no such fee will be payable with respect to unrealized gains unless and until such gains are actually realized.

All percentages are based on FSK’s net assets.

 

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Indemnification

The Existing FSK Investment Advisory Agreement provides that the Advisor and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity affiliated with, or acting on its behalf, the Advisor shall be entitled to indemnification (including reasonable attorneys’ fees and amounts reasonably paid in settlement) for any liability or loss suffered by the Advisor or such other person, and the Advisor or such other person shall be held harmless for any loss or liability suffered by the Advisor or such person to the extent such losses are not fully reimbursed by insurance, and to the extent that such indemnification would not be inconsistent with the FSK charter, the laws of the State of Maryland, the 1940 Act or other applicable law, except the Advisor and such other person shall not be entitled to indemnification against any such loss to FSK or FSK’s stockholders by reason of willful misfeasance, bad faith or gross negligence in the performance of the Advisor’s duties or by reason of the reckless disregard of the Advisor’s duties and obligations under the Existing FSK Investment Advisory Agreement. FSK maintains a joint liability insurance policy with the Advisor. The premiums for this policy are allocated between FSK and the Advisor based on the proportional share of the premium that FSK and the Advisor would pay had they purchased FSK’s policies separately. The FSK Independent Directors must review and approve this allocation on an annual basis. As a result, the Advisor bears the cost of its own liability insurance.

Revisions to the Existing FSK Investment Advisory Agreement in the Proposed FSK Investment Advisory Agreement

The Proposed FSK Investment Advisory Agreement is identical to the Existing FSK Investment Advisory Agreement, except that the Proposed FSK Investment Advisory Agreement would (1) reduce FSK’s income incentive fee rate from 20% to 17.5% and (2) remove the total return lookback provision applicable to the subordinated incentive fee on income from the Existing FSK Investment Advisory Agreement.

After giving effect to the amendments contemplated by the Proposed FSK Investment Advisory Agreement, the subordinated incentive fee on income will be calculated for each quarter as follows:

 

   

no subordinated incentive fee is payable to the Advisor in any calendar quarter in which FSK’s pre-incentive fee net investment income does not exceed the hurdle rate of 1.75%;

 

   

100% of FSK’s pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.12% in any calendar quarter (8.48% annualized) is payable to the Advisor. FSK refers to this portion of its pre-incentive fee net investment income (which exceeds the hurdle rate but is less than or equal to 2.12%) as the “catch-up.” The “catch-up” provision is intended to provide the Advisor with an incentive fee of 17.5% on all of FSK’s pre-incentive fee net investment income when FSK’s pre-incentive fee net investment income reaches 2.12% in any calendar quarter; and

 

   

17.5% of the amount of FSK’s pre-incentive fee net investment income, if any, that exceeds 2.12% in any calendar quarter (8.48% annualized) is payable to the Advisor once the hurdle rate is reached.