Capital Southwest Corporation

5400 Lyndon B Johnson Freeway, Suite 1300

Dallas, Texas 75240

 

 

May 22, 2017

 

BY EDGAR AND OVERNIGHT DELIVERY 

 

United States Securities and Exchange Commission
Division of Investment Management

Attn: Jay Williamson
Washington, DC 20549-8626

 

 

Dear Mr. Williamson:

 

On May 17, 2017, Capital Southwest Corporation (the “Company”), was provided comments from the staff of the Division of Investment Management (the “Staff”) of the Securities and Exchange Commission (the “Commission”) relating to the Company’s Preliminary Proxy Statement on Schedule 14A, filed with the Commission on May 11, 2017 (File No. 814-00061) (the “Proxy Statement”).

On behalf of the Company, please find below the Company’s responses to the Staff’s comments.  For ease of reference, the Staff’s comments are included in boldface below, followed by the Company’s response.

Comment 1:   Please file responses to our comments on EDGAR as correspondence.  Where revised disclosure is required or contemplated by the response, please provide draft revised disclosure with the response letter.  Please allow sufficient time for us to review the responses and revised disclosure prior to filing your definitive Proxy Statement on Schedule 14A.

As requested, this response letter has been filed as correspondence through EDGAR.  We understand that the Staff will require sufficient time to review these responses prior to our filing a definitive Proxy Statement.

Comment 2:  Please clarify the language in the first paragraph on page 3 of the preliminary Proxy Statement to indicate how the holders’ shares will be voted if the holder signs, dates and returns a proxy card without indicating how the shares are to be voted.

The Company will revise the first paragraph on page 3 of the Proxy Statement to indicate how the holders’ shares will be voted if the holder signs, dates and returns a proxy card without indicating how the shares are to be voted.  The revised disclosure is included in Exhibit C2 to this response letter.

Comment 3:  We note Mr. Armes chose not to stand for reelection to the Board of Directors.  Please confirm his decision to not stand for reelection was not the result of a disagreement with the Company or other Board members.

Consistent with our Current Report on Form 8-K filed on May 10, 2017, the Company confirms to the Staff that Mr. Armes’ decision not to stand for reelection to the Board of Directors was voluntary and not the result of any disagreement with the Company or other Board members.

Comment 4:  We note you provide your executives with annual cash incentive opportunities based on the achievement of certain performance goals and objectives, including the maintenance and growth of dividends and NAV.  However, you do not disclose the performance target levels used nor do you fully explain how the specific amount paid ties to the achievement of the goals listed. Please revise to explain why the NEOs receive the incentive compensation paid.  Please refer to Item 402(b)(1)(iv) and (v) of Regulation S-K.

The Company will revise the “Compensation Discussion and Analysis” in the Proxy Statement to more fully describe the program.  In selecting the performance measures which will be used to measure NEO performance, the Committee chooses items that it believes are priorities for the Company for the fiscal year.  The Committee strives to ensure that the performance measures utilized each year to evaluate NEO performance effectively align the performance of each individual NEO with the performance of the Company.  In evaluating the performance of the Company and the individual executives to award annual cash incentives, the Committee uses discretion in determining how successfully the selected performance measures are reflected in the Company's results and the NEO's performance.  The Committee does not assign weights to the different performance measures selected or use the performance measures in a formulaic determination of annual incentive awards.  Exhibit C4 to this response letter contains revised disclosure describing this process.

 

Comment 5:  Please confirm whether your reincorporation from Texas to Maryland is in compliance with Rule 145(a)(2) under the Securities Act.

The Company confirms that the proposed conversion from a Texas corporation to a Maryland corporation is in compliance with Rule 145(a)(2) under the Securities Act.  The sole purpose of the conversion is to change the Company’s domicile solely within the Unites States.

Comment 6:  Please revise your discussion of corporate governance provisions under the heading “Impact of the Conversion on Key Corporate Governance Practices” on page 31 of the preliminary Proxy Statement to clearly identify material differences between Texas and Maryland and explain the implications to investors.

The Company acknowledges the Staff’s comments and will revise the discussion under the heading “Impact of the Conversion on Key Corporate Governance Practices” in the Proxy Statement.  The revised disclosure is included in Exhibit C6 to this response letter.

Comment 7:  Please remove the reference to “relevant provisions of the MGCL” from the introductory paragraph under the heading “Description of the Company’s Capital Stock Following the Conversion” on page 35 of the preliminary Proxy Statement.

The Company confirms that it will remove the reference to “relevant provisions of the MGCL” from the introductory paragraph under the heading “Description of the Company’s Capital Stock Following the Conversion.”  The revised disclosure is included in Exhibit C7 to this response letter.

Comment 8:  Please clarify what “best practices” are included in your Maryland Charter and Bylaws, as referred to on page 36 of the preliminary Proxy Statement under the subheading “Charter and Bylaws.”

The Company acknowledges the Staff’s comments and will revise the “Compensation Discussion and Analysis” in the Proxy Statement.  The revised disclosure is included in Exhibit C8 to this response letter.

Comment 9:  Please remove the qualifications with respect to Texas and Maryland law from page 37 of the preliminary Proxy Statement and confirm that you have summarized all the material differences in shareholder rights.

The Company confirms that it will remove the qualifications with respect to Texas and Maryland law.  The revised disclosure is included in Exhibit C9 to this response letter.  The Company confirms that it has summarized all material differences in shareholder rights under Texas and Maryland law.

Comment 10:  Please revise the discussion on page 44 of the preliminary Proxy Statement to more clearly highlight material differences in the standard of conduct and personal liability of directors and officers. Revised disclosure should focus on the implications for investors.

The Company consulted Maryland counsel.  The Company believes that there are no material differences between the standard of conduct required of directors under Texas law and the standard of conduct required of directors under Maryland law.  For this reason, the Company has removed the standard of conduct discussion from the Proxy Statement.  The Company will revise its comparison of the limitation on personal liability of directors and officers under Texas law to the limitation on personal liability of directors and officers under Maryland law to more clearly highlight the differences and focus on the implications for investors.  The revised disclosure is included in Exhibit C10 to this response letter. 

Comment 11:  Please confirm to us your Maryland charter will include language consistent with 17(h) of the Investment Company Act.

The Company confirms that Section 8.6 of the Maryland charter currently contains language consistent with 17(h) of the Investment Company Act.

Comment 12:  We note your Maryland charter, unlike your Texas charter, authorizes the Board to re-classify authorized common shares to preferred shares, as disclosed on page 48 of the preliminary Proxy Statement.  Please confirm you have no intention of issuing any other share classes (i.e., preferred shares) within one year.  If you are unable to confirm, please note we may have additional comments on your disclosures.

The Company confirms that it does not intend to issue any shares classes other than common stock (i.e., preferred shares) within one year of the filing of the Maryland charter after the annual meeting.

Comment 13:  Please consider moving your CD&A closer to Proposal 3 in order to make the disclosure more accessible to investors.

The Company confirms that it will move the sections entitled "Compensation Discussion and Analysis" and "Compensation of Executive Officers" from their current placement in the Proxy Statement to a new position immediately following Proposal 3 in order to make the disclosure more accessible to investors.

 

Comment 14:  In the first paragraph of page 55 of the preliminary Proxy Statement, you refer to a “Say on Pay” vote.  Please clarify whether this should refer to a “Say on Frequency” vote.

The Company will revise the first, second and fifth paragraphs on page 55 of the Proxy Statement to remove references to "Say on Pay."  The revised disclosure is included in Exhibit C14 to this response letter.

Comment 15:  Please provide us with a legible copy of your proxy card that meets the requirements of Rule 14a-4.

The Company has included a legible copy of the proxy card that meets the requirements of Rule 14a-4 as Exhibit C15 to this letter.  The Company also confirms that it will file a legible copy of the proxy card with the definitive Proxy Statement.

If you have any questions, please do not hesitate to contact Michael S. Sarner at (214) 884-3829.

 

 

 

 

 

 

Exhibit C2

 

If you sign, date and return a proxy card and do not make any selection on the proxy card, the proxy holders named on your proxy card will vote your shares in favor of (1) the election of all of the director nominees, (2) the proposal to convert the Company from a Texas corporation to a Maryland corporation, (3) the proposal to approve, on an advisory basis, the compensation of our named executive officers, (4) the proposal to select, on an advisory basis, that the advisory vote on the compensation of our named executive officers occur every year and (5) the ratification of the appointment of Grant Thornton as our independent registered public accounting firm for the 2018 fiscal year.

 

 

Exhibit C4

 

Annual Cash Incentive Opportunities

Annual cash incentive opportunities are intended to reward individual performance as well as operating results during the year and therefore can be highly variable from year to year. The Committee established the target annual cash incentive opportunities for the NEOs at the start of the year, taking into account the potential contribution by that executive to overall company performance and each executive’s industry experience length of tenure, relative to the market. For fiscal 2018, the Committee set the annual cash incentive opportunity at 150% of annual base salary for Mr. Diehl and 125% of annual base salary for Mr. Sarner, consistent with fiscal 2017. No threshold or maximum payout levels were set. The Committee may, in its sole discretion, award cash incentives that are higher or lower than the target annual cash incentive opportunities set for fiscal 2017.

At the start of each fiscal year, the Committee also establishes the Company and individual performance to be achieved to earn the target annual cash incentive award measures. The Committee strives to ensure that the performance measures utilized each year to evaluate NEO performance effectively align the performance of each individual NEO with the performance of the Company.  The fiscal year 2017 performance criteria measures used for determining the annual cash incentive for NEOs included, among other things, the following:

    Achievement of significant corporate financial objectives, particularly;: (1) investment income growth, (2) pre-tax net investment income growth, (3) dividend growth, (4) growth and diversification of the investment portfolio, (5) overall credit quality of the investment portfolio, (6) liquidity and capital flexibility, (7) preservation of net asset value and (8) total return on shareholders’ equity;

 

    Individual performance and achievement of individual goals, as well as the contribution to corporate objectives;

 

    Maintaining the highest ethical standards, internal controls and adherence to regulatory requirements; and

 

    Appropriate and planned development of personnel.

 

In April 2017, the Committee evaluated the overall outcome of these performance measures in determining the annual cash incentive payout. In determining the cash incentive awards for fiscal 2017, the Committee considered the following: (1) investment income of $23.5 million vs. $9.2 million in the prior year, (2) pre-tax net investment income of $0.61 per share compared to ($0.76) per share in the prior year, (3) declared $0.79 per share in total cash dividends compared to $0.14 per share in the prior year, (4) net asset value of $17.80 per share compared to $17.34 per share in the prior year, (5) $287 million in total investments at fair value, with no investments on non-accrual, compared to $178 million in total investments at fair value in the prior year, (6) closed a credit facility with $100 MM in commitments, an accordion to $150 MM, and $75 MM available to draw at year end and (7) total return on shareholders’ equity of 8.6% for fiscal year 2017.

The Committee evaluated concluded that the performance against these goals for fiscal 2017 in April 2017 and determined each NEO’s achievement of the goals and the amount of of the Company and each individual NEO was at a consistent high level in fiscal year 2017, resulting in excellent financial results. In evaluating these results, the Committee did not assign weights to these performance measures and used discretion in determining the annual cash incentive to be paid as a result compensation awarded to each NEO. Based on the  the fiscal year 2017 evaluation, and upon completion of the annual audit, Mr. Diehl was paid awarded an annual cash incentive of $751,938 (representing 170% of his base salary) and Mr. Sarner was awarded paid an annual cash incentive of $528,795 (representing 142% of his base salary). The Committee believes the annual cash incentives earned by the NEOs are appropriate in relation to Capital Southwest’s financial performance for fiscal 2017 as well as each named executive officer’s individual performance during that period.

 

 

Exhibit C6

 

The following is a description of the impact of the Conversion on some of the key corporate governance provisions relating to shareholder rights. Please see the section captioned "Comparison of Shareholder Rights Before and After the Conversion" for a more complete discussion.

 

 

 

 

 

 

 

Exhibit C7

 

If this Conversion proposal is approved by our shareholders and the Conversion is completed, CSWC Texas will convert into CSWC Maryland, and the rights of shareholders of CSWC Maryland will generally be governed by the MGCL and the Maryland Charter and Maryland Bylaws. The following is a description of the capital stock of CSWC Maryland upon completion of the Conversion. This description is not intended to be complete and is qualified in its entirety by reference to the full texts of the proposed Maryland Charter and Maryland Bylaws, copies of which are attached as Appendices D and E, respectively, and relevant provisions of the MGCL.

 

Exhibit C8

 

 

Charter and Bylaws. The provisions of the Maryland Charter and Maryland Bylaws are generally similar in substance to those of the Company’s existing Texas Charter and Texas Bylaws in most respects, except when modified to conform to Maryland law or updated to conform to what we believe are current best practices with respect to advance notice of matters to be brought before a shareholder meeting, indemnification and exculpation of officers and directors and simple majority voting standards for the approval of mergers, business combinations and charter amendments.

 

 

Exhibit C9

 

The summary below does not purport to be a complete statement of the respective rights of holders of our common stock before and after the Conversion, and is qualified in its entirety by reference to the TBOC and the MGCL, to our Texas Charter and Texas Bylaws, and to the Maryland Charter and the Maryland Bylaws.

 

 

Exhibit C10

 

 

 

 

 

 

Exhibit C14

 

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and SEC regulations, the shareholders are entitled to vote on how frequently we should request that our shareholders vote on a non-binding basis on executive compensation. This is sometimes referred to as the “Say on Pay” vote.

By voting on this proposal, shareholders may indicate whether they prefer that we conduct the advisory “Say on Pay” vote on executive compensation every one year, every two years or every three years. Shareholders may also abstain from casting a vote on this proposal. Pursuant to the Act, the shareholder vote on the frequency of the “Say on Pay” vote on executive compensation is an advisory vote only, and it is not binding on the Company or the Board.

After careful consideration of this proposal, our Board has determined that an advisory vote on executive compensation that occurs every one year is the most appropriate alternative for our Company and our shareholders at this time.

Even though your vote is advisory and therefore will not be binding on the Company or our Board, our Board and the Compensation Committee value the opinions of our shareholders and will consider the outcome of the vote on this proposal when deciding the frequency of future advisory votes on executive compensation.

THE BOARD OF RECOMMENDS THAT YOU VOTE FOR “ONE YEAR” ON THE FREQUENCY OF ADVISORY “SAY ON PAY” VOTE ON THE COMPENSATION OF OUR EXECUTIVE OFFICERS.

 

 

Exhibit C15

 

See attached.