Capital Southwest Corporation
CAPITAL SOUTHWEST CORP (Form: PRE 14A, Received: 05/11/2017 17:28:11)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934 (Amendment No.      )

 

 

 

Filed by the Registrant ☒

Filed by a Party other than the Registrant ☐

Check the appropriate box:

Preliminary Proxy Statement

Confidential, For Use of the Commission Only (as permitted by Rule 14a‑6(e)(2))

Definitive Proxy Statement

Definitive Additional Materials

Soliciting Material Pursuant to Rule 14a‑11(c) or Rule 14a‑12

 

 

CAPITAL SOUTHWEST CORPORATION

 

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

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PICTURE 2

5400 LBJ Freeway, Suite 1300

Dallas, TX 75240

214.238.5700

www.capitalsouthwest.com

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD AUGUST 2, 2017

To the Shareholders of Capital Southwest Corporation:

The 2017 Annual Meeting of Shareholders of Capital Southwest Corporation will be held on August 2, 2017, at 9:00 a.m., Dallas time (the “Annual Meeting”). We will hold our Annual Meeting in the Madison Conference Room, Hilton Dallas Lincoln Centre, 5410 LBJ Freeway, Dallas, Texas 75240. The purpose of this meeting is for our shareholders to consider and vote to:

1.     elect six directors to serve until the 2018 Annual Meeting of Shareholders or until their respective successors are duly elected and qualified;

2.     approve the conversion of Capital Southwest Corporation from a Texas corporation to a Maryland corporation;

3.     approve, on an advisory basis, the compensation of our named executive officers;

4.     approve, on an advisory basis, the frequency of the advisory vote on executive compensation;

5.     ratify the appointment by our Audit Committee of Grant Thornton LLP as our independent registered public accounting firm for the fiscal year ending March 31, 2018; and

6.      transact such other business as may properly come before the Annual Meeting.

Shareholders of record at the close of business on June 13, 2017 are entitled to receive notice and to vote at the Annual Meeting.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING TO BE HELD ON AUGUST 2, 2017. Our proxy statement and our Annual Report on Form 10‑K for the fiscal year ended March 31, 2017 (“Annual Report”) are available online at www.proxyvote.com. The proxy statement and Annual Report can also be found on our website www.capitalsouthwest.com under the “SEC Filings” tab or on the SEC’s EDGAR website at www.sec.gov.

Your vote is very important. Accordingly, please vote or authorize a proxy to vote, whether or not you plan to attend the Annual Meeting. You may vote or authorize a proxy to vote by (1) mail by marking, signing, dating and returning the accompanying proxy card in the postage-paid envelope we have provided; (2) Internet at www.proxyvote.com; (3) phone by calling 1‑800‑690‑6903; or (4) attending the Annual Meeting and voting in person. If you plan to attend the Annual Meeting to vote in person and your shares are registered in your own name with our transfer agent, American Stock Transfer & Trust Company, you may do so. If your shares are held in the name of a bank, broker or other nominee ( i.e. , in street name), you must obtain a proxy from the bank or broker assigning voting rights to you for your shares in order to vote in person at the Annual Meeting. This proxy statement, proxy card and any accompanying proxy materials are first being mailed to shareholders of record on or about June 16, 2017.

Thank you for your support of Capital Southwest Corporation.

 

 

 

By Order of the Board of Directors

 

PICTURE 1

 

 

 

Michael Sarner

 

Chief Financial Officer,

 

Chief Compliance Officer

 

and Secretary

 

June 16, 2017

Dallas, Texas

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

Page

GENERAL INFORMATION  

1

VOTING INFORMATION  

2

PROPOSAL ONE ELECTION OF DIRECTORS  

5

Board Composition  

5

Director Qualifications  

5

Information about the Directors  

5

Director Nominee Biographies  

6

GOVERNANCE OF THE COMPANY  

9

Board Leadership and Corporate Governance  

9

Board Independence and Meeting  

10

Board Committees  

10

Board and Committee Evaluations  

13

Guidelines on Governance and Codes of Ethics  

14

Risk Oversight  

15

Communication with the Board  

15

DIRECTOR COMPENSATION  

16

EXECUTIVE OFFICERS  

16

STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT  

17

COMPENSATION DISCUSSION AND ANALYSIS  

19

Compensation Philosophy  

19

Elements of Executive Compensation  

20

Historical Elements of Executive Compensation  

22

Other Benefits  

24

Potential Payments upon Change in Control or Termination of Employment  

24

Shareholder Advisory Vote on Executive Compensation  

24

Compensatory Risk Assessment  

24

COMPENSATION COMMITTEE REPORT  

25

COMPENSATION OF EXECUTIVE OFFICERS  

26

Summary Compensation Table  

26

All Other Compensation  

27

Grants of Plan-Based Awards  

27

Outstanding Equity Awards at Fiscal Year End  

28

Option Exercises and Equity Awards Vested in Fiscal Year  

28

Potential Payments Upon Termination or Change in Control  

28

PROPOSAL TWO CONVERSION FROM TEXAS CORPORATION TO MARYLAND CORPORATION  

30

PROPOSAL THREE ADVISORY VOTE ON EXECUTIVE COMPENSATION  

54

PROPOSAL FOUR ADVISORY VOTE ON THE FREQUENCY OF THE ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS  

55

PROPOSAL FIVE RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED ACCOUNTING FIRM  

56

Audit and Other Fees  

56

AUDIT COMMITTEE REPORT  

57

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE  

58

OTHER MATTERS  

58

Shareholder Proposals for 2018 Annual Meeting  

58

Reduce Duplicate Mailings  

59

 

 

 

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PROXY STATEMENT

2017 ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD ON AUGUST 2, 2017

2017 EXECUTIVE SUMMARY

Dear Fellow Shareholders,

Fiscal year 2017 represented our second full fiscal year as a middle market lender and one in which we made substantial progress establishing ourselves as a meaningful participant in the lower middle market. Since launching our credit strategy in January 2015, we have worked diligently to create a robust middle market lending firm in which every decision we make is made to support the long term interests of our shareholders. This includes not only portfolio investment and divestiture decisions, but also setting up internal systems and controls that are best-in-class. Our aim is to ensure that all governance, structural and legal aspects of the firm are set up to attract top talent to our firm and Board of Directors, as well as to ensure investor confidence in our management of their capital. To that end, this year we conducted a review of our organizational documents and determined that Capital Southwest and its shareholders would benefit from changing Capital Southwest’s state of incorporation from Texas to Maryland. We found that Capital Southwest was the only business development company (“BDC”) incorporated in Texas, with most other BDCs incorporated in either Maryland or Delaware due to those states’ well developed case law and familiarity with registered investment companies. Additionally, we determined that there are a number of modern provisions in each of the Maryland and Delaware statutes that we believe would benefit our shareholders, such as greater flexibility for dividends and distributions. After a full evaluation, the Board of Directors decided that converting Capital Southwest to a Maryland corporation was the most beneficial course of action for our shareholders. In reviewing the details included within the Maryland provisions, the Board of Directors has proactively chosen to opt out of several Maryland provisions that could restrict shareholder rights in an effort to preserve current shareholder rights and distinguish ourselves from other business development companies in Maryland. The proxy statement includes a summary of changes that will result from our conversion.

We are pleased with the progress we were able to make during fiscal year 2017 and look forward to discussing our results for the full year prior to the annual meeting once our audit is completed. We are truly grateful for your support.  Finally, we want you to know that we take the responsibility of the stewardship of your capital very seriously and are honored to have the opportunity to serve you.

Yours truly,

PICTURE 3

Bowen S. Diehl

President & Chief Executive Officer

GENERAL INFORMATION

We are furnishing you this proxy statement in connection with the solicitation of proxies by the Board of Directors (the “Board”) of Capital Southwest Corporation, a Texas corporation (the “Company,” “Capital Southwest,” “we,” “us,” or “our”). This proxy statement addresses the items of business for the Annual Meeting of Shareholders of Capital Southwest (the “Annual Meeting”) to be held on August 2, 2017 or any postponement or adjournment thereof. We will hold the Annual Meeting at 9:00 a.m., Dallas time in the Madison Conference Room, Hilton Dallas Lincoln Centre, 5410 LBJ Freeway, Dallas, Texas 75240. This proxy statement, the proxy card and any accompanying proxy materials are being mailed to shareholders on or about June 16, 2017. The Company will bear all expenses incurred in connection with this proxy solicitation, which we expect to conduct primarily by mail. In addition, our officers may solicit your proxy by telephone, by facsimile transmission or in person, for which they will not be separately compensated. In addition, we have engaged Georgeson to assist in the solicitation of proxies for fees and disbursements not to exceed approximately $15,000

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in the aggregate. If your shares are held through a broker or other nominee ( i.e. , in “street name”), we have requested that your broker or nominee forward this proxy statement to you and obtain your voting instructions, for which the Company will reimburse them for reasonable out-of-pocket expenses.

PROPOSALS TO BE VOTED ON

At the meeting, you will be asked to vote on the following five proposals:

     Proposal 1 :      the election of six directors to serve until the 2018 Annual Meeting;

     Proposal 2 :      the conversion of the Company from a Texas corporation to a Maryland corporation;

     Proposal 3 :      an advisory vote on the compensation of our named executive officers;

     Proposal 4 :      an advisory vote on the frequency of the advisory vote on the compensation of our named executive officers; and

     Proposal 5 :      the ratification of our appointment of Grant Thornton LLP as our independent registered public accounting firm for the year ending March 31, 2018.

VOTING INFORMATION

Record Date and Who May Vote

Our Board selected the close of business on June 13, 2017 as the record date (the “Record Date”) for determining shareholders entitled to vote at the Annual Meeting. If your shares were registered directly in your name with American Stock Transfer and Trust Company, our transfer agent and registrar, on the Record Date, you were a shareholder of record or registered holder on the Record Date and you may vote your shares on the matters to be considered by our shareholders at the Annual Meeting. If your shares were held through a bank, broker or other nominee (the “account holder”) on the Record Date, you are considered the “beneficial owner” of shares held in “street name” and your nominee has the authority to vote your shares at the Annual Meeting in accordance with your instructions.

Voting by Internet, by Phone, by Mail or in Person

If your shares are held directly in your name, you may vote or authorize a proxy to vote using any of the following methods:

     By Internet :    Go to www.proxyvote.com   and use the Internet to transmit your voting instructions and for electronic delivery of information until 11:59 p.m. Eastern Time on August 1, 2017. Have your proxy card in hand when you access the website and following the instructions.

 

     By Phone :       Call 1‑800‑690‑6903   on any touch-tone telephone to transmit your voting instructions until 11:59 p.m. Eastern Time on August 1, 2016. Have your proxy card in hand when you call and follow the instructions.

 

     By Mail :          Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided. The named proxies will vote your shares according to your directions. If you should deliver a signed proxy card without indicating your vote, the person voting the proxy will vote in favor of proposals 1, 2, 3 and 5, and in favor of “one year” on proposal 4.

 

     In Person :       You may vote shares held directly in your name in person at the Annual Meeting. If you want to vote shares that you hold in “street name” at the meeting, you must request a legal proxy from your broker, bank or other nominee.

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If you 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.

If your shares are held in street name, these proxy materials are being forwarded to you by your account holder, along with voting instructions. As the beneficial owner, you have the right to direct your account holder how to vote your shares, and the account holder is required to vote your shares in accordance with your instructions. In addition, as the beneficial owner of shares, you are entitled to attend the Annual Meeting. If you are a beneficial owner, however, you may not vote your shares in person at the Annual Meeting unless you obtain a legal proxy, executed in your favor, from the account holder of your shares.

You may receive more than one proxy statement and proxy card or voting instructions form if your shares are held through more than one account ( e.g. , through different account holders). Each proxy card or voting instructions form only covers those shares of common stock held in the applicable account. If you hold shares in more than one account, you must provide voting instructions as to all your accounts to vote all your shares.

Confidentiality

Proxy cards, ballots and voting tabulations that identify individual shareholders are confidential. Only the inspectors of election and certain employees associated with processing proxy cards and counting the vote have access to your card.

How to Revoke or Change Your Vote

For shares held of record, you may revoke a proxy or change your vote at any time before the Annual Meeting by any of the following methods:

·

sending a written revocation to our Secretary at our principal executive office;

·

authorizing a subsequent proxy card through the Internet or by telephone;

·

executing and submitting a later dated proxy card; or

·

voting in person at the Annual Meeting.

Unless you attend the Annual Meeting and vote your shares in person, you should change your vote using the same method (by telephone, Internet or mail) that you first used to vote your shares. That way, the inspectors of election for the meeting will be able to verify your latest vote.

For shares held in street name, you should follow the instructions in the voting instructions form provided by the account holder to change your vote. If you want to change your vote as to shares held in street name by voting in person at the Annual Meeting, you must obtain a valid proxy from the account holder that holds those shares for you.

Quorum

The presence at the Annual Meeting, in person or by proxy, of holders of a majority of our outstanding shares of common stock as of the Record Date will constitute a quorum. The Annual Meeting will be held only if a quorum is present. If you attend the meeting or vote your shares using the enclosed proxy card or voting instructions form (including

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any telephone or Internet voting procedures provided), your shares will be counted toward a quorum, even if you abstain from voting on a particular matter.

Vote Required; and How Votes Are Counted

All votes will be tabulated by the inspector of election appointed for the Annual Meeting, who will separately tabulate affirmative votes, negative votes and abstentions.

Assuming a quorum is present at the Annual Meeting, the following votes are required to approve each proposal:

 

 

 

Proposal

    

Vote Required

Proposal One:
Election of Directors

 

A nominee for director will be elected to the Board of Directors if the director nominee receives more affirmative votes than votes withheld. Abstentions have the same effect as votes withheld, while broker non-votes are not counted as votes cast for purposes of the election of directors and, therefore, will have no effect of the outcome of the election.

Proposal Two:
Conversion from a Texas corporation
to a Maryland corporation

 

The affirmative vote of two-thirds of the shares outstanding is required to approve the proposal to convert from a Texas corporation to a Maryland corporation. Abstentions and broker non-votes will have the same effect as votes cast against the proposal.

Proposal Three:
Advisory Vote on the Compensation of
our Named Executive Officers

 

The affirmative vote of a majority of the votes cast at the Annual Meeting, in person or by proxy, is required to approve, on an advisory basis, the compensation of our named executive officers. Abstentions have the same effect as votes cast against the proposal, while broker non-votes do not affect the outcome.

Proposal Four:
Advisory Vote on the Frequency of the
Advisory Vote on the Compensation of
our Named Executive Officers

 

The frequency receiving the greatest number of votes will be the frequency of the advisory vote on the compensation of our named executive officers that is approved by our shareholders. Abstentions and broker non-votes will not have any effect on the result of the vote on the proposal.

Proposal Five:
Ratification of Independent Registered
Public Accounting Firm

 

The affirmative vote of a majority of the votes cast at the Annual Meeting, in person or by proxy, is required to ratify the appointment of Grant Thornton LLP to serve as our independent registered public accounting firm for fiscal year 2018. Abstentions have the same effect as votes cast against the proposal.

 

We are not aware of any other matters that may be presented or acted on at the Annual Meeting. If you vote by signing and returning the enclosed proxy card or using the telephone or Internet voting procedures, the individuals named as proxies on the card may vote your shares, in their discretion, on any other matter requiring a shareholder vote that comes before the Annual Meeting.

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PROPOSAL ONE: ELECTION OF DIRECTORS

There are currently seven directors on the Board, six of whom are standing for reelection at the Annual Meeting. David R. Brooks, Jack D. Furst, T. Duane Morgan, William R. Thomas III, John H. Wilson and Bowen S. Diehl are currently directors and each has been nominated to continue to serve as a director. Each director elected at the Annual Meeting will hold office for a one-year term expiring at the 2018 annual meeting of shareholders. Joseph B. Armes has chosen not to stand for reelection as director and Chairman of the Board and will no longer serve as a director following the Annual Meeting. The Board has determined that a board of directors comprised of six directors is an appropriate size for the Company following Mr. Armes’ departure. Only six board seats will be elected at the Annual Meeting. The Board intends to appoint David Brooks to serve as our Chairman of the Board following the Annual Meeting.

Board Composition

The Nominating/Corporate Governance Committee (the “NCG Committee”) seeks directors with established, strong professional reputations and experience in areas relevant to our investment strategy. Each of the director nominees holds or has held senior executive positions in large, complex organizations and has experience that meets this objective. In these positions, they have also gained experience in core management skills, such as strategic and financial planning, public company financial reporting, compliance, risk management and leadership development. Each of our directors also has experience serving on or advising boards of directors and board committees of other organizations and has an understanding of corporate governance practices and trends.

The NCG Committee also believes that each of the nominees has other key attributes that are important to an effective board: integrity, candor, analytical skills, the willingness to engage management and each other in a constructive and collaborate fashion, and the ability and commitment to devote significant time and energy to serve on the Board and its committees. The NCG Committee takes into account diversity considerations in determining the director nominees and planning for director succession and believes that, as a group, the nominees bring a diverse range of perspectives to the Board’s deliberations.

In addition to the above, the NCG Committee also considered the specific experience described in the biographical information that follows in determining to nominate the individuals set forth below for election as directors.

Director Qualifications

The NCG Committee reviews with the Board on an annual basis the appropriate skills and characteristics required of Board members in the context of the then-current composition of the Board. This assessment includes, in addition to qualities of intellect, integrity and judgment, business experience and knowledge, reputation and character, issues of diversity, relevant industry and trade association knowledge and participation, accounting and financial expertise, public company experience, willingness and ability to devote the time and effort required to effectively serve on the Board and relevant legal and regulatory qualifications. The NCG Committee makes this determination in the context of an assessment of the perceived needs of the Board at that point in time.

The Board recognizes that its members benefit from service on the boards of other companies. We encourage that service but also believe it is critical that directors have the ability to dedicate sufficient time to their service on our Board.

Information about the Directors

For each director, we have highlighted certain key areas of experience that qualify him or her to serve on the Board in each of their respective biographies below. The business address of each director nominee is 5400 LBJ Freeway,

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Suite 1300, Dallas, Texas 75240. No director nominee otherwise serves as a director of an investment company subject to the 1940 Act.

Name and Age

    

Position Held with
Company

    

Year First
Elected or
Appointed

    

Principal Occupation

Independent Directors

 

 

 

 

 

 

David R. Brooks (58) (1)

 

Chairman of the Board of Directors

 

2017

 

Chairman and Chief Executive Officer of Independent Bank Group, Inc.

 

 

Director

 

2014

 

 

Jack D. Furst (58)

 

Director

 

2014

 

Founder of Oak Stream Investors

T. Duane Morgan (67)

 

Director

 

2012

 

Former/Retired Senior Vice President of Gardner Denver, Inc.

William R. Thomas III (46)

 

Director

 

2014

 

President of Thomas Heritage Foundation

John H. Wilson (74)

 

Director

 

1988

 

President of U.S. Equity Corporation

Interested Director

 

 

 

 

 

 

Bowen S. Diehl (48)

 

Director, President and Chief Executive Officer

 

2015

 

President and Chief Executive Officer of Capital Southwest Corporation


(1)

The Board intends to appoint David Brooks to serve as our Chairman of the Board following the Annual Meeting.

Director Nominee Biographies

Independent Directors

The Board has determined that Messrs. Brooks, Furst, Morgan, Thomas and Wilson are “independent” as defined by the Nasdaq Marketplace Rules and are not “interested persons” for purposes of the Investment Company Act of 1940 (the “1940 Act”).

David R. Brooks will be the Chairman of the Board of Capital Southwest following the Annual Meeting, subject to his re-election. Mr. Brooks is the Chairman of the Board, Chief Executive Officer, and a director of Independent Bank Group, Inc. (NASDAQ:IBTX), a publicly-traded bank holding company with approximately $5.9 billion in assets. Mr. Brooks previously served on the board of managers of Noel-Levitz, LLC, a large national higher education consulting company. He also previously served on the board of trustees of Houston Baptist University. Mr. Brooks has over 35 years of experience in the financial services industry and previously served as the chief financial officer at Baylor University. Mr. Brooks holds Bachelor and Master degrees in Business Administration from Baylor University. Capital Southwest benefits from Mr. Brooks’ extensive experience in overseeing the operations and growth of a bank holding company, his executive expertise in public and private companies, his significant experience as a director of public and private companies, and his expertise in financial matters.

Jack D. Furst is the founder of Oak Stream Investors, a private investment firm he started in 2008. Mr. Furst has over 25 years of experience in leveraged acquisitions and private investments. He joined HM Capital Partners LLC, a private equity firm, in 1989, the year it was formed (as Hicks, Muse, Tate & Furst, Inc.). Until 2008, he was a partner in HM Capital and was involved in all aspects of the firm’s business, including originating, structuring and monitoring HM Capital’s investments. Prior to joining HM Capital, Mr. Furst served as a Vice President and subsequently a partner of Hicks & Haas from 1987 to 1989. From 1984 to 1986, Mr. Furst was a mergers and acquisitions/corporate finance specialist for The First Boston Corporation in New York. Before joining First Boston, Mr. Furst was a Financial Consultant at Pricewaterhouse Coopers. Mr. Furst received his Bachelor of Science degree with honors from the College of Business Administration at Arizona State University and his Masters of Business Administration degree with honors from the Graduate School of Business at The University of Texas at Austin. Capital Southwest benefits from Mr. Furst’s senior executive and extensive private equity experience and his significant experience as a director of public and private companies.

T. Duane Morgan is the retired former President of the Engineered Products Group (EPG) of Gardner Denver, a global industrial manufacturer. Under Mr. Morgan, the EPG at Gardner Denver generated $1.1 billion of revenue across

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four divisions and 22 production facilities in the US, China, Germany, UK and Sweden. He spent almost 10 years with Gardner Denver until it was sold to Kohlberg Kravis Roberts (KKR) in July 2013 for $3.9 billion. Following the sale, Mr. Morgan continued as a Senior Vice President of Gardner Denver and advisor to KKR through July 2014, advising on matters including operational transition and strategy, as well as making presentations to ratings agencies that resulted in favorable financing for KKR and the new company. Prior to Gardner Denver, Mr. Morgan spent 20 years with Cooper Cameron, serving as President or Vice President of several of Cooper Cameron’s major divisions. Mr. Morgan also serves on the board of SACHEM, Inc., a privately-held specialty chemical company. Mr. Morgan holds a Bachelor of Science in Mathematics from McNeese State University and a Masters of Business Administration from Louisiana State University. He served as an Army Air Defense Artillery Officer in South Korea. Mr. Morgan is a National Association of Corporate Directors (“NACD”) Governance Fellow. Capital Southwest benefits from Mr. Morgan’s track record, spanning decades, of successful executive leadership through multiple economic cycles.

William R. Thomas III is a private investor who provides leadership for, and invests in, organizations that create financial return, social impact or both. He has served as President of the Thomas Heritage Foundation since 2008, a nonprofit and grant-making corporation. He manages personally and on behalf of Thomas Heritage Partners, Ltd. approximately 3.7% of the outstanding shares of the Company. Mr. Thomas was a deal professional with Capital Southwest from 2006 to 2012. During this time, Mr. Thomas made, enhanced and monetized investments in stand-alone private companies and add-on opportunities, served on the boards of eleven private companies, and oversaw valuation and regulatory compliance. From 2004 to 2006, Mr. Thomas earned his M.B.A. from Harvard Business School. During a portion of his time at Harvard, Mr. Thomas served as a consultant to private equity clients at Investor Group Services. From 1993 through 2004, Mr. Thomas served in the U.S. Air Force as a pilot in multiple aircraft and led training, safety, acquisition and logistics operations, achieving the rank of Major. Mr. Thomas serves as a director of Encore Wire Corporation (WIRE), is recognized as a National Association of Corporate Directors (NACD) Board Leadership Fellow and graduated from the United States Air Force Academy. Capital Southwest benefits from Mr. Thomas’ history with the Company, his investment experience and his perspective as a major shareholder of the Company.

John H. Wilson has been President of U.S. Equity Corporation, a private investment company, since 1983. He has over 45 years of experience as an executive or investor in numerous companies in the banking, insurance, manufacturing, communications, health and transportation industries. Mr. Wilson is also a director of Encore Wire Corporation (NASDAQ:WIRE). Mr. Wilson has a Bachelor of Business Administration degree from Baylor University. Capital Southwest benefits from Mr. Wilson’s diverse industry experience, his significant experience as a director of public and private companies, and his experience as both an executive and an investor in numerous companies.

Interested Director

The Board has determined that Mr. Diehl is an  “interested person” as defined in the 1940 Act due to his position as an officer of the Company.

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Bowen S. Diehl has served as President and Chief Executive Officer and as a director of Capital Southwest since October 2015. Mr. Diehl joined Capital Southwest in March 2014 and served as its Chief Investment Officer from March 2014 to October 2015. Prior to joining Capital Southwest, Mr. Diehl was employed by American Capital, Ltd., a publicly traded private equity firm and global asset manager. From 2007 to 2014, he served as Co-Head of American Capital’s Sponsor Finance Group, the group responsible for the majority of American Capital’s middle market lending business. He served in other capacities at American Capital from 2001 to 2007. Mr. Diehl has managed investments that have included senior and subordinated debt, as well as preferred and common equity in both control and non-control structures. Mr. Diehl’s investment experience relates to a variety of industries including healthcare, business services, industrial manufacturing and consumer finance. Prior to American Capital, Mr. Diehl was a Vice President in Investment Banking at Merrill Lynch, where he gained experience working with companies in the exploration and production, oilfield services, natural gas pipeline, natural gas gathering and processing, homebuilding and semiconductor sectors. Prior to joining Merrill Lynch, Mr. Diehl was a Vice President in the Global Oil and Gas Group at Chase Securities Inc., completing numerous transactions in the upstream and midstream oil and gas sectors. Mr. Diehl earned a Bachelor of Engineering degree, with majors in Environmental/Geotechnical Engineering and Economics, from Vanderbilt University and a Masters of Business Administration from the University of Texas at Austin. In his capacity as President and Chief Executive Officer, Mr. Diehl is an “interested person” under the Investment Company Act of 1940. Capital Southwest benefits from Mr. Diehl’s extensive experience as a senior investment professional as well as his knowledge of the business development company industry.

THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE “FOR” EACH OF THE DIRECTOR NOMINEES NAMED IN THIS PROXY STATEMENT.

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GOVERNANCE OF THE COMPANY

During our fiscal year ended March 31, 2017, the Board held nine meetings and acted by unanimous written consent two times. In fiscal 2017, each director attended at least 75% of the aggregate of (1) the total number of meetings of the Board (held during the period for which he was a director) and (2) the total number of meetings held by all committees of the Board on which he served (held during the periods that he served), except the total attendance of Mr. Furst was less than 75% due to illness and extenuating circumstances. Mr. Furst was briefed in detail on all matters covered at all of these meetings, which included receipt and discussion of all presentation materials provided to the full Board of Directors at each meeting. In addition, Mr. Furst has made himself available to the management team between meetings to consult on specific matters in which his extensive investment and management experience can benefit Capital Southwest. The Company does not have a formal policy on director attendance at the annual meeting of shareholders; however, attendance is encouraged. All directors who were serving at the time of our 2016 annual meeting of shareholders attended the meeting.

Board Leadership and Corporate Governance

The Board recognizes that one of its key responsibilities is to evaluate and determine its optimal leadership structure so as to provide independent oversight of management. The Board understands that there is no single, generally accepted approach to providing board leadership and that, given the dynamic and competitive environment in which we operate, the right board leadership structure may vary as circumstances warrant. Accordingly, the Board seeks to fulfill its responsibilities by continually seeking the appropriate board leadership and corporate governance for Capital Southwest Corporation.

Currently, the offices of Chairman of the Board and Chief Executive Officer are separated. We have no fixed policy with respect to the separation of the offices of the Chairman of the Board and Chief Executive Officer. The Board believes that the separation of the offices is in the best interests of the Company at this time and is an integral part of good corporate governance and the succession planning process.

No single leadership model is right for all companies at all times. Our Board recognizes that depending on the circumstances, other leadership models might be appropriate. Accordingly, our Board periodically reviews its leadership structure.

Mr. Armes, who has served as Chairman of the Board since January 2014, has chosen not to stand for reelection as director and Chairman of the Board at the Annual Meeting. Following the annual meeting, the Board intends to appoint Mr. Brooks as Chairman of the Board. In addition, Mr. Furst will replace Mr. Brooks as chair of the Audit Committee following the Annual Meeting.

The Board appoints the members of the Audit Committee, Compensation Committee and the Nominating/Corporate Governance Committee. Each of these committees has a written charter approved by the Board. These committee charters are available on our website at www.capitalsouthwest.com/governance. The current members of the committees are identified in the following table.

 

 

 

 

 

 

 

 

 

Current Board Committees

Director

    

Audit

    

Compensation

    

Nominating/
Corporate
Governance

David R. Brooks

 

Chair

 

X

 

X

Jack D. Furst

 

X

 

X

 

X

T. Duane Morgan

 

X

 

X

 

Chair

William R. Thomas III

 

X

 

X

 

X

John H. Wilson

 

X

 

Chair

 

X

 

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Following the Annual Meeting, we expect the committee chairs to change as described in the following table.

 

 

 

 

 

 

 

 

 

Prospective Board Committees

Director

    

Audit

    

Compensation

    

Nominating/
Corporate
Governance

David R. Brooks

 

X

 

X

 

X

Jack D. Furst(1)

 

Chair

 

X

 

X

T. Duane Morgan

 

X

 

X

 

Chair

William R. Thomas III

 

X

 

X

 

X

John H. Wilson

 

X

 

Chair

 

X


(1)

The Board intends to appoint Jack Furst to fill the role of Audit Committee Chair following the Annual Meeting.

Board Independence and Meeting

Independence

Currently, the Board has seven directors. The Board has determined that five of our current directors (Messrs. Brooks, Furst, Morgan, Thomas, and Wilson) are independent, as “independence” is defined by the Nasdaq Marketplace Rules. This means that none of the independent directors has any direct or indirect material relationship with us, either directly or as a partner, shareholder or officer of an organization that has a relationship with us. As a result, the Board has a majority of independent directors on the Board as required by the Nasdaq Marketplace Rules. Following Mr. Armes’ departure from the Board, five of our six directors will be independent.

Executive Sessions

Our independent directors have regularly scheduled executive sessions in which they meet without the presence of management or management directors. These executive sessions occur after each regularly scheduled meeting of the Board.

Board Committees

Audit Committee

The Audit Committee oversees our accounting and financial reporting processes and the audits of the Company’s financial statements. The responsibilities of the Audit Committee include:

·

engaging the Company’s independent registered public accounting firm and conducting an annual review of the independence of that firm;

·

pre-approving and approving all audit and non-audit engagements with the Company’s independent registered public accounting firm;

·

reviewing the annual audited financial statements and quarterly financial information with management and the independent registered public accounting firm, including disclosures regarding internal controls;

·

reviewing with the independent registered public accounting firm the scope and the planning of the annual audit;

·

reviewing and discussing with management the results of the audit of the independent registered public accounting firm;

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·

discussing risk assessment and corporate policies with respect to financial reporting and valuation of our investments and the Company’s financial risk exposure;

·

approving related party transactions exceeding $50,000 in aggregate value;

·

overseeing investigations into complaints concerning accounting, internal accounting controls and auditing matters;

·

reviewing the adequacy of the Audit Committee charter on an annual basis; and

·

preparing the Audit Committee report to be included in our annual proxy statement.

During fiscal 2017, the Audit Committee met nine times. The Board has determined that each member of the Audit Committee is “independent” as independence for audit committee members is defined by the Nasdaq Marketplace Rules and is not an “interested person” as defined by the 1940 Act. The Board has also determined that each of the Audit Committee members is financially literate and that each of Mr. Brooks and Mr. Furst is an “audit committee financial expert” as defined by the SEC and Nasdaq Marketplace Rules. In discharging its oversight role, the Audit Committee has authority to investigate any matter brought to its attention with full access to all books, records, facilities and personnel of Capital Southwest and the authority to engage independent counsel and other advisers as it determines necessary to carry out its duties.

Nominating/Corporate Governance Committee

The responsibilities of the NCG Committee include:

·

developing and recommending corporate governance principles and procedures applicable to the Board and the Company’s employees;

·

establishing criteria for selection of potential directors, taking into consideration an established set of desired attributions, and periodically assessing the criteria to ensure they are consistent with best practices and the goals of the Company;

·

reviewing the qualifications, performance and independence of Board members pursuant to criteria and procedures established by the NCG Committee and making recommendations whether each director should stand for re-election when his or her term expires;

·

reviewing annually with the Board the composition of the Board as a whole and recommending, if necessary, measures to be taken so that the Board reflects the appropriate balance of knowledge, experience, skill, expertise and diversity desired for the Board and so that the Board meets Nasdaq Marketplace Rules and/or any other regulatory requirements;

·

identifying individuals qualified to become members of our Board consistent with the criteria approved by the Board in our Corporate Governance guidelines and recommending to the Board a slate of director nominees for each annual meeting of our shareholders;

·

considering and evaluating shareholder nominees for election to the Board;

·

recommending to the Board the removal of a director where appropriate;

·

establishing criteria for membership on the Board for appointments to and removal from the committees;

·

reviewing and re-examining the NCG Committee Charter periodically and making recommendations to the Board with respect to any proposed changes;

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·

reviewing annually its own performance against the responsibilities outlined in its charter and as otherwise established by the Board;

·

reviewing, at least once annually, the insider trading and related policies adopted by the Board to assure that they are appropriate for us and comply with the requirements of the Nasdaq Marketplace Rules and/or any other regulatory requirements, recommending to the Board any desirable changes to the Code of Conduct and Ethics, considering any other corporate governance issues that arise from time to time and developing appropriate recommendations for the Board related to any such issues;

·

overseeing and establishing appropriate procedures for the annual evaluation of the Board and management; and

·

developing and recommending to the Board a set of corporate governance guidelines applicable to the Company, reviewing them annual and, if appropriate, recommending changes to the corporate governance guidelines to the Board.

Qualifications for Director Nominees. In considering director nominees, the NCG Committee considers a number of factors, including the following:

·

significant experience that is relevant and beneficial to the Board and Capital Southwest;

·

the ability and willingness to make sufficient time commitments to our affairs in order to perform their duties as directors, including regular attendance at Board and committee meetings;

·

consistent demonstration of strong character and integrity;

·

the ability and willingness to represent the best interests of our shareholders; and

·

whether the nominee is “independent” as determined in accordance with the rules promulgated by the SEC, the Nasdaq Marketplace Rules and/or any other regulatory requirements and the Company’s corporate governance guidelines.

During fiscal 2017, the NCG Committee met two times. The Board has determined that each member of the NCG Committee is “independent” as independence for compensation committee members is defined by the Nasdaq Marketplace Rules and is not an “interested persons” as defined by the 1940 Act.

Consideration of Director Nominees of Shareholders.   The NCG Committee will consider nominees for directors whose names are submitted in writing by a holder of our common stock. Nominations must be addressed to Capital Southwest Corporation, 5400 LBJ Freeway, Suite 1300, Dallas, Texas 75240, Attention: Chairman of the Nominating/Corporate Governance Committee, indicating the nominee’s qualification, and other relevant biographical information and providing confirmation of the nominee’s consent to serve as a director. In order to be considered for the next annual election of directors, any such written request must comply with the requirements in our bylaws.

The NCG Committee will evaluate director nominees recommended by a shareholder, current Board member or other person according to the same criteria as a nominee identified by the NCG Committee. While the NCG Committee has the ability to retain a third party to assist in the nomination process, we have not paid a fee to any third party to identify or assist in identifying or evaluating potential nominees.

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Compensation Committee

The Compensation Committee has the sole authority and responsibility for establishing, administering and reviewing the Company’s policies, programs and procedures for compensating our executive officers and members of the Board. The functions and responsibilities of the Compensation Committee include:

·

reviewing, at least annually, the goals and objectives and the structure of Capital Southwest’s plans for executive compensation, incentive compensation, equity-based compensation, and its general compensation plans and employee benefit plans (including retirement plans);

·

making recommendations to the Board with respect to any new equity or other incentive compensation plans or any changes in the objectives and structure of existing plans;

·

reviewing and evaluating annually the performance of the Company’s executive officers, in light of the goals and objectives of Capital Southwest’s executive compensation plans, and to determine executive compensation;

·

overseeing, in consultation with the Chief Executive Officer, the annual evaluation of other executive officers and key employees;

·

recommending grants of equity-based compensation awards to any officer or other employee;

·

meeting with management to review and discuss the Compensation Discussion and Analysis included in this proxy statement; and

·

reviewing and reassessing annually the adequacy of the Compensation Committee Charter and recommending any changes to the Board.

During fiscal 2017, the Compensation Committee met two times. The Board has determined that each member of the Compensation Committee (a) meets the Nasdaq Marketplace Rules with respect to independence and all other applicable legal requirements, (b) is a “non-employee director” as that term is defined under Rule 16b‑3 promulgated under the Securities Exchange Act of 1934, as amended (the “1934 Act”), and (c) is an “outside director” as that term is defined under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). The Compensation Committee may retain independent counsel and other independent advisors to assist it in carrying out its responsibilities.

Compensation Committee Interlocks and Insider Participation

During fiscal 2017, no member of the Compensation Committee was an officer or employee of our Company or any of our subsidiaries. In addition, none of our executive officers served on the board of directors or on the compensation committee of any other entity, for which any executive officers of such other entity served either on our Board or on our Compensation Committee.

Board and Committee Evaluations

Our Guidelines on Governance require the Board and each committee of the Board to conduct an annual self-evaluation to determine whether the Board or committee is functioning effectively. The review focuses on the performance of the entire Board or the committee. In connection with each annual performance evaluation, the Board or committee surveys and receives comments from each director or committee member regarding an assessment of the Board’s or the committee’s performance. The Board also reviews the NCG Committee’s recommendations concerning the performance and effectiveness of the Board and each of its committees. The NCG Committee will also review the individual performance of a director as circumstances warrant.

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During fiscal 2017, the Board engaged a third party consultant to conduct an evaluation of the governance processes and procedures, and the skill sets and backgrounds of the Board members, compared to industry best practices. The third party consultant presented its evaluation to the Board and provided their recommendations.

Our bylaws provide that the Board may increase or decrease the number of directors by resolution of the Board, provided that the tenure of office of any incumbent director will not be affected by any decrease in the number of directors. Our bylaws also provide that any vacancy may be filled either by a majority of the remaining directors or by our shareholders at an annual meeting or a special meeting called for that purpose. Any director elected to fill a vacancy will hold office until the next annual election of directors and until a successor is elected and qualified.

Guidelines on Governance and Codes of Ethics

The Board has adopted the Guidelines on Governance to address significant corporate governance issues. These guidelines provide a framework for our corporate governance initiatives and cover a variety of topics, including the role of our Board, Board selection and composition, Board committees, Board operation and structure, Board orientation and evaluation, Board planning and oversight functions and stock ownership guidelines. The NCG Committee is responsible for overseeing and reviewing the guidelines and reporting and recommending to the Board any changes to the guidelines.

The Board has also adopted a Code of Conduct and Code of Ethics, which are designed to help officers, managers and employees resolve ethical issues in an increasingly complex business environment. It covers topics such as reporting unethical or illegal behavior, compliance with the law, share trading, conflicts of interest, fair dealing, protection of our assets, disclosure of proprietary information, internal controls, personal community activities, business records, communication with external audiences and obtaining assistance to help resolve ethical issues.

You may obtain a copy of the Code of Conduct and Code of Ethics on our website at www.capitalsouthwest.com/governance.

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Risk Oversight

The Board has an active role in overseeing management of Capital Southwest’s risk. The Board regularly reviews information regarding Capital Southwest’s operational, financial, legal, regulatory, strategic and reputational risks which are usually conveyed to the Board by the senior management of Capital Southwest. Because overseeing risk is an ongoing process and inherent in Capital Southwest’s strategic decisions, the Board discusses risk throughout the year during its meetings in relation to specific proposed actions. The Board delegates certain risk management oversight to the Board committees. While the Board oversees Capital Southwest’s overall risk management, management is responsible for the day-to-day risk management process.

The primary areas of risk oversight for which the Board and each Board committee is responsible are summarized in the chart below.

Board/Committee

    

Primary Areas of Risk Oversight

Board

 

Strategic, financial and executive risks and exposures associated with the annual operating plan and strategic plan; legal and regulatory exposures and other current matters including cybersecurity and information systems risk that may present material risk to our operations, plans, prospects or reputations; material acquisitions and divestitures.

Audit Committee

 

Risks and exposures associated with accounting, auditing, reporting, financial practices (including the integrity of Capital Southwest’s financial statements and related systems of internal controls), administration and financial controls, compliance with legal and regulatory requirements, including ethical business standards, the independent registered public accounting firm’s qualifications, independence and performance and the performance of the internal audit function. The Audit Committee also has the direct responsibility for the appointment, compensation, retention and oversight of our independent registered public accounting firm, including the performance of any non-audit services.

Compensation Committee

 

Risks and exposures associated with compensation, severance agreements, any succession plans and incentive and equity-based compensation plans for Company employees and non-employee members of the Board, including with respect to compliance of compensation plans and arrangements with applicable regulations.

Nominating/Corporate Governance Committee

 

Risks and exposures related to governance of Capital Southwest and to the composition and organization of the Board including nominations and qualification criteria for membership, Board size, and Board education and evaluation.

 

Communication with the Board

Shareholders and interested parties who wish to communicate with any member of the Board may do so by writing to: Capital Southwest Corporation, 5400 LBJ Freeway, Suite 1300, Dallas, Texas 75240, Attention: Board of Directors.

Mr. Brooks currently reviews all correspondence addressed to the Board, or any individual Board member, for any inappropriate correspondence and correspondence more suitably directed to management.   Mr. Brooks will summarize all correspondence not forwarded to the Board and make the correspondence available to the Board for its review at the Board’s request. Mr. Brooks will forward shareholder communications to the Board prior to the next regularly scheduled meeting of the Board following the receipt of the communication as appropriate.

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DIRECTOR COMPENSATION

Directors who are not employed by the Company receive an annual retainer of $102,000 for service as a director. Directors are also reimbursed for travel expenses related to attending Board meetings. The non-executive Chairman of the Board and committee chairs also receive additional annual fees as follows:

 

 

 

 

Position

    

Annual Fee

Non-Executive Chairman of the Board

 

$

30,000 

Audit Committee Chair

 

 

15,000 

Compensation Committee Chair

 

 

10,000 

Nominating/Corporate Governance Committee Chair

 

 

8,000 

 

The following table sets forth the total compensation paid to our non-employee directors for fiscal 2017. During fiscal 2017, we did not grant any equity awards or pay or accrue any pension or retirement benefits for our non-employee directors.

 

 

 

 

 

 

 

Name

    

Fees Earned
or
Paid in Cash

    

Total

Joseph B. Armes

 

$

132,000 

 

$

132,000 

David R. Brooks

 

 

117,000 

 

 

117,000 

John H. Wilson

 

 

112,000 

 

 

112,000 

T. Duane Morgan

 

 

110,000 

 

 

110,000 

Jack D. Furst

 

 

102,000 

 

 

102,000 

William R. Thomas III

 

 

102,000 

 

 

102,000 

 

In October 2015, the Nominating/Corporate Governance Committee adopted a stock ownership policy for members of the Board. This policy requires each non-employee director to own shares of Capital Southwest stock equal to 2.5 times the annual director retainer, or $255,000. Each director has five years to establish this required minimum ownership position.

EXECUTIVE OFFICERS

Bowen S. Diehl . See “Nominees for Director” for Mr. Diehl’s biography.

Michael S. Sarner , 45, has served as our Chief Financial Officer since October 2015. Before that, he served as a Senior Vice President of Capital Southwest since July 2015. Prior to joining Capital Southwest, from 2000 to 2015, Mr. Sarner was the Senior Vice President, Treasury at American Capital, Ltd., a publicly traded private equity firm and global asset manager. Mr. Sarner was responsible for capital raising, debt capital markets, corporate restructurings, financial planning, corporate development of strategic initiatives, and system implementations of budget and treasury solutions. During the course of his career, he has raised over $6 billion in debt capital in term securitizations, secured revolving lines of credit, unsecured notes, and term loans to support middle market platforms. Mr. Sarner has also led both corporate and debt restructurings, serving as both the strategic lead internally and the external liaison to over 20 financial institutions involved in the negotiations. Prior to joining American Capital, Mr. Sarner served in various roles in the accounting and finance fields performing and managing due diligence, raising debt and equity capital, and performing audits in public accounting. Mr. Sarner holds a Bachelor of Business Administration in Accounting from James Madison University and a Masters of Business Administration in Finance from George Washington University. Mr. Sarner holds an inactive Certified Public Accountant License in the Commonwealth of Virginia.

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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of May 16, 2017 by (1) each named executive officer in the Summary Compensation Table; (2) each director that served at any time during fiscal 2017; (3) all current directors and executive and non-executive officers as a group; and (4) each person who is the beneficial owner (as that term is defined in the rules and regulations of the SEC) of 5% or more of our outstanding common stock. The number of shares beneficially owned by each entity, person, director or executive officer is determined under the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has the sole or shared voting power or investment power and also any shares that the individual has a right to acquire as of July 15, 2017 through the exercise of any stock option or other right. Unless otherwise indicated below, each of the persons named in the table has sole voting and investment power with respect to the shares indicated to be beneficially owned. Percentage of ownership is based on 16,011,296 shares of common stock outstanding as of May 16, 2017. Number of shares held by beneficial owners of 5% or more of our outstanding common stock are as of the date of the applicable SEC filing made by those owners (unless otherwise noted).

 

 

 

 

 

 

Name and Address of Beneficial Owner

    

Amount and Nature of
Beneficial Ownership

    

Percent
of Class

 

Directors & Executive Officers

 

 

 

 

 

Joseph B. Armes(1),(2)

 

37,000 

 

 

David R. Brooks(1)

 

20,000 

 

 

Bowen S. Diehl(1),(3)

 

193,012 

 

1.2 

%

Jack D. Furst(1)

 

17,100 

 

 

T. Duane Morgan(1),(4)

 

12,841 

 

 

Michael S. Sarner(1),(5)

 

65,286 

 

 

William R. Thomas III(1),(6)

 

592,156 

 

3.7 

%

John H. Wilson(1)

 

12,000 

 

 

 

 

 

 

 

 

All directors and executive officers as a group (8 persons)

 

949,895 

 

5.9 

%

 

 

 

 

 

 

5% Owners

 

 

 

 

 

Punch & Associates Investment Management, Inc.(7)

 

1,688,317 

 

10.5 

%

Moab Capital Partners, LLC(8)

 

1,630,852 

 

10.2 

%

Zuckerman Investment Group(9)

 

1,400,439 

 

8.7 

%

River Road Asset Management, LLC(10)

 

943,034 

 

5.9 

%

Ariel Investments, LLC(11)

 

939,799 

 

5.9 

%

First Manhattan Co.(12)

 

826,728 

 

5.2 

%


* Less than 1%

(1)

Unless otherwise indicated, the address of each of the persons whose name appears in the table above is: c/o Capital Southwest Corporation, 5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas 75240. None of the shares of Capital Southwest’s common stock owned by our directors, director nominees or executive officers are pledged as security.

(2)

Mr. Armes has voting power with respect to 16,000 unvested restricted shares of Capital Southwest’s common stock and 21,000 unrestricted shares of common stock. Lastly, 81,222 shares of his stock options granted under the 2009 stock option plan will be exercisable as of August 2, 2017.

(3)

Mr. Diehl has voting power with respect to 94,375 unvested restricted shares and 98,637 unrestricted shares of common stock. In addition, 29,977 of Mr. Diehl’s stock options granted under the 2009 stock option plan will be exercisable as of August 2, 2017.

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(4)

Mr. Morgan holds 4,491 shares of Capital Southwest’s common stock directly and 8,350 shares indirectly through the Morgan Family Trust.

(5)

Mr. Sarner has voting power with respect to 52,500 unvested restricted shares and 12,786 unrestricted shares of common stock.

(6)

Mr. Thomas holds 8,217 shares of Capital Southwest’s common stock directly. Mr. Thomas is President and sole manager of Thomas Heritage Company, L.L.C., the sole general partner (the “General Partner”) of Thomas Heritage Partners, Ltd. (the “Partnership”). In such capacity, Mr. Thomas has sole voting and dispositive power with respect to 571,939 shares owned by the Partnership. Mr. Thomas beneficially owns 12,000 held by his minor children.

(7)

Based on a Schedule 13G/A filed with the SEC on February 3, 2017, Punch & Associates beneficially owns and has sole voting and dispositive power with respect to 1,688,317 shares of Capital Southwest’s common stock. The address for Punch & Associates is 3601 W. 76th Street, Suite 225, Edina, Minnesota 55435.

(8)

Based on a Schedule 13G filed with the SEC on February 14, 2017, Moab Capital Partners, LLC, Moab Partners, L.P. and Michael M. Rothenberg beneficially own and have sole voting and dispositive power with respect to 1,630,852 shares of Capital Southwest’s common stock. According to the Schedule 13G, Moab Capital Partners, LLC is the investment adviser to Moab Partners, L.P. and a certain managed account. Mr. Rothenberg is an owner and a Managing Member of Moab Capital Partners, LLC. By virtue of these relationships, each of Moab Capital Partners, LLC and Mr. Rothenberg may be deemed to beneficially own shares of Capital Southwest’s common stock owned directly by Moab Partners, L.P. and held in the managed account. The address for Moab Capital Partners is 15 East 62nd Street, New York, New York 10065.

(9)

Based on a Schedule 13G/A filed with the SEC on February 14, 2017, Zuckerman Investment Group, LLC, Sherwin A. Zuckerman and Daniel R. Zuckerman beneficially own and have shared voting and dispositive power with respect to 1,400,439 shares of Capital Southwest’s common stock. The address for Zuckerman is 155 N. Wacker Drive, Suite 1700, Chicago, Illinois 60606.

(10)

Based on a Schedule 13G/A filed with the SEC on January 12, 2017, River Road Asset Management, LLC beneficially owns and has sole dispositive power with respect to 943,034 shares of Capital Southwest’s common stock and has sole voting power with respect to 792,143 shares of Capital Southwest’s common stock. The address for River Road Asset Management is 462 S. Fourth Street, Suite 2000, Louisville, Kentucky 40202.

(11)

Based on a Schedule 13G filed with the SEC on February 14, 2017, Ariel Investments, LLC beneficially owns and has sole dispositive power with respect to 939,799 shares and has sole voting power with respect to 732,323 shares of Capital Southwest’s common stock. The address for 200 East Randolph Street, Suite 2900, Chicago Illinois 60601.

(12)

Based on a Schedule 13G/A filed with the SEC on February 10, 2017, First Manhattan Co. beneficially owns and has shared dispositive power with respect to 826,728 shares and has shared voting power with respect to 821,228 shares of Capital Southwest’s common stock. The address for First Manhattan is 399 Park Avenue, New York, New York 10022.

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COMPENSATION DISCUSSION AND ANALYSIS

The following Compensation Discussion and Analysis, or CD&A, provides information relating to the compensation earned by our Named Executive Officers, or NEOs, in fiscal 2017 who were:

·

Bowen S. Diehl, President and Chief Executive Officer (“CEO”) and

·

Michael S. Sarner, Chief Financial Officer (“CFO”).

Compensation Philosophy

The Capital Southwest Compensation Committee (the “Committee”) has the primary authority to establish our compensation philosophy and the actual compensation levels for the NEOs and to administer all executive compensation arrangements and policies. The compensation programs of the Company adopted by our Committee are designed with the goal of providing compensation that is fair, reasonable and competitive. These programs are intended to align the compensation paid to our NEOs with both our short-term and long-term objectives and the interests of shareholders, which we believe will contribute to the achievement of long-term sustainable investment returns. The key elements of our compensation philosophy include: (1) designing compensation programs that enable us to attract and retain the best talent in the industry in which we compete; (2) aligning executive compensation packages with the Company’s performance; and (3) using long-term equity awards to align employee and shareholder interests.

The structure of the NEOs’ compensation program is designed to encourage and reward the following factors, among other things:

·

sourcing and pursuing attractively priced investment opportunities in both upper and lower middle market companies;

·

achievement of income and capital gains to sustain and grow the Company’s dividend payments;

·

maintenance of liquidity and capital flexibility to accomplish the Company’s business objectives, including the preservation of investor capital;

·

attainment of superior risk-adjusted returns on the Company’s investment portfolio; and

·

professional development and growth of individual executives, the management team and other employees.

The Committee has the primary authority to establish compensation for the NEOs and other key employees and administers all executive compensation arrangements and policies. Our CEO assists the Committee by providing recommendations regarding the compensation of our CFO and other key employees based on the compensation objectives set by the Committee as well as current business conditions. The Committee exercises it discretion by modifying or accepting his recommendations. The Committee determines the CEO’s compensation without assistance or consultation. The CEO routinely attends a portion of the Committee meetings. However, the Committee meets in executive session without the CEO or other members of executive management from time to time.

To determine the competitiveness of executive compensation levels, the Committee analyzes a group of BDCs, both internally and externally managed. Items reviewed included corporate and, to the extent available,  executive performance measures established to achieve total returns for shareholders. However, the Committee does not specifically benchmark the compensation of our NEOs against that paid by other companies. This is in part due to the fact that there are few internally managed BDCs and none of them are directly comparable to the Company with respect to business strategies, assets under management, typical investment size and market capitalization. Moreover, many externally managed BDCs do not publicly report the compensation of their executive officers. While various salary surveys from other private sources may become available to the Company with regard to these private entities, the Company believes

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that, among other reasons, without accurate, publicly disclosed information that would serve as benchmarks, it is not appropriate for the Company to set formal benchmarking procedures.

The Committee has from time to time engaged an independent compensation consultant to assist the Committee and provide advice on a variety of compensation matters relating to NEO and non-executive director compensation, incentive compensation plans and compensation trends, regulatory matters and compensation planning best practices. In prior periods, the compensation consultant was hired by and reported directly to the Committee. Although a compensation consultant may work directly with management on behalf of the Committee, any such work is under the control and supervision of the Committee. No fees were paid or will be paid for compensation consulting services during fiscal 2017. The Committee has engaged an independent compensation consultant to evaluate NEO and non-executive director compensation for fiscal 2018 compensation.

In all categories, we believe our compensation, taken as a whole, helps us attract, retain and motivate exceptional executive officers. To achieve these objectives, the Committee implements and expects to maintain compensation plans that tie a substantial portion of executive’s overall compensation to key strategic financial and operational goals such as maintaining and growing our portfolio. It is always the intention of the Committee that our executive officers be compensated competitively and consistent with our strategy, sound corporate governance principles and shareholder interests and concerns.

Elements of Executive Compensation

For fiscal 2017, the components of Capital Southwest’s compensation program for NEO’s included:

 

 

    

 

 

Compensation Element

    

Form of Compensation

    

Compensation Objective

Base Salary

 

Cash paid on a regular basis throughout the year

 

Provide a level of fixed income that is competitive to allow the Company to attract and retain executive talent

Annual Cash Incentive Opportunities

 

Cash awards paid on an annual basis following year-end audit completion

 

Reward NEOs who contribute to our financial performance and strategic success during the year and reward individual achievements

Long-term Equity
Compensation Awards

 

Restricted stock awards are subject to a graded vesting over four or five years and are contingent on continued employment with the Company.

 

Reward NEOs who contribute to our success through the creation of shareholder value and to provide meaningful retention incentives and reward individual achievements and to align interests with shareholders

 

Base Salaries

Salaries were determined by the Committee for each of the NEOs on an individual basis, taking into consideration individual contributions to overall company and individual performance, length of tenure, compensation levels for comparable positions at companies and internal pay equity among similar positions within Capital Southwest. The Committee placed more emphasis on those compensation elements which are linked to long-term results.

In fiscal 2018, after consideration of the factors set forth above, the Committee determined the annual base salary of Mr. Diehl would remain $442,000, consistent with fiscal 2017. The Committee determined the annual base salary of Mr. Sarner would remain $373,000, consistent with fiscal 2017. The Committee believes that the base salaries of our NEOs are appropriate for each NEO as a component of his overall compensation package.

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 length of tenure, relative to the market. For fiscal 2018, the Committee set the annual

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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 performance goals to be achieved to earn the target annual cash incentive award. The fiscal year 2017 performance criteria used for determining the annual cash incentive for NEOs included, among other things, the following:

·

Achievement of corporate objectives, particularly those related to the maintenance and growth of dividends and preservation of capital through maintenance and growth of net asset value per share;

·

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

·

Maintaining liquidity and capital flexibility to accomplish the Company’s business objectives;

·

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

·

Appropriate and planned development of personnel.

The Committee evaluated performance against these goals for fiscal 2017 in April 2017 and determined each NEO’s achievement of the goals and the amount of annual cash incentive to be paid as a result. Based on that evaluation, for fiscal 2017 upon completion of the annual audit, Mr. Diehl was paid an annual cash incentive of $751,938 (representing 170% of his base salary) and Mr. Sarner was 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.

Long-Term Equity Compensation

The Board and its shareholders approved Capital Southwest’s 2009 Stock Incentive Plan and 2010 Restricted Stock Award Plan. The Committee ceased granting additional options prior to the spin-off and will not grant additional options under the 2009 Stock Incentive Plan. The 2010 Restricted Stock Award Plan, in addition to our annual cash incentive awards, allows Capital Southwest to provide cash and stock-based compensation opportunities to certain key employees, including NEOs. Capital Southwest stock-based awards as long-term incentive compensation to: (1) align compensation commensurate with the creation of shareholder value; (2) create opportunities for increased stock ownership by executives; and (3) attain competitive levels of total compensation over the long term. The Company has requested, but not yet received, approval from the SEC regarding our exemptive relief request permitting the company to withhold shares or net settle in order to satisfy participants’ tax withholding obligations.

2010 Restricted Stock Award Plan

In 2010, the Company received exemptive relief from the SEC that permits Capital Southwest to grant restricted stock in exchange for or in recognition of services by its executive officers and certain key employees. Pursuant to the 2010 Restricted Stock Award Plan, the Committee may award shares of restricted stock to plan participants in such amounts and on such terms as the Committee determines in its sole discretion, provided that such awards were consistent with the conditions in the SEC’s exemptive order. Each restricted stock grant is for a fixed number of shares as set forth in an award agreement between the grantee and Capital Southwest. Award agreements describe time and/or performance vesting schedules and other appropriate terms and/or restrictions with respect to awards, including rights to dividends and voting rights. Except for restricted stock granted in connection with the spin-off as described below, the grants of restricted stock vest ratably over four or five years.

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If a participant’s employment is terminated for any reason, including retirement, other than death or disability, the participant’s unvested restricted stock awards shall be forfeited. If a participant’s employment is terminated due to death or disability or if a change in control (as defined in the 2010 Restricted Stock Award Plan) occurs, the participant’s unvested restricted stock awards will vest immediately. Participants who have received restricted stock awards will receive dividends and will have voting rights with respect to such shares.

On an annual basis, the Committee considers employee performance and future potential when determining the amount of restricted stock awards to recommend for each executive officer. In addition, the Committee considers each NEO’s total cash compensation in relation to the proposed stock award and the effect of dilution of net asset value per share and earnings per share prior to awarding the stock grants. On October 26, 2016, the Board, through the Committee, approved restricted stock awards for NEOs. Mr. Diehl was awarded 43,125 shares of restricted stock. The aggregate grant date fair value of the award was $624,450. This award reflects Mr. Diehl’s leadership, which enabled us to achieve our operational and financial objectives. Mr. Diehl’s performance during this time period was vital to our Company’s success. Mr. Sarner was awarded 34,500 shares of restricted stock. The aggregate grant date fair value of the award was $499,560. This award reflects Mr. Sarner’s role in managing all financial aspects of our Company, and his leadership in matters relating to our capital structure, investment committee and investor relations. Mr. Sarner’s restricted stock awards also reflect his continued service as our Chief Compliance Officer and Secretary.

In August 2014, the Committee granted restricted stock awards to Mr. Diehl and other executives, as part of the Spin-Off Compensation (discussed below) Plan to incentivize Mr. Diehl and the other executives to complete a transformative transaction such as the spin-off. The restricted stock awards vested and became payable after the completion of a transformative transaction, with one-third vesting on December 29, 2015, one-third on December 29, 2016 and one-third will vest on December 29, 2017. In addition, the number of restricted stock awards held by Mr. Diehl and other executives that were granted the restricted stock awards as part of the Spin-Off Compensatin Plan were subject to reduction if the value of restricted stock awards plus the value of the options granted under the Spin-Off Compensation exceeded six percent of the accretion in the aggregate value of the then outstanding Company and shares of CSW Industrials, Inc. (“CSWI”), together with interim dividends paid on the Company shares over the aggregate value of Company shares on the grant date, realized from the grant date through the Determination Date (as defined below). See “ Spin-Off Compensation Plan ” for an additional discussion of the restricted stock awards and the terms of the potential reduction in the awards.

Historical Elements of Executive Compensation

Prior to the spin-off (the “spin-off”) of our CSWI businesses, we granted long-term cash incentive awards and stock options to our NEOs, as described below.

Long-Term Cash Incentive Awards

The Committee has historically used our long-term cash incentive awards (“Individual Incentive Awards”) as a way to motivate its executives to increase the value of the Company as reflected by our net asset value, without the dilution that accompanies the use of stock options or restricted stock awards. Individual Incentive Awards generally vest on the fifth anniversary of the award date, providing a meaningful retention device. The Committee generally sets the baseline for measuring increases in net asset value at Capital Southwest’s most recent quarterly net asset value per share at the time of issuance, requiring sustained asset value appreciation for the awards to provide a meaningful return. In connection with the spin-off, all Individual Incentive Awards were amended to provide that the payments due thereunder would be based on our net asset value as of June 30, 2015. As of March 31, 2017, there are 24,000 Individual Incentive Awards outstanding for our Named Executive Officers. We retained all liabilities related to Individual Incentive Awards granted to NEOs following the spin-off, including with respect to those executive officers whose employment transferred to CSWI. Upon exercise of an Individual Incentive Award, Capital Southwest pays the recipient a cash payment in an amount equal to (1) the net asset value per share as of June 30, 2015 minus the baseline net asset value per share, multiplied by (2) the number of units subject to such Individual Incentive Award. The Committee did not grant any Individual Incentive Awards during fiscal 2017.

The Committee does not intend to grant additional Individual Incentive Awards in the future.

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2009 Stock Incentive Plan

The Committee previously granted options to purchase Capital Southwest’s common stock (including incentive stock options and nonqualified stock options). Options were granted with an exercise price at the closing price of Capital Southwest’s stock on the date of grant. Capital Southwest has never granted options with an exercise price that was less than the closing price of Capital Southwest’s common stock on the grant date, nor has it granted options that are priced on a date other than the grant date.

Historically, options have become exercisable on or after the first anniversary of the date of grant in five annual installments and have a term of 10 years. Upon termination or retirement, option holders have 30 days to exercise vested options to purchase shares except in the case of death or disability (subject to a 6‑month limitation). Prior to the exercise of options, holders have no rights as shareholders with respect to the shares subject to such option, including voting rights and the right to receive dividends or dividend equivalents. The Board retained the right to make option holders whole in certain situations, such as distributions.

From time to time, the Committee recommended and the Board granted qualified and non-qualified stock options to certain key employees and named executive officers. In August 2014, the Committee granted stock options to Mr. Diehl to incentivize Mr. Diehl to complete a transformative transaction, with one-third vesting 90 days after the consummation of the spin-off on December 29, 2015 (the “Determination Date”), one-third on the first anniversary of the Determination Date on December 29, 2016 and one-third on the second anniversary of the Determination Date on December 29, 2017. Please see “ Spin-Off Compensation Plan ” for an additional discussion of these options.

The Committee ceased granting additional options prior to the spin-off and will not grant additional options under the 2009 Stock Incentive Plan or request shareholders’ approval of any additional stock options to be added to the 2009 Stock Incentive Plan. In connection with the spin-off, certain adjustments, using volumetric weighted-average prices for the 10‑day period immediately prior to and immediately following the spin-off, were made to the exercise price and number of shares of our stock subject to the awards, with the intention of preserving the economic value of the awards immediately prior to the spin-off for all of our employees.

Spin-Off Compensation Plan

On August 28, 2014, the Board adopted the Spin-Off Compensation Plan, which entitled Mr. Diehl, Kelly Tacke, former CFO, and Joseph Armes, in his former capacity as CEO, to certain stock options, restricted stock and cash awards upon the consummation of the spin-off. The plan was intended to align the compensation of the Company’s key officers with the Company’s strategic objective of increasing the market value of the Company’s shares through a transformative transaction for the benefit of the Company’s shareholders. Under the plan, Mr. Diehl and the other executives were eligible to receive a total amount equal to six percent of the aggregate increase in the Company’s market value from August 28, 2014 (using a base price of $36.16 per share) to the “Determination Date.” The first plan component consists of awards of nonqualified options to purchase 259,000 shares of common stock at an exercise price of $36.60 per share. The second plan component consists of awards of 127,000 shares of restricted stock, which have voting rights but do not have cash dividend rights. The final plan component consists of cash incentive payments awarded to each participant in an amount equal to the excess of each awardee’s allocable portion of the total payment amount over the aggregate value as of the Determination Date of the awardee’s restricted common stock and nonqualified option awards under the plan.

The Committee granted options to purchase 86,334 shares of Company common stock to Mr. Diehl. The Company also granted 42,000 shares of restricted stock to Mr. Diehl. The Committee granted a cash award to Mr. Diehl that represented the difference between (1) the value of the options and restricted stock awards and (2) six percent of the accretion in aggregate market value of the Company and CSWI market value from the grant date of such awards through the Determination Date (as defined below).

On September 8, 2015, the Board designated the spin-off as a transformative transaction for purposes of the executive compensation plan and amended the award agreements granted under the plan to provide for accelerated vesting of the awards held by a participant in the event of a termination of that participant’s service effected by the participant for good reason, by the employer without cause, or as a result of the disability or death of the participant. On September 30,

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2015, we completed the spin-off through a tax-free pro-rata share distribution of CSWI’s common stock to CSWC shareholders of record on September 18, 2015.

The total value accretion was six percent of the aggregate appreciation in Capital Southwest’s share price from $36.16 to the combined volume-weighted average prices of both CSWC and CSWI stock as of December 29, 2015. The cash component of the Spin-Off Compensation Plan was the difference between the total value accretion and the aggregate value of the awardee’s restricted common stock and non-qualified option awards under the plan. The first cash payment was made in January 2016 and the second cash payment was made in January 2017. The vesting date for the final payment is December 29, 2017.

Other Benefits

Effective October 1, 2015, we established a qualified defined contribution plan intended to meet the requirements of Section 401(k) of the Code (the “401(k) Plan”). The 401(k) Plan permits all full-time employees to defer a portion of their total annual compensation up to the maximum amount allowed under the Internal Revenue Code. We make contributions to the 401(k) Plan on behalf of employees up to 4.5% of the employee’s eligible compensation, all of which is fully vested immediately. Mr. Diehl and Mr. Sarner were eligible to participate in the 401(k) Plan in fiscal 2016 on the same basis as all other employees of the Company.

Additionally, the Company’s NEOs participate in the same benefit plans and programs as the Company’s other employees, including comprehensive medical and dental insurance and vision care.

The Company provides no other material benefits, perquisites or retirement benefits to the NEOs.

Potential Payments upon Change in Control or Termination of Employment

Capital Southwest offers change-in-control benefits under its long-term incentive plans to motivate executives to focus on transactions that are likely in the best interests of Capital Southwest’s shareholders, even though such transactions may result in a loss of employment for the executives. Capital Southwest believes its programs are consistent with market practices and therefore also serve to attract and retain its executives.

Shareholder Advisory Vote on Executive Compensation

At Capital Southwest’s 2016 annual meeting of shareholders, Capital Southwest shareholders approved an advisory vote with 95% of the votes cast in favor of Capital Southwest’s compensation philosophy, policies and procedures and the 2016 fiscal year compensation of the NEOs. The Committee considered the results of that vote as an affirmation of Capital Southwest’s executive compensation decisions and policies.

Compensatory Risk Assessment

Capital Southwest works to integrate sound risk management into its compensation programs. Capital Southwest implements a multi-faceted strategy to mitigate risk in compensation. Capital Southwest believes our focus on long-term stable compensation programs and our ability to retain long-term employees work to limit incentives to take unnecessary or imprudent risk-taking actions. Capital Southwest also provides stable fixed cash compensation to each of our executive officers to limit the financial exposure that our named executive officers face as holders of significant equity in our enterprise.

In April 2017, the Compensation Committee undertook a review of its compensation programs and determined that the programs are not reasonably likely to have a material adverse effect on Capital Southwest. The Committee analyzed the competitiveness of the components of compensation described above on both an individual and aggregate basis. The Committee believes that the total compensation paid to the NEOs in fiscal 2017 is consistent with the overall objectives of the Company’s executive compensation program.

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COMPENSATION COMMITTEE REPORT

We have reviewed and discussed the Compensation Discussion and Analysis included in this proxy statement with Capital Southwest’s management and, based on our review and discussions, we recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

 

 

 

Compensation Committee

 

 

John H. Wilson, Chairman

 

 

David R. Brooks

 

 

Jack D. Furst

 

 

T. Duane Morgan

 

 

William R. Thomas III

 

 

 

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COMPENSATION OF EXECUTIVE OFFICERS

Summary Compensation Table

The following table includes information concerning compensation received by our named executive officers for fiscal years 2017, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Name and Principal Position

    

Fiscal
Year

    

Salary

    

Bonus

    

Stock 
Awards 
(1)

    

Option
Awards
(2)

    

Non-Equity
Incentive Plan
Compensation

    

Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings (3)

    

All Other
Compensation
(4)

    

Total

Bowen S. Diehl(5)

 

2017

 

$

442,000 

 

$

— 

 

$

624,450 

 

$

— 

 

$

1,441,624 

(8)  

$

— 

 

$

34,268 

 

$

2,542,342 

President and Chief Executive Officer

 

2016

 

$

429,000 

 

$

— 

 

$

698,890 

 

$

— 

 

$

1,359,586 

(8)  

$

16,530 

 

$

114,295 

 

$

2,618,301 

 

 

2015

 

$

428,000 

 

$

14,151 

 

$

637,980 

 

$

499,874 

 

$

643,500 

 

$

48,410 

 

$

27,000 

 

$

2,298,915 

Michael S. Sarner(6)

 

2017

 

$

373,000 

 

$

— 

 

$

499,560 

 

$

— 

 

$

528,795 

 

$

— 

 

$

27,309 

 

$

1,428,664 

Chief Financial Officer, Chief Compliance Officer and Secretary

 

2016

 

$

261,349 

(7)  

$

75,000 

 

$

356,880 

 

$

— 

 

$

482,649 

 

$

— 

 

$

4,106 

 

$

1,179,984 


(1)

These amounts represent the grant date fair value of restricted stock awards determined in accordance with ASC 718 based on the closing price of our common stock on the date of grant. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. The amounts do not correspond to the actual value that will be recognized by our named executive officers upon vesting of these grants. In connection with the spin-off, all previously granted restricted stock awards were adjusted. Each holder of a restricted stock award received one restricted share of CSWI stock for every Capital Southwest restricted share held. An immaterial amount of incremental fair value was granted through this adjustment. Awards made in fiscal 2016 and fiscal 2017 were granted after the spin-off and required no adjustment. See Note 10 of the consolidated financial statements in Capital Southwest’s Annual Report for the fiscal year ended March 31, 2017 regarding assumptions underlying valuation of equity awards.

(2)

These amounts represent the grant date fair value of stock option awards using Black-Scholes pricing model determined in accordance with ASC 718 based on the closing price of our common stock on the date of grant. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. The amounts do not correspond to the actual value that will be recognized by our named executive officers upon vesting of these grants. The number of shares and the exercise price of option awards granted prior to the completion of the spin-off were adjusted for the spin-off transaction. No incremental fair value was granted through this adjustment. See Note 10 of the consolidated financial statements in the Company’s Annual Report for the fiscal year ended March 31, 2017 regarding the assumptions underlying the valuation of equity awards.

(3)

Amounts shown reflect the aggregate change during the year in actuarial present value of accumulated benefit under the Retirement Plan and the Restoration Plan, as applicable. The Retirement Plan was transferred to CSWI effective as of September 30, 2015, and CSWI assumed liability for all future funding obligations under the Retirement Plan. Therefore, amounts shown in this column for 2016 with respect to the Retirement Plan reflect the aggregate change during the partial year beginning April 1, 2015 and ending September 30, 2015. See Note 11 of the consolidated financial statements in Capital Southwest’s Annual Report for the fiscal year ended March 31, 2017 regarding assumptions used in determining these amounts.

(4)

See “All Other Compensation” table below for information regarding amounts included in this column.

(5)

Effective October 1, 2015 with the completion of the spin-off, Mr. Diehl was appointed President and Chief Executive Officer of Capital Southwest Corporation.

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(6)

Effective July 14, 2015, Mr. Sarner joined Capital Southwest Corporation as Senior Vice President. Effective October 1, 2015 with the completion of the spin-off, Mr. Sarner was appointed Chief Financial Officer, Chief Compliance Officer, Secretary and Treasurer.

(7)

Mr. Sarner’s compensation reflects partial year salary from July 14, 2015 to March 31, 2016 for fiscal 2016.

(8)

“Non-Equity Incentive Plan Compensation” for Mr. Diehl includes $689,686 in both fiscal 2017 and 2016 for cash incentive awards under the Spin-Off Compensation Plan.

All Other Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Name and Principal Position

    

Fiscal Year

    

Accrued
Non-Vested
Benefits Upon
Termination of 
ESOP (1)

    

401(k)
Plan/ESOP
Contributions

    

Dividends (2)

    

Total

Bowen S. Diehl

 

2017

 

$

— 

 

$

9,894 

 

$

24,374 

 

$

34,268 

President and Chief Executive Officer

 

2016

 

$

105,851 

 

$

8,044 

 

$

400 

 

$

114,295 

 

 

2015

 

$

— 

 

$

26,000 

 

$

1,000 

 

$

27,000 

Michael S. Sarner

 

2017

 

$

— 

 

$

13,344 

 

$

13,965 

 

$

27,309 

Chief Financial Officer, Chief

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compliance Officer, and Secretary

 

2016

 

$

— 

 

$

4,106 

 

$

— 

 

$

4,106 


(1)

Prior to the spin-off, our subsidiaries maintained two Employee Stock Ownership Plans, or ESOPs, and the Company made discretionary contributions to the ESOPs within limits established by the Code. In connection with the spin-off, the ESOPs related to CSWI employees were transferred to CSWI effective September 30, 2015. The account balances in the ESOPs of participants who remained our employees following the spin-off, including Mr. Diehl, were either transferred to the 401(k) Plan in the case of accrued vested benefits or paid in cash in the case of accrued unvested benefits. This column represents cash paid in connection with the transfer of the ESOPs. Effective 2015, the ESOPs transferred to CSWI in connection with the spin-off.

(2)

These amounts reflect dividends received on unvested restricted shares held by the NEO, which were not included in the grant date fair value of the awards previously reported.

Grants of Plan-Based Awards

The following table sets forth certain information with respect to each grant of a plan-based award to our named executive officers in fiscal 2017.

 

 

 

 

 

 

 

 

Name

    

Grant Date

    

Stock Awards:
Number of Shares
of Stock (1)

    

Grant Date Fair
Value of
Stock and Option
Awards (2)

Bowen S. Diehl

 

11/15/2016

 

43,125 

 

$

624,450 

Michael S. Sarner

 

11/15/2016

 

34,500 

 

$

499,560 


(1)

These restricted stock awards under the 2010 Restricted Stock Award Plan vest one-fourth each year beginning on the first anniversary of the grant date, subject to continued employment. Restricted stock awards entitle the holder to dividends and voting rights beginning on the grant date.

(2)

The amounts represent the grant date fair value of restricted stock awards determined in accordance with ASC 718 based on the closing price of our common stock on the date of grant.

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Outstanding Equity Awards at Fiscal Year End

The following table sets forth certain information with respect to the outstanding equity awards held by our named executive officers as of March 31, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Name

    

Number of
securities
underlying
unexercised
Options (#)
exercisable

    

Number of
securities
underlying
unexercised
options (#)
unexercisable

    

Option
exercise
price
(1)

    

Option
expiration
date

    

Number of
shares of
stock that
have not
vested
(2)

    

Market value
of shares of
stock that have
not vested
(3)

Bowen S. Diehl

 

5,977 

 

11,950 

 

$

11.00 

 

3/17/2024

 

94,375 

 

$

1,595,881 

 

 

24,000 

 

28,661 

 

$

11.53 

 

8/24/2024

 

 

 

 

 

Michael S. Sarner

 

— 

 

— 

 

 

— 

 

— 

 

52,500 

 

$

887,775 


(1)

Represents the closing price on the date of grant. Exercise prices for options granted prior to the spin-off were adjusted in connection with the spin-off effective as of September 30, 2015. No incremental fair value was granted through this adjustment.

(2)

With respect to Mr. Diehl, 1,000 shares of restricted stock will vest on each of March 17, 2018 and 2019, 11,750 shares of restricted stock will vest on each of November 10, 2017, 2018 and 2019, 10,781 shares of restricted stock will vest on each of November 15, 2017, 2018 and 2019 and 10,782 shares of restricted stock will vest on December 29, 2020, and 14,000 shares of restricted stock will vest on December 29, 2017. With respect to Mr. Sarner, 6,000 shares of restricted stock will vest on each of November 10, 2017, 2018 and 2019 and 8,625 shares of restricted stock will vest on each of November 15, 2017, 2018, 2019 and 2020.

(3)

The value of the non-vested restricted stock was computed by multiplying the number of non-vested shares of restricted stock by $16.91, the closing stock price on March 31, 2017, the last trading day of fiscal 2017.

Option Exercises and Equity Awards Vested in Fiscal Year

The following table provides information regarding the vesting of restricted stock held by each of our named executive officers for fiscal 2017. Neither of our NEOs exercised any options in fiscal 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

Option Awards

 

Stock Awards

 

    

Number of Shares
Acquired on Exercise

    

Value Realized
on Exercise

    

Number of Shares
Acquired on Vesting (1)

    

Value Realized
on Vesting (2)

Bowen S. Diehl

 

45,271 

 

$

215,938 

 

26,750 

 

$

410,913 

Michael S. Sarner

 

— 

 

$

— 

 

6,000 

 

$

86,580 


(1)

Includes vesting of the first two-thirds of restricted shares granted under the Spin-Off Compensation Plan.

(2)

The value realized equals the number of shares multiplied by closing price on the vesting date.

Potential Payments Upon Termination or Change in Control

The agreements governing our restricted stock awards and our Long-Term Cash Incentive Awards to employees, including NEOs, provide upon certain transactions involving a change in control or upon a participant’s death or disability (each as defined in the award agreement), that unvested shares of restricted stock will fully vest and the long term cash incentive awards would be paid. The acceleration of unvested restricted stock would apply to both Mr. Sarner and Mr. Diehl, however the payment of the long term cash incentive award would only apply to Mr. Diehl. The full amount of unvested cash incentive awards issued under the Spin-Off Compensation Plan as discussed above would be paid upon termination without cause, upon a change in control or upon a participant’s death or disability. This payment would apply only to Mr. Diehl. All stock options currently unexercisable issued under the Spin-Off Compensation Plan and the 2009

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Stock Incentive Plan would become exercisable upon termination without cause, upon a change in control or upon a participant’s death or disability. This payment would only apply to Mr. Diehl.

The following table quantifies potential compensation that would have become payable to each of our named executive officers if their employment had terminated on March 31, 2017, given the closing price of our common stock on that date. In addition, the table quantifies the compensation that would have become payable to each of our named executive officers assuming that a change in control of Capital Southwest had occurred on March 31, 2017, and determining any amounts that would be payable under all compensation agreements in effect as of that date.

 

 

 

 

 

 

 

 

 

 

 

    

Cash Payments

    

Acceleration of
Equity Awards
(1)

    

Total

Bowen S. Diehl

 

 

 

 

 

 

 

 

 

Termination for Cause

 

$

— 

 

$

— 

 

$

— 

Termination without Cause

 

 

689,686 

 

 

224,821 

 

 

914,507 

Change in Control(2)

 

 

752,357 

 

 

1,820,705 

 

 

2,573,062 

Death or Disability

 

 

752,357 

 

 

1,820,705 

 

 

2,573,062 

Michael S. Sarner

 

 

 

 

 

 

 

 

 

Termination for Cause

 

 

— 

 

 

 

 

— 

Termination without Cause

 

 

— 

 

 

 

 

— 

Change in Control(2)

 

 

— 

 

 

887,775 

 

 

887,775 

Death or Disability

 

 

— 

 

 

887,775 

 

 

887,775 


(1)

Amounts reflected in this table do not include the value of any CSWI equity awards that will accelerate upon a change in control of CSWC.

(2)

Change of control payment does not assume or require termination of the employee.

 

 

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PROPOSAL TWO: CONVERSION FROM TEXAS CORPORATION TO MARYLAND CORPORATION

CONVERSION SUMMARY

The Board has approved and recommends that our shareholders approve a proposal to change the Company’s state of incorporation from Texas to Maryland (the "Conversion"). If our shareholders approve the proposal, we intend to complete the Conversion as soon as practicable by converting to a Maryland corporation as permitted by Texas and Maryland law. In this proxy statement, we sometimes refer to the Company as a Texas corporation before the Conversion as "CSWC Texas" and the Company as a Maryland corporation after the Conversion as "CSWC Maryland."

This summary highlights information regarding the Conversion. We encourage you to review the entire Conversion proposal in this proxy statement.

General Information

Assuming that shareholders approve the Conversion proposal and the Conversion becomes effective:

·

the Company will become subject to the Maryland General Corporation Law (the “MGCL”), and the Company’s Articles of Incorporation (the "Texas Charter"), and Bylaws (the "Texas Bylaws") will be replaced by a new charter (the "Maryland Charter") and new bylaws (the "Maryland Bylaws");

·

CSWC Maryland will (a) be deemed to be the same entity as CSWC Texas for all purposes under Texas and Maryland law, (b) continue to have all of the rights, privileges and powers of CSWC Texas, except for the changes that result from being governed by Maryland law, the Maryland Charter and the Maryland Bylaws, (c) continue to possess all of the assets of CSWC Texas, and (d) continue to be liable for all of the debts, liabilities and obligations of CSWC Texas;

·

each outstanding share of CSWC Texas common stock will continue as an outstanding share of CSWC Maryland common stock, and each outstanding option or other right to acquire shares of CSWC Texas common stock will continue as an outstanding option or other right to acquire shares of CSWC Maryland common stock;

·

each employee benefit plan, incentive compensation plan or other similar plan of CSWC Texas will continue as an employee benefit plan, incentive compensation plan or other similar plan of CSWC Maryland;

·

each director or officer of CSWC Texas will continue to hold his or her respective office with CSWC Maryland; and

·

the name of the Company following the Conversion will remain Capital Southwest Corporation.

Effects for Shareholders

The number of shares of common stock you own, and your percentage ownership of the Company, will remain unchanged and will not be affected by the Conversion. You do not need to exchange your stock certificates for new stock certificates.

There will be no income tax impact to you as a result of the Conversion. Your basis and duration of holding our shares will not change .

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Impact of the Conversion on Key Corporate Governance Provisions

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.

Key Governance Provision

    

CSWC Texas

    

CSWC Maryland

Plurality Voting for Directors

 

Directors are elected by plurality vote.

 

Same.

Shareholder Ability to Act by Written Consent

 

Shareholders may act by written consent but unanimous written consent is required.

 

Same.

Charter Amendments

 

Amendments to the Texas Charter require the approval of holders of two-thirds of the outstanding shares.

 

Amendments to the Maryland Charter generally require the approval of holders of a majority of the outstanding shares (amendments to certain provisions require approval of holders of two-thirds of the outstanding shares).

Amendments to Bylaws

 

The Texas Bylaws may be amended by action of the Board or by action of the Company’s shareholders.

 

Same.

Shareholder Vote Required for Merger or Sale of All or Substantially All Assets

 

Generally, a merger or sale of all or substantially all of the Company’s assets requires the approval of two-thirds of outstanding shares.

 

Generally, a merger or sale of all or substantially all of the Company’s assets requires the approval of a majority of outstanding shares.

Shareholder Ability to Call a Special Meeting

 

Shareholders holding 10% of the Company’s outstanding stock may call a special meeting.

 

Shareholders holding a majority of the Company’s outstanding stock may call a special meeting.

Board Vacancies

 

Vacancies on the Board may be filled by an election at a meeting of the shareholders or by the vote of a majority of the remaining directors.

 

Vacancies on the Board for any reason other than an increase in the number of directors may be filled by a majority of the remaining directors, even if such majority is less than a quorum, and any vacancy in the number of directors created by an increase in the number of directors may be filled by a majority of the entire Board. Shareholders may elect a successor to fill a vacancy on the Board which results from the removal of a director.

Removal of Directors

 

Shareholders may remove directors for cause with the approval of two-thirds of outstanding shares.

 

Same.

Unsolicited Takeovers Act

 

The Board does not have the right to pass resolutions that override certain provisions of the Texas Charter or Texas Bylaws without shareholder approval.

 

Same, as a result of CSWC affirmatively opting out of Maryland’s Unsolicited Takeovers Act, which gives boards the ability to pass resolutions, in certain circumstances, that would override certain provisions of the corporation’s charter and bylaws without shareholder approval.

 

 

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Our Board has approved, and recommends that our shareholders approve, a proposal to change the Company’s state of incorporation from the State of Texas to the State of Maryland. If our shareholders approve this proposal, we will accomplish the Conversion by converting the Company from a Texas corporation to a Maryland corporation, as provided in the Texas Business Organizations Code (the “TBOC”) and the MGCL.

While the proposed Maryland Charter and Maryland Bylaws are similar in many respects to the existing Texas Charter and Texas Bylaws, the Conversion will result in some changes to shareholders’ rights. See “— Comparison of Shareholder Rights Before and After the Conversion.” The Texas Charter and Texas Bylaws are available upon request to the Secretary, 5400 LBJ Freeway, Suite 1300, Dallas, Texas 75240, or (214) 238‑5700.

For the reasons discussed below, our Board believes that the best interests of the Company and its shareholders would be served by changing its state of incorporation from Texas to Maryland.

Principal Reasons for the Conversion

The Board believes the Conversion is in the best interests of the Company’s shareholders because Maryland is recognized as a preferred jurisdiction for business development companies such as our Company. Since the spin-off in September 2015, we have pursued a credit-focused investing strategy akin to similarly structured business development companies. As part of the Company’s transition to a national credit-focused business development company aligned with its peers, the Board believes it is in the best interests of the Company’s shareholders to reincorporate as a Maryland corporation. Based on a review of our peers and competitors, we believe that a majority of the public companies that are registered as business development companies under the 1940 Act are currently organized under Maryland law.

Our Board has concluded that, when compared with Texas, Maryland has more comprehensive and focused laws addressing the needs and concerns of business development companies’ shareholders and operations and has courts with greater experience than Texas in addressing relevant issues. Additionally, the Board believes that the Conversion will enhance our ability to attract and retain qualified directors and officers, and encourage directors and officers to continue to make independent decisions in  the best interests of our Company’s shareholders. In deciding to propose the Conversion, the Board considered, among other things, the following benefits of Maryland law to our Company and shareholders:

·

As the domicile for a majority of business development companies, including many of our competitors, we believe the Conversion will allow our shareholders to more easily compare our shareholder’s rights to our competitors’ shareholders’ rights;

·

Unlike the TBOC, the MGCL explicitly contemplates closed-end investment funds and contains certain provisions conducive to the operations of a closed-end investment fund;

·

Maryland’s case law with respect to registered investment companies, including business development companies, is relatively well-developed;

·

The MGCL is a modern and flexible statute with respect to dividends and other distributions;

·

Our proposed Maryland Charter and Maryland Bylaws include enhancements to shareholder rights, including lowering the threshold required to amend our charter from two-thirds of outstanding shares to a majority of outstanding shares, while opting out of several MGCL provisions that could restrict shareholder rights as discussed in “–Other Board Considerations Regarding the Conversion” below;

·

Maryland’s clear statutory standard of conduct for directors and its statutory presumption that any act of a director satisfies the standard of conduct for directors are intended to provide directors and management with greater certainty and predictability in managing the affairs of the Company and enhance the Company’s ability to attract and retain qualified directors;

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·

The fact that Maryland does not require the payment of franchise taxes, which will represent a savings for our Company and shareholders; and

·

Under the MGCL, the Company will be able to exculpate officers and directors from personal liability for money damages, except for liability resulting from receipt of an improper benefit or active and deliberate dishonesty. We believe this will enhance the Company’s ability to attract talented individuals to serve as officers.

For the reasons described above and elsewhere in this proxy statement, our Board believes that the Conversion proposal is in the best interests of the Company’s shareholders and operations. The Board is not proposing the Conversion to prevent a change in control of our Company and is not aware of any present attempt by any person to acquire control of our Company or to obtain representation on the Board.

Other Board Considerations Regarding the Conversion

Notwithstanding the Board’s belief regarding the benefits of the Conversion to our Company’s shareholders, it should be noted that Maryland corporate law has been criticized recently by some for its statutory takeover defense protections, which may restrict business combination opportunities that could benefit shareholders. The Company has sought to ameliorate these aspects of Maryland corporate law by (1) affirmatively opting out of Maryland’s Control Share Acquisition Act, (2) affirmatively opting out of the powers and takeover defense protections afforded a corporation’s board of directors under Maryland’s Unsolicited Takeovers Act and (3) requiring the affirmative vote of only a majority of outstanding shares to approve a merger or other business combination, which is the lowest approval threshold permitted by the MGCL. (See “— Comparison of Shareholder Rights Before and After the Conversion”). We believe our decisions to opt out of these statutes sets our corporate governance apart and compares favorably with respect to other credit-focused business development companies incorporated in Maryland.

The Company also sought to minimize any potential negative effects the Conversion may have on shareholder rights generally. Nevertheless, there are differences between Texas and Maryland law that could impact shareholders. Additionally, the Maryland Charter and Maryland Bylaws contain provisions requiring that holders of at least a majority of the shares outstanding and entitled to vote at a special meeting of shareholders are needed to request that the secretary call a special meeting of shareholders after the Conversion, whereas shareholders holding at least 10% of shares outstanding and entitled to vote may currently be able to call a special meeting of shareholders. This is in line with many of our peers incorporated in Maryland that require holders of at least a majority of the votes entitled to be cast at a special meeting to request a special meeting of shareholders.

Plan of Conversion

To accomplish the Conversion, our Board has adopted a plan of conversion in the form attached to this proxy statement as Appendix A (the “Plan of Conversion”). The Plan of Conversion provides that we will convert into a Maryland corporation and thereafter will be subject to all of the provisions of the MGCL and the Maryland Charter and Maryland Bylaws.

Assuming that holders of two-thirds of our outstanding shares of common stock vote in favor of this proposal and the Board does not elect to delay or terminate the Conversion, we will cause the Conversion to be effected at such time as we determine by filing (1) with the Secretary of State of the State of Texas a certificate of conversion, substantially in the form attached to this proxy statement as Appendix B (the “Certificate of Conversion”), and (2) with the State Department of Assessments and Taxation of Maryland (a) articles of conversion, substantially in the form attached to this proxy statement as Appendix C (the “Articles of Conversion”) and (b) the Maryland Charter, which will govern our Company as a Maryland corporation, substantially in the form attached to this proxy statement as Appendix D.

In addition, assuming that our shareholders approve this proposal, the Board will adopt the Maryland Bylaws for our Company, substantially in the form attached to this proxy statement as Appendix E, and enter into an indemnification agreement with each director and executive officer of CSWC Maryland, substantially in the form attached to this proxy statement as Appendix F. Approval of this proposal by our shareholders will constitute approval of the Plan of Conversion,

33


 

the Certificate of Conversion and the Articles of Conversion, the Maryland Charter and the Maryland Bylaws. Shareholders also should note that approval of the Conversion also will constitute approval of our equity and other employee benefit and incentive plans continuing as plans of our Company after the Conversion.

If the Conversion is approved by our shareholders, and the Board does not elect to delay or terminate the Conversion, the Conversion would become effective upon the filing of the Certificate of Conversion (and acceptance for record of this plan by the Secretary of State of the State of Texas) and the filing (and acceptance for record by the State Department of Assessments and Taxation of Maryland) of the Articles of Conversion and the Maryland Charter. If this proposal is adopted and approved, it is anticipated that the Board will cause CSWC Texas to complete the Conversion as soon as practicable.

Effect of Conversion

If this proposal is approved, the Conversion will cause a change in the legal domicile of the Company and other changes of a legal nature, the most significant of which are described below in the section captioned “— Comparison of Shareholder Rights Before and After the Conversion.”

The Conversion will not affect the respective positions of the Company or its shareholders under the federal securities laws or stock exchange listing rules. The Conversion will not affect the trading of the Company’s common stock, which will continue to trade on the Nasdaq Global Select Market under the symbol “CSWC.” The Company will continue to file periodic reports and other documents as required by the rules and regulations of the SEC and stock exchange listing rules. Shareholders who own shares of CSWC Texas common stock that are freely tradable prior to the Conversion will continue to hold freely tradable shares in CSWC Maryland after the Conversion and shareholders holding restricted shares of CSWC Texas common stock prior to the Conversion will continue to hold shares of CSWC Maryland common stock that are subject to the same restrictions after the Conversion. Existing shareholders will not be required to exchange existing stock certificates for new stock certificates of CSWC Maryland .

Additionally, the Conversion will not result in any change in the business, physical location, management, assets, liabilities or net worth of the Company, nor will it result in any change in the location of our headquarters or current employees, including management. Members of the Company’s management, including all directors and officers, will retain in CSWC Maryland each of the respective positions, responsibilities, duties and benefits they currently hold with CSWC Texas. The Conversion will not affect our daily business operations, our organizational structure, or our consolidated financial condition and results of operations. We believe that the Conversion will not affect any of our material contracts with any third parties, and that our rights and obligations under such material contractual arrangements will continue as our rights and obligations after the Conversion. The Conversion will not affect the amount or timing of any dividends to be paid by the Company. In addition, the Conversion will not alter the composition of management or the Board. After the Conversion, the Company’s principal executive offices will remain located at 5400 LBJ Freeway, Suite 1300, Dallas, Texas 75240.

Effect of Vote for Conversion

Approval of this Conversion proposal by our shareholders will constitute approval by our shareholders of the Plan of Conversion, the Certificate of Conversion, the Articles of Conversion and the proposed Maryland Charter and Maryland Bylaws, including those provisions of the Maryland Charter and Maryland Bylaws that, subject to certain exceptions enumerated in the MGCL, would (a) limit the personal liability of the directors and officers and (b) authorize the Company to indemnify its directors and officers against expenses incurred by the director or officer in defending against a legal action brought or threatened against the director or officer due to his or her service in such capacity, and to advance payment of those expenses to a director or officer prior to the final disposition of the proceeding. Shareholders are urged to carefully read this proxy statement and the attached appendices. Upon adoption and approval of the Plan of Conversion, the Company will be authorized to take the steps necessary under the Plan of Conversion to complete the Conversion, including to file a Certificate of Conversion with the Texas Secretary of State and Articles of Conversion and the Maryland Charter with the State Department of Assessments and Taxation of Maryland, and to adopt the Maryland Bylaws.

34


 

Effect of Not Obtaining Required Vote for Conversion

If we fail to obtain the requisite number of affirmative votes of shareholders to approve this Conversion proposal, the Conversion will not occur and the Company will continue to be incorporated in Texas and governed by Texas law and its existing Texas Charter and Texas Bylaws.

Discretion Not to Complete the Conversion

The Conversion may be delayed by the Board or the Plan of Conversion may be terminated and abandoned by action of the Board at any time prior to the effective time of the Conversion, whether before or after approval by our shareholders, if the Board determines for any reason that such delay or termination would be in the best interests of our Company and shareholders.

Regulatory Approvals

The Company is not required to obtain any regulatory approvals in advance of the Conversion.

Description of the Company’s Capital Stock Following the Conversion

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.

General . After the Conversion is completed, the authorized capital of CSWC Maryland will continue to be 25,000,000 shares of common stock, par value $0.25 per share.

Under the Maryland Charter, our Board will be authorized to classify and reclassify any unissued shares of stock into other classes or series of stock, and to cause the issuance of such shares, without obtaining shareholder approval or ratification unless such approval or ratification is required by applicable law, the terms of any other class or series of Company stock or the rules of any stock exchange or automated quotation system on which any shares of Company stock are listed or traded.

Description of Common Stock . At the effective time of the Conversion (the “Effective Time”), CSWC Maryland will continue to be authorized to issue up to 25,000,000 shares of stock, and all of the issued and outstanding shares of common stock at that time will remain issued and outstanding.

At the Effective Time, the holders of shares of CSWC Maryland common stock will continue to be entitled to one vote per share on each matter on which the holders of common stock are entitled to vote, including the election of directors. Except as could be provided with respect to any other class or series of stock, the holders of our common stock will possess exclusive voting power. Directors will be elected by a plurality of all the votes cast at the meeting in which directors are being elected. The holders of common stock will not be entitled cumulative voting rights in the election of directors.

CSWC Maryland common stock will not be redeemable, will not have subscription or conversion rights and will not entitle common stock holders to any preemptive rights to subscribe for any shares of any class or series of CSWC Maryland capital stock, or for any obligations convertible into shares of any class or series of CSWC Maryland capital stock, whether now or hereafter authorized.

At the Effective Time, the holders of CSWC Maryland common stock will continue to be entitled to receive such dividends, if any, as may be authorized by the Board in its discretion out of legally available funds and declared by CSWC Maryland. Subject to the rights of any preferred stock outstanding, upon liquidation or dissolution of CSWC Maryland,

35


 

the holders of common stock will be entitled to receive on a pro rata basis all assets remaining for distribution to shareholders after payment of or adequate provision for all of the CSWC Maryland’s known debts and liabilities.

CSWC Maryland common stock will continue to be listed on the Nasdaq Global Select Market and trade under the symbol "CSWC."

At the Effective Time, Subtitle 6 of Title 3 of the MGCL will apply to CSWC Maryland and its shareholders. This provision provides that certain “business combinations” (including a merger, consolidation, statutory share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and an interested shareholder (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock or an affiliate or associate of the corporation who, at any time during the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding stock of the corporation) or an affiliate of such an interested shareholder are prohibited for five years after the most recent date on which the interested shareholder becomes an interested shareholder. Thereafter, any such business combination must generally be recommended by the board of directors of the corporation and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (b) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation, other than shares held by the interested shareholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested shareholder, unless, among other conditions, the corporation’s common shareholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for its shares. A person is not an interested shareholder under the statute if the board of directors approved in advance the transaction by which the person otherwise would have become an interested shareholder. A corporation’s board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

American Stock Transfer & Trust Company will continue to be the transfer agent and registrar for CSWC Maryland common stock.

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.

For a discussion of all the legal changes that will result from the Conversion, see “— Comparison of Shareholder Rights Before and After the Conversion,” as well as Appendices D and E to this proxy statement.

No Change to Employee Benefit Plans . Upon completion of the Conversion, all of CSWC Texas’s employee benefit plans (including stock option and other equity-based plans) will be continued by CSWC Maryland, and each stock option and other equity-based award issued and outstanding pursuant to such plans will automatically convert into a stock option or other equity-based award with respect to the same number of shares of CSWC Maryland, upon the same terms and subject to the same conditions as set forth in the applicable plan under which the award was granted and in the agreement reflecting the award. Approval of the Conversion would constitute approval of the assumption of these plans by CSWC Maryland. Provided the Conversion is approved by our shareholders, CSWC Maryland will continue CSWC Texas’s other employee benefit arrangements upon the terms and subject to the conditions currently in effect.

Comparison of Shareholder Rights Before and After the Conversion . As a result of differences between the TBOC and MGCL, as well as differences between our current Texas Charter and Texas Bylaws, on the one hand, and the Maryland Charter and Maryland Bylaws, on the other hand, the Conversion will effect changes in the rights of our shareholders. Summarized below are material rights of the Company’s shareholders (including certain significant differences thereof) prior to and after giving effect to the Conversion resulting from the differences between the TBOC and the MGCL, and between our Texas Charter and Texas Bylaws, on the one hand, and the Maryland Charter and Maryland Bylaws, on the other hand.

36


 

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.

CSWC Texas

CSWC Maryland

Elections; Voting; Procedural Matters

Director Elections

Director   Elections

The Texas Bylaws provide that directors are elected by a plurality of the votes cast at a meeting of shareholders at which a quorum is present.

The Texas Charter does not permit cumulative voting for the election of directors.

Same.

Term of Directors

Term of Directors

The Texas Bylaws provide that directors are elected at each annual meeting of shareholders and hold office until the next succeeding annual meeting, and until such director’s successor is elected and qualified, or until the earlier death, resignation, or removal of such director.

The Maryland Charter provides that directors are elected at each annual meeting of shareholders and serve until the next annual meeting and until such director’s successor is duly elected and qualified, or until the earlier death, resignation, or removal of such director.

Number of Directors

Number   of Directors

The Texas Bylaws provide that the number of directors is determined by resolution of the Board, except that the Board may not fill more than two new directorships resulting from an increase in the size of the Board during the period between any two successive annual meetings of shareholders.

The Maryland Charter and Maryland Bylaws provide that the Board may determine the number of directors. The Maryland Charter and Maryland Bylaws provide the number of directors shall be not less than one nor more than fifteen. Neither the Maryland Charter nor the Maryland Bylaws, however, prohibit the Board from filling more than two new directorships resulting from an increase in the size of the Board during the period between any two successive annual meetings of shareholders.

Removal of   Directors

Removal of Directors

The Texas Charter provides that shareholders may remove directors for cause by the affirmative vote of two-thirds of outstanding shares entitled to vote.

Same.

 

37


 

CSWC Texas

CSWC Maryland

Board Vacancies

Board   Vacancies

The Texas Bylaws provides that vacancies may be filled by an election at an annual or special meeting of the shareholders or by the vote of a majority of the remaining directors although less than a quorum.

The Maryland Charter provides that, subject to applicable requirements of the 1940 Act and the MGCL, any vacancy on the Board for any cause other than an increase in the number of directors may be filled by a majority of the remaining directors, even if such majority is less than a quorum and any vacancy in the number of directors created by an increase in the number of directors may be filled by a majority of the entire Board of Directors.     Stockholders may elect a successor to fill a vacancy on the Board of Directors which results from the removal of a director by the same vote that is required to elect a director.

Shareholder Voting – Quorum

Shareholder Voting – Quorum

The TBOC provides that the holders of a majority of the voting power of the shares entitled to vote at a meeting are a quorum, unless the charter provide otherwise.

The Texas Charter and Texas Bylaws do not vary from the TBOC in this regard.

The MGCL provides that the presence, in person or by proxy, of shareholders entitled to cast a majority of all the votes entitled to be cast at a meeting constitutes a quorum, unless the charter or bylaws provide otherwise.

The Maryland Charter and Maryland Bylaws do not vary from the MGCL in this regard.

Shareholder Voting – Action   Generally

Shareholder Voting – Action Generally

The TBOC provides that except for the election of directors, shareholders take action by a majority of the votes cast, except where the TBOC or charter requires a larger proportion or number (see “—Shareholder Voting – Fundamental Actions” below).

The Texas Charter provides that except for the election of directors and certain fundamental actions, all questions are decided by the majority of votes cast at a meeting at which quorum is present.

The MGCL provides that except for the election of directors, shareholders take action by a majority of the votes cast, except where the MGCL or charter or bylaws requires a larger proportion or number (see “—Shareholder Voting – Fundamental Actions” below).

Like the Texas Charter, the Maryland Charter and Maryland Bylaws provides that except for the election of directors and certain fundamental actions, in general, all other matters are decided by a majority of the votes cast at a meeting at which quorum is present.

 

38


 

CSWC Texas

CSWC Maryland

Shareholders Voting – Fundamental Actions

Shareholder   Voting – Fundamental Actions

The TBOC and Texas Charter require the affirmative vote of a greater percentage of shares entitled to vote for the approval of certain fundamental actions described below.

The TBOC requires that, unless a corporation’s charter otherwise provides, the approval of holders of two-thirds of the shares outstanding to approve (1) the liquidation or dissolution or the corporation, (2) any amendments to the charter (see “—Amendment of Articles of Incorporation” below), (3) any merger or sale and (see “—Shareholder Voting – Mergers and Sales” below) and (4) certain business combinations with significant shareholders (see “—Business Combination Statute” below).

The Texas Charter does not increase or decrease the voting thresholds set forth in the TBOC.

The Texas Charter imposes further restrictions on certain business combinations with significant shareholders (see “—Business Combination Statute” below).

The MGCL and Maryland Charter require the affirmative vote of a greater percentage of shares entitled to vote for the approval of certain fundamental actions described below.

The MGCL requires supermajority approval of certain business combinations with significant shareholders (see “—Business Combination Statute” below).

The Maryland Charter requires the approval of holders of two-thirds of the shares outstanding to (1) amend the Maryland Charter to make the common stock “redeemable securities” or any proposal, whether by charter amendment, merger or otherwise, to convert CSWC Maryland from a “closed-end company” to an “open-end company,” (2) approve the liquidation or dissolution of CSWC Maryland and (3) amend certain provisions of the Charter (see “—Amendment of Articles of Incorporation” below).

The Maryland Charter requires the approval of holders of a majority of shares outstanding to (1) amend the Maryland Charter generally (see “—Amendment of Articles of Incorporation” below), (2) approve any merger or sale of all or substantially all assets that requires shareholder approval under the MGCL (see “—Shareholder Voting – Mergers and Sales” below) and (3) approve any transaction with a person or group that beneficially holds 10% or more of outstanding voting stock, except that if (a) the Board approves such transaction and (b) at least two-thirds of the directors who are not affiliated with such person or group approve the transaction, no shareholder approval will be required unless otherwise required by the MGCL or another provision of the Maryland Charter or Maryland Bylaws.

 

39


 

CSWC Texas

CSWC Maryland

Shareholder Proposals; Advance Notice

Shareholder   Proposals; Advance Notice

The TBOC permits a corporation to include provisions that require advance notice of and information requirements with respect to business to be brought before an annual or special meeting of shareholders, including nominations of persons for election as directors.

The Texas Bylaws do not contain specific advance notice or information requirements for business to be brought before an annual or special meeting of shareholders.

The MGCL permits a corporation to include provisions that require advance notice of and information requirements with respect to business to be brought by shareholders before an annual or special meeting of shareholders, including nominations of individuals for election as directors.

The Maryland Bylaws contain advance notice and information requirements for business to be brought before an annual or special meeting of shareholders, including nominations of individuals for election as directors. As a result, shareholders must satisfy specific timing and information requirements in order to have a proposal considered at or in order to nominate an individual for election as a director at an annual or special meeting. For annual meetings, in order to be considered timely, shareholders must submit proposals or director nominees to CSWC Maryland no more than 150 days and no less than 120 days prior to the anniversary date of the prior year’s annual proxy mailing date. The proposal or nomination must include all information required by the Maryland Bylaws with respect to the proposing shareholders and the proposal or nominees, as applicable. Any proposal or nomination that fails to comply with these timing and information requirements may be disqualified.

Shareholder Voting – Mergers, Conversions and Asset Sales

Shareholder Voting – Mergers, Conversions and Asset Sales

Under the TBOC, (1) a plan of conversion or merger of the corporation with another company, (2) a plan of exchange or (3) the sale of all or substantially all of the corporation’s assets (collectively referred to in the TBOC as “fundamental business transactions”) requires the affirmative vote of the holders of two-thirds of the outstanding shares of the corporation unless a different threshold, not less than a majority, is specified in the charter.

The Texas Charter does not vary from the TBOC in this regard.

Under the MGCL, a consolidation, merger, conversion, share exchange or sale of all or substantially all of the corporation’s assets generally requires approval by two-thirds of the outstanding shares of the corporation unless a different threshold, not less than a majority, is specified in the charter.

Generally, the Maryland Charter provides that these extraordinary actions will be valid if approved by the holders of a majority of the outstanding shares entitled to vote thereon, except for certain business combinations with significant shareholders that require a super-majority shareholder vote under the MGCL (see “—Business Combination Statute” below).

 

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CSWC Maryland

Shareholder Action by Written Consent

Shareholder Action by Written Consent

The TBOC provides that shareholders may act by written consent if all of the shareholders execute a written consent setting forth the action, unless the charter provides the shareholders may act by less than unanimous written consent.

The Texas Charter does not vary from the TBOC in this regard.

The MGCL provides that shareholders may act by written consent if all of the shareholders execute a written consent setting forth the action, unless the charter provides the shareholders may act by less than unanimous written consent.

Same.

Special Meetings of Shareholders

Special Meetings of Shareholders

The Texas Bylaws provide that the Chairman of the Board, President or a majority of the directors then in office may call a special meeting of stockholders.

The TBOC provides that holders of at least 10% of the shares outstanding that are entitled to vote at a special meeting may call a special meeting. A Texas corporation may establish in its charter or bylaws a greater or lesser percentage of votes required to call a special meeting, which percentage cannot be greater than a majority.

The Texas Charter and Texas Bylaws do not vary from the TBOC.

Like the Texas Bylaws, the Maryland Bylaws provide that the Chairman of the Board, President or a majority of the directors then in office may call a special meeting of stockholders.

The MGCL provides that the secretary of a corporation must call a special meeting at the request of holders of at least 25% of the shares outstanding that are entitled to vote at a special meeting may call a special meeting. A Maryland corporation may establish in its charter or bylaws a greater or lesser percentage of votes required to call a special meeting, which percentage may not be greater than a majority.

The Maryland Charter and Maryland Bylaws provide that a special meeting of shareholders to act on any matter that may properly be considered by shareholders will be called by the secretary upon the written request of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting on such matter, accompanied by the information required by the Maryland Bylaws. This standard reflects the majority position among our competitors that are incorporated in Maryland.

 

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CSWC Maryland

Amendment of Articles of Incorporation

Amendment of Articles of Incorporation

Under the TBOC, an amendment to the charter must be recommended by the board of directors and approved by the affirmative vote of the holders of at least two-thirds of the outstanding shares of the corporation, unless a different threshold, not less than a majority, is specified in the charter.

The Texas Charter does not provide for a different threshold.

Under the MGCL, amendments to the charter generally must be recommended by the board of directors and approved by the affirmative vote of the holders of at least two-thirds of the outstanding shares of the corporation, unless a different threshold, not less than a majority, is specified in the charter.

The Maryland Charter provides that, except for those amendments permitted to be made without shareholder approval under Maryland law or by specific provision in the Maryland Charter, amendments to the Maryland Charter must be recommended by the Board and approved by the affirmative vote of a majority of the outstanding shares entitled to be cast on the matter, except with respect to any of the following amendments, which require the affirmative vote of two-thirds of the outstanding shares entitled to be cast on the matter:

(1)  amendments relating to removal of directors;

(2)  amendments relating to the number and vacancies of directors;

(3)  amendments relating to the election of directors;

(4)  amendments relating to special meetings of shareholders;

(5)  amendments relating to amendments to the Maryland Charter generally; and

(6)  amendments relating to the vote required to approve certain extraordinary actions and charter amendments.

Purpose of the Company

Purpose of the Company

The Texas Charter provides that the Company is organized solely for the purpose of operating either as a management investment company under the 1940 Act or as a business development company under the 1940 Act.

The Maryland Charter provides that CSWC Maryland is formed to engage in any lawful act or activity for which corporations may be organized under the general laws of the State of Maryland as now or hereafter in force, including, without limitation or obligation, engaging in business as a business development company under the 1940 Act or as a managed investment company under the 1940 Act, subject in either case to making an election to be regulated as such thereunder.

 

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CSWC Maryland

Amendment of Bylaws

Amendment of Bylaws

The TBOC provides that a corporation’s bylaws may be amended by action of the shareholders or action of the board of directors.

The Texas Charter and Texas Bylaws do not vary from the TBOC in this regard.

The MGCL vests the ability to amend or repeal a corporation’s bylaws solely in the shareholders unless the charter or bylaws confer the power to amend the bylaws on the board of directors, which power may be conferred exclusively on the board of directors.

Like the Texas Charter and Texas Bylaws, the Maryland Bylaws provide that either the Board or the shareholders by a majority of the votes entitled to be cast may amend the bylaws.

Board or Committee Action by Written Consent

Board or Committee Action by Written Consent

The Texas Bylaws provide that any action permitted or required to be taken by the Board or any committee thereof may be done by unanimous written consent.

Same.

Inspection of Books and Records

Inspection of Books and Records

The TBOC provides that shareholders are entitled to examine and copy a corporation’s books and records upon making a written demand; provided the shareholder has held shares for at least six months or holds at least 5% of the corporation.

The Texas Charter and Texas Bylaws do not vary from the TBOC in this regard.

The MGCL provides that any shareholder may inspect and copy, during usual business hours, only the corporation’s bylaws, minutes of shareholder meetings, annual statements of affairs, voting trust agreements and a statement showing all stock and securities issued by the corporation during the prior twelve months. Additionally, any person who has been a holder of record for a minimum of six months of at least 5% of the corporation’s outstanding shares may also (1) inspect the books of account and stock ledger, (2) require the corporation to prepare and have available a statement of its affairs and (3) for a corporation that does not maintain at shareholder list at its principal office, require the corporation to prepare and have available a list of its shareholders.

The Maryland Charter and Maryland Bylaws do not vary from the MGCL in this regard.

 

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CSWC Texas

CSWC Maryland

Standard of Conduct

Standard of Conduct

Under Texas law, a director owes the fiduciary duties of loyalty (including good faith), care and obedience to the corporation. The duty of loyalty requires a director to act in good faith and to not allow personal interest to prevail over that of the corporation. The duty of care requires a director to act and perform corporate duties in the same manner as an ordinarily prudent person would under similar circumstances. In performing this obligation, a director must be diligent and informed and exercise honest and unbiased business judgment in pursuit of corporate interests. Texas law provides that a director may in good faith rely on information, opinions, reports or statements prepared by officers or employees of the corporation, counsel, accountants and investment bankers. The duty of obedience requires that a director avoid committing acts beyond the scope of the powers of the corporation. When a director acts consistently with the director’s duties of loyalty (including good faith), care and obedience, the director’s decisions are generally presumed to be valid under the Texas business judgment rule.

The MGCL requires that a director act in good faith, in a manner the director reasonably believes to be in the best interests of the corporation and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, under the MGCL, any act of a director of a corporation is presumed to satisfy this standard of conduct, and any act of a director relating to or affecting an acquisition or a potential acquisition of control of the corporation or any other transaction or potential transaction may not be subject to a higher duty or greater scrutiny than is applied to any other act of a director.

Limitation on Personal Liability of Directors

Limitation on Personal Liability of Directors and Officers

The TBOC permits corporations to include in the charter a provision limiting the personal liability of directors to the corporation and its shareholders for an act or omission in his or her capacity as a director, except to the extent the person is found liable under applicable law for:

(1)  breach of the duty of loyalty to the corporation or its shareholders;

(2)  acts or omissions not made in good faith that constitutes a breach of duty to the corporation or that involve intentional misconduct or a knowing violation of the law;

(3)  a transaction from which the director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director’s office; or

(4)  an act or omission for which the liability of the director is expressly provided by statute.

The Texas Charter does not contain a provision limiting the personal liability of directors as permitted by the TBOC.

The MGCL permits a corporation to include in its charter a provision limiting the personal liability of its directors and officers to the corporation and its shareholders for money damages,  except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty that is established by a final judgment and which is material to the cause of action.

The Maryland Charter contains a provision limiting the personal liability of directors and officers to the fullest extent permitted by Maryland law.

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CSWC Texas

CSWC Maryland

Indemnification of Directors and Officers

Indemnification of Directors and Officers

The TBOC permits a corporation to indemnify a director or former director, against judgments and expenses reasonably and actually incurred by the person in connection with a proceeding if the person: (1) acted in good faith, (2) reasonably believed, in the case of conduct in the person’s official capacity, that the person’s conduct was in the corporation’s best interests, and that the person’s conduct was not opposed to the corporation’s best interests and (3) in the case of a criminal proceeding, did not have a reasonable cause to believe the person’s conduct was unlawful.

If, however, the person is found liable to the corporation, or is found liable on the basis he received an improper personal benefit, then indemnification under Texas law is limited to the reimbursement of reasonable expenses actually incurred. Additionally, no indemnification will be available if the person is found liable for: (1) willful or intentional misconduct in the performance of the person’s duty to the corporation, (2) breach of the person’s duty of loyalty owed to the enterprise or (3) an act or omission not committed in good faith that constitutes a breach of a duty owed by the person to the corporation.

The Texas Charter provides for indemnification of directors and officers to the fullest extent permitted by Texas law, but does not provide for advancement of expenses.

Under the MGCL, Maryland corporations must (unless the charter provides otherwise, which the Maryland Charter does not) indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity.

A Maryland corporation may indemnify present and former directors and officers, among others,   against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to be made a party by reason of their service in those or certain other capacities unless it is established that:

(1) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty;

(2) the director or officer actually received an improper personal benefit in money, property or services; or

(3) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

A  Maryland corporation may not indemnify a director or officer:

(1) in a suit by or on behalf of the corporation in which the director or officer was adjudged liable to the corporation; or

(2) in a suit in which the director or officer was adjudged liable on the basis that personal benefit was improperly received.

A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit was improperly received. However, indemnification for an adverse judgment in a suit by or in the right of the corporation, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses.

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CSWC Texas

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A corporation may advance reasonable expenses to a director and officer upon the corporation’s receipt of (1) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification and (2) a written undertaking by or on behalf of the director or officer to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the director or officer did not meet the standard of conduct.

The Maryland Charter provides for indemnification of directors and officers to the fullest extent permitted by Maryland law, including advancement of expenses, subject to the 1940 Act.

Appraisal Rights

Appraisal Rights

Except for the limited classes of mergers, consolidations, sales and asset dispositions for which no shareholder approval is required under the TBOC, shareholders of Texas corporations with voting rights have dissenters’ rights in the event of a merger, consolidation, conversion, sale, lease, exchange or other disposition of all, or substantially all, the property and assets of the corporation. However, a shareholder of a Texas corporation has no dissenters’ rights with respect to any plan or merger or conversion in which there is a single surviving or new domestic or foreign corporation, or with respect to any plan of exchange if:

(1) the ownership interest, or a depository receipt in respect of the ownership interest, held by the owner is part of a class or series of ownership interests, or depository receipts in respect of ownership interests, that are, on the record date set for purposes of determining which owners are entitled to vote on the plan of merger, conversion, or exchange, as appropriate:

(a) listed on a national securities exchange (the Company currently meets this condition by virtue of its listing on the Nasdaq Select Global Market); or

(b) held of record by at least 2,000 owners;

Under the MGCL, except as noted below, a shareholder has the right to demand payment of fair value for its stock from the successor if:

(1) the corporation consolidates or merges with another corporation;

(2) stock is to be acquired in a statutory share exchange;

(3) the corporation transfers all or substantially all of its assets in a manner requiring shareholder approval;

(4) the corporation amends its charter to alter contract rights set forth in the charter and adversely affects the shareholder's rights (unless the right to do so is reserved by the charter of the corporation);

(5) the transaction is subject to certain provisions of the Maryland Business Combination Act; or

(6) the corporation is converted.

 

 

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CSWC Texas

CSWC Maryland

(2) the owner is not required by the terms of the plan of merger, conversion, or exchange, as appropriate, to accept for the owner’s ownership interest any consideration that is different from the consideration to be provided to any other holder of an ownership interest of the same class or series as the ownership interest held by the owner, other than cash instead of fractional shares or interests the owner would otherwise be entitled to receive; and

(3) the owner is not required by the terms of the plan of merger, conversion, or exchange, as appropriate, to accept for the owner’s ownership interest any consideration other than:

(a) ownership interests, or depository receipts in respect of ownership interests, of a another entity of the same general organizational type that, immediately after the effective date of the merger, conversion, or exchange, as appropriate, will be part of a class or series of ownership interests, or depository receipts in respect of ownership interests, that are (i) listed on a national securities exchange or authorized for listing on the exchange on official notice of issuance or (ii) held of record by at least 2,000 owners;

(b) cash instead of fractional ownership interests the owner would otherwise be entitled to receive; or

(c) any combination of the ownership interests and cash above.

The Texas Charter does not vary from the TBOC in this regard

Unless the transaction is governed by certain provisions of the Maryland Business Combination Act, a shareholder may not demand the fair value of its stock if the stock is:

(1) listed on a national securities exchange;

(2) that of the successor in the merger, unless either (a) the merger alters the contract rights of the stock (and the charter does not reserve the right to do so) or (b) the stock is to be changed or converted into something other than stock in the successor or cash, scrip or other rights arising out of provisions for the treatment of fractional shares of stock in the successor;

(3) not entitled to vote on the transaction; or

(4) denied appraisal rights in the corporation’s charter.

The Maryland Charter does not vary from the MGCL in this regard.

The Maryland Charter does not deny appraisal rights to shareholders as is common among business development companies incorporated in Maryland. However, similar to other publicly traded business development companies, our current listing on the Nasdaq Global Select Market will effectively prevent shareholders from seeking appraisal rights as long as we remain listed.

Authorized Shares; Dividends

Authorized Shares

Authorized Shares

The Texas Charter authorizes CSWC Texas to issue up to 25,000,000 shares of common stock, par value $0.25 per share. As of May [16], 2017, 16,011,296 shares of common stock were issued and outstanding. [NTD: Should match date on beneficial ownership table and elsewhere in document.]

The Maryland Charter authorizes CSWC Maryland to issue up to 25,000,000 shares of common stock, par value $0.25 per share.

 

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CSWC Texas

CSWC Maryland

Classification of Stock

Classification of Stock

None of the TBOC, the Texas Charter or the Texas Bylaws contain any provisions authorizing the Board to classify or reclassify unissued shares of stock.

As permitted under the MGCL, the Maryland Charter authorizes the Board, without shareholder approval, to classify and reclassify any unissued shares of CSWC Maryland common stock into other classes or series of stock and authorizes the Board to issue the newly classified shares. Prior to the issuance of shares of each new class or series, the Board is required by Maryland law to set the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series.

Declaration and Payment of Dividends

Declaration and Payment of Dividends

The TBOC provides that dividend may be declared as authorized by the board of directors and other distributions, provided that no dividends may be paid if the payment of such dividend:

(1) violates its charter;

(2) renders the corporation unable to pay its debts as they become due; or

(3) exceeds either of the corporation’s net assets or surplus.

The Texas Charter does not vary from the TBOC in this regard.

The MGCL provides that dividends and other distributions may be declared as authorized by the board, provided that no dividends may be paid if, after giving effect to the dividend or other distribution:

(1) the corporation would not be able to pay its debts as they become due in the usual course of business; or

(2) the corporation's total assets would be less than the sum of its total liabilities plus, unless the charter provides otherwise, the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution; except the corporation may make a dividend or other distribution from (a) the net earnings of the corporation for the fiscal year in which the dividend or other distribution is made, (b) the net earnings of the corporation for the preceding fiscal year or (c) the sum of the net earnings of the corporation for the preceding eight fiscal quarters.

The corporation’s charter may further restrict the corporation’s ability to pay dividends.

The Maryland Charter does not vary from the MGCL in this regard.

 

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CSWC Texas

CSWC Maryland

Anti-Takeover Statute

Business Combination Statute

Business Combination Statute

The TBOC prohibits specific mergers, sales of assets, reclassifications and other transactions between a Texas public corporation and an “affiliated shareholder” for a period of three years after the date the shareholder obtained “affiliated shareholder” status.

“Affiliated shareholder” is defined as a person who beneficially owns (or has owned within the preceding three-year period) 20% or more of the outstanding stock of a Texas public corporation for a period of three years following the shareholder acquiring shares representing 20% or more of the corporation’s voting power.

The TBOC provides an exception to this prohibition if: (1) the board of directors of the corporation approves the transaction or the acquisition of shares by the affiliated shareholder prior to the affiliated shareholder becoming an affiliated shareholder, (2) two-thirds (or a higher if specified in the charter) of the unaffiliated shareholders approve the transaction at a meeting held no earlier than six months after the shareholder acquires that ownership, or (3) if the affiliated shareholder was an affiliated shareholder before December 31, 1996, and continued as such through the date of the transaction.

The Texas Charter further provides that a shareholder becomes the beneficial owner of at least 10% of the Company’s outstanding shares, it cannot enter into a business combination unless:

(1) the combination is approved by two-thirds of shareholders; or

(2) (a) certain fair price and terms conditions are met,
(b) the shareholder has not received any loans,
financial assistance or tax advantages from the Company and (c) a proxy statement is mailed 40 days prior to the meeting that includes a board recommendation and fairness opinion.

Under the MGCL, certain “business combinations” between a Maryland corporation and an “interested shareholder” or an affiliate of an interested shareholder are prohibited for five years after the most recent date on which the interested shareholder becomes an interested shareholder. 

After such five-year period, any such business combination must generally be recommended by the board of directors and approved by the affirmative vote of at least (1) 80% of the votes entitled to be cast and (2) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested shareholder with whom (or with whose affiliate) the business combination is to be effected or such interested shareholder’s affiliate or associate, unless, among other conditions, the corporation’s common shareholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for its shares.

If the board of directors approves in advance the transaction by which a person would become an interested shareholder, that person will be deemed to not be an interested shareholder and will not be subject to the MGCL’s restrictions described above. In approving a transaction, however, the board of directors may provide that its approval is subject to compliance, at or after the time of the approval, with any terms and conditions determined by it.

A “business combination” includes a merger, consolidation, statutory share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities. An “interested shareholder” is defined generally as (1) any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock or (2) an affiliate or associate of the corporation who, at any time during the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

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CSWC Texas

CSWC Maryland

 

These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a Maryland corporation’s board of directors prior to the time that the interested shareholder becomes an interested shareholder.

A corporation may elect not to be governed by the Business Combination Act through a charter provision or board resolution. The Maryland Charter does not make an election to opt out of the business combination statute. CSWC Maryland will be subject to the MGCL’s business combination statute at the completion of the Conversion. The Maryland Charter does not make an election not to be governed by the business combination statute and does not otherwise vary from the MGCL in this regard.

Control Share Acquisition Act

Control Share Acquisition Act

The   TBOC does not contain a control share acquisition act or similar statute, nor do the Texas Charter or Texas Bylaws contain any similar provisions or requirements.

The description below of the Control Share Acquisition Act is provided for completeness only. The SEC Staff has stated that use of the MGCL’s Control Share Acquisition Act is inconsistent with certain requirements under the 1940 Act. As such, the Maryland Bylaws contain a provision opting out of the Control Share Acquisition Act.

The MGCL provides that a holder of “control shares” of a Maryland corporation acquired in a “control share acquisition” has no voting rights with respect to such shares except to the extent approved by the affirmative vote of at least two-thirds of the votes entitled to be cast on the matter, excluding shares held by: (1) a person who has made or proposes to make the control share acquisition; (2) an officer of the corporation or (3) an employee of the corporation who is also a director of the corporation.

“Control shares” are voting shares which, if aggregated with all other shares owned by the acquirer, or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power within one of the following ranges of voting power: (A) one-tenth or more but less than one-third; (B) one-third or more but less than a majority or (C) a majority or more of all voting power. Control shares do not include shares that the acquirer is entitled to vote as a result of having previously obtained shareholder approval or shares acquired directly from the corporation. A “control share acquisition” means the acquisition of issued and outstanding control shares, subject to certain exceptions.

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CSWC Texas

CSWC Maryland

 

A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses and making an “acquiring person statement” as described in the MGCL), may compel the corporation’s board of directors to call a special meeting of shareholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any shareholders meeting.

If voting rights are not approved at the meeting or if the acquiring person does not deliver an “acquiring person statement,” then, subject to certain conditions and limitations, the corporation may redeem for fair value any or all of the control shares (except those for which voting rights have previously been approved). Fair value is determined, without regard to the absence of voting rights for the control shares, (1) as of the date of the last control share acquisition by the acquirer or (2) if a meeting of shareholders is held at which the voting rights of such shares are considered and not approved, as of the date of the meeting.

If voting rights for control shares are approved at a shareholder meeting and the acquirer becomes entitled to exercise or direct the exercise of a majority of all voting power, all other shareholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition.

The Control Share Acquisition Act does not apply to (1) shares acquired in a merger, consolidation or statutory share exchange if the corporation is a party to the transaction or (2) acquisitions approved or exempted by the charter or bylaws of the corporation.

 

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CSWC Texas

CSWC Maryland

Unsolicited Takeovers Act

Unsolicited Takeovers Act

The   TBOC does not contain an unsolicited takeovers act or similar statute.

Subtitle 8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under the 1934 Act and at least three independent directors to elect to be subject to any or all of five provisions of the MGCL that provide, respectively, for:

(1)  a classified board;

(2)  a two-thirds vote requirement for removing a director;

(3)  a requirement that the number of directors be fixed only by vote of the board of directors;

(4)  a requirement that a vacancy on the board be filled only by the remaining directors in office and (if the board is classified) for the remainder of the full term of the class of directors in which the vacancy occurred; and

(5)  a majority requirement for the calling of a shareholder-requested special meeting of shareholders.

The election can be made either through a corporation’s charter or bylaws or through a resolution of its board of directors (notwithstanding any contrary provision in the charter or bylaws).

The Maryland Charter prohibits CSWC Maryland from electing to be subject to any of the provisions of Subtitle 8, unless the election is first approved by shareholders by a majority of the votes cast. Through provisions in the Maryland Charter and Maryland Bylaws unrelated to Subtitle 8, CSWC will (a) vest in the Board the exclusive power to fix the number of directorships (b) require a two-thirds vote for removing a director and (c) require, unless called by our Chairman of the Board, President or a majority of the directors then in office , the request of shareholders entitled to cast not less than a majority of all the votes entitled to be cast at the meeting to call a special meeting of shareholders.

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Certain U.S. Federal Income Tax Consequences

The following discussion summarizes the material U.S. federal income tax consequences of the Conversion to holders of our common stock. This summary is not a comprehensive description of all of the U.S. federal tax consequences of the Conversion that may be relevant to holders. We urge you to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of the conversion, as well as any tax consequences arising under the laws of any state, local, foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.

The Conversion provided for in the Plan of Conversion is intended to be a tax-free reorganization under Section 368(a) of the U.S. Internal Revenue Code. Assuming the Conversion qualifies as a tax-free reorganization within the meaning of Section 368(a) of the U.S. Internal Revenue Code, and subject to the qualifications and assumptions described in this proxy statement: (a) holders of CSWC Texas common stock will not recognize any gain or loss as a result of the completion of the Conversion, (b) the aggregate tax basis of shares of CSWC Maryland common stock immediately following completion of the Conversion will be equal to the aggregate tax basis of the shares of CSWC Texas common stock immediately before consummation of the Conversion, and (c) the holding period for shares of CSWC Maryland common stock following the Conversion will include the holding period of shares of CSWC Texas common stock converted therefor.

Accounting Treatment

We expect that the Conversion will have no effect on the Company from an accounting perspective because there is no change in the entity as a result of the Conversion. As such, the historical financial statements of the Company, which have previously been reported to the SEC on our periodic reports, as of and for all periods through the date of this proxy statement, will remain the financial statements of CSWC Maryland following the Conversion.

Dissenters’ or Appraisal Rights

The shareholders of the Company will not be entitled to dissenters’ rights or appraisal rights as a result of the Conversion.

THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE “FOR” THE APPROVAL OF THE CONVERSION OF OUR COMPANY FROM A TEXAS CORPORATION TO A MARYLAND CORPORATION

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PROPOSAL THREE: ADVISORY VOTE ON EXECUTIVE COMPENSATION

As required by the Exchange Act, we are asking our shareholders to provide advisory approval of the compensation of our current named executive officers, as we described in the “Compensation Discussion and Analysis” section of this proxy statement. While this vote is advisory and non-binding, it will provide information to the Compensation Committee regarding investor sentiment about our executive compensation philosophy, policies and practices, which the Compensation Committee will consider when determining executive compensation for fiscal 2018 and future periods. We currently request that our shareholders to vote annually (on a non-binding basis) on executive compensation. The next advisory vote on executive compensation will occur at our 2018 annual meeting.

The Compensation Committee strives to attract, retain and motivate exceptional executives, to reward past performance, provide incentives for future performance and to align executive’s long-term interests with the interests of our shareholders. To achieve these objectives, the Compensation Committee has implemented compensation plans that tie a substantial portion of executive’s overall compensation to key strategic financial and operational goals such as maintaining and growing our investment portfolio. It is the intention of the Compensation Committee that our executive officers be compensated competitively and consistent with our strategy, sound corporate governance principles and shareholder interests and concerns.

The Board recommends that shareholders approve the program by approving the following advisory resolution:

“RESOLVED, that the shareholders of Capital Southwest Corporation approve, on an advisory basis, the compensation of the individuals identified in the Summary Compensation Table, as disclosed in the proxy statement relating to the 2017 fiscal year pursuant to the compensation disclosure rules of the SEC (which disclosure includes the Compensation Discussion and Analysis section, the compensation tables and the accompanying footnotes and narratives within the Executive Compensation section of the proxy statement).”

THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE “FOR” THE APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS

54


 

PROPOSAL FOUR: ADVISORY VOTE ON THE FREQUENCY OF THE ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS

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 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 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.

55


 

PROPOSAL FIVE: RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

The Audit Committee has appointed Grant Thornton LLP as the independent registered accounting firm to audit our financial statements for the fiscal year ending March 31, 2018. SEC regulations and the Nasdaq Marketplace Rules require the Company’s independent registered public accounting firm to be engaged, retained and supervised by the Audit Committee. However, if the Board considers the selection of an independent registered public accounting firm to be an important matter to shareholders. Accordingly, the Board considers a proposal for shareholders to ratify this appointment to be an opportunity for shareholders to provide input to the Audit Committee and the Board on a key corporate governance issue. If shareholders fail to ratify the appointment, the Audit Committee may, but is not required to, reconsider the appointment.

A representative of Grant Thornton LLP will be present at the Annual Meeting and will have the opportunity to make a statement regarding our financial statements for the fiscal year ended March 31, 2017 and is expected to be available to respond to appropriate questions you may have.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF GRANT THORNTON LLP AS OUR INDEPENDENT REGISTERED ACCOUNTING FOR FISCAL 2018.

Audit and Other Fees

The following table sets forth fees for services rendered by Grant Thornton LLP for fiscal 2017 and 2016 as of the date of this proxy statement.

 

 

 

 

 

Service

    

2017

    

2016

Audit Fees (1)

 

232,000 

 

149,950 

Audit Related Fees (2)

 

— 

 

508,195 

Tax Fees (3)

 

— 

 

47,213 

All Other Fees

 

— 

 

— 

Total Fees

 

232,000 

 

705,358 


(1)

Represents fees for the audit of our annual financial statements, internal controls and review of our quarterly financial statements and audit services provided in connection with our statutory and regulatory filings.

(2)

Audit-related fees for fiscal 2016 consist of $388,750 of professional service fees in connection with the spin-off. In addition, $119,445 was related to professional services provided in connection with various SEC filings.

(3)

Represents fees for services provided in connection with tax compliance, tax advice and tax planning.

The Audit Committee has determined that the provision of non-audit services by Grant Thornton LLP is compatible with maintaining Grant Thornton’s independence. At its regularly scheduled and special meetings, the Audit Committee considers and pre-approves any audit and non-audit services to be performed by our independent accountants, Grant Thornton LLP. In accordance with its charter, the Audit Committee approves in advance all audit and tax services to be provided by Grant Thornton LLP. During fiscal 2017, all services were pre-approved by the Audit Committee in accordance with this policy.

56


 

AUDIT COMMITTEE REPORT

The Audit Committee is currently composed of five members of the Board. Each member is an independent director as required by Sarbanes-Oxley and Nasdaq Marketplace Rules. The Audit Committee operates under a written charter adopted by the Board and reviewed annually by the Audit Committee. The charter is available on Capital Southwest’s website at http://www.capitalsouthwest.com/media/audit-committee-charter.pdf.

The Audit Committee oversees Capital Southwest’s financial reporting process and system of internal control over financial reporting on behalf of the Board. Management is responsible for preparing Capital Southwest’s financial statements and Capital Southwest’s reporting process, including Capital Southwest’s system of internal control over financial reporting. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited consolidated financial statements in the Annual Report with management, including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of the valuation of securities and other significant judgments, and the clarity of disclosures in the financial statements. The Audit Committee is not, however, professionally engaged in the practice of accounting or auditing, and does not provide any expert or other special assurance as to such financial statements concerning compliance with the laws, regulations or accounting principles generally accepted in the United States (“GAAP”). The Audit Committee relies, without independent verification, on the information provided to them and on the representations made by management and Capital Southwest’s independent registered public accounting firm.

Capital Southwest’s independent registered public accounting firm, Grant Thornton LLP, is responsible for performing an independent audit of Capital Southwest’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”) and for expressing an opinion on the conformity of those audited financial statements with GAAP. The Audit Committee reviewed with Grant Thornton LLP its judgment as to the quality, not just the acceptability, of Capital Southwest’s accounting principles, the reasonableness of the valuation of securities and other significant judgments, the clarity of disclosures in the financial statements and such other matters as are required to be discussed with the Audit Committee by Statements on Auditing Standards No. 1301, as adopted by the PCAOB in Rule 3200T and by SEC Regulations S-X Rule 2‑07, Communications with Audit Committees, as currently in effect. The Audit Committee has received the written disclosures and the letter from Grant Thornton LLP required by applicable requirements of the PCAOB regarding Grant Thornton’s communications with the Audit Committee concerning Grant Thornton’s independence, and has discussed with Grant Thornton the independent accountant’s independence.

The Audit Committee discussed with Grant Thornton LLP the overall scope and plans for their audit and also met with them, with and without management present, to discuss the results of their audit, their evaluation of Capital Southwest’s system of internal controls over financial reporting and the overall quality of Capital Southwest’s financial reporting.

The Audit Committee reviewed and discussed the audited consolidated financial statements for the fiscal year ended March 31, 2017 with management and Grant Thornton LLP and also discussed with management and Grant Thornton LLP the process used to support certifications by our Chief Executive Officer and Chief Financial Officer that are required by the SEC and Sarbanes-Oxley to accompany our periodic filings with the SEC.

Based on the reviews and discussions referred to above and subject to the limitations on the Audit Committee’s role and responsibilities referred to above and in the Audit Committee charter, all of the Audit Committee members, whose names are listed below, recommended to the Board that the Board approve the inclusion of the audited consolidated financial statements for the fiscal year ended March 31, 2017 in the Annual Report on Form 10‑K.

 

 

 

 

Audit Committee

 

 

David R. Brooks, Chairman

 

 

Jack D. Furst

 

 

T. Duane Morgan

 

 

William R. Thomas III

 

 

John H. Wilson

 

 

57


 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the 1934 Act requires our officers and directors and persons who beneficially own 10% or more of our common stock to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors and greater than 10% beneficial owners also are required by SEC rules to furnish us with copies of all Section 16(a) reports they file with the SEC. Based solely upon a review of the reports furnished to us, we believe that each of our officers, directors and 10% beneficial owners complied with all Section 16(a) filing requirements applicable to them during fiscal 2017.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

We have procedures in place for the review, approval and monitoring of transactions involving the Company and certain persons related to CSWC. As a BDC, the 1940 Act restricts us from participating in transactions with any persons affiliated with CSWC, including our officers, directors and employees and any person controlling or under common control with us, subject to limited exceptions.

In order to ensure that we do not engage in any prohibited transactions with any persons affiliated with CSWC, our officers screen each of our transactions for any possible affiliations, close or remote, between the proposed portfolio investment, CSWC, companies controlled by us and our employees and directors. The Audit Committee is   responsible for approving related party transactions exceeding $50,000 in aggregate value.

In addition, our Code of Conduct and Code of Ethics, which are applicable to all of our employees, officers and directors, require that all employees, officers and directors avoid any conflict, or the appearance of a conflict, between an individual’s personal interests and our interests. Our Code of Conduct and Code of Ethics are available at http://www.capitalsouthwest.com/governance.

OTHER MATTERS

As of the mailing date of this proxy statement, the Board knows of no other matters to be presented at the meeting. Should any of the matters requiring a vote of the shareholders arise at the meeting, the persons named in the proxy will vote the proxies in accordance with their best judgment.

Shareholder Proposals for 2018 Annual Meeting

Any shareholder who intends to present a proposal at the annual meeting in the year 2018, and who intends to have the proposal included in our proxy statement for that meeting, must deliver the proposal to our corporate secretary at 5400 LBJ Freeway, Suite 1300, Dallas, Texas 75240, Attention: Secretary, no later than February 16, 2018. All proposals must meet the requirements set forth in the rules and regulations of the SEC in order to be eligible for inclusion in the proxy statement for that meeting.

If our conversion is approved, any shareholder, who intends to bring business to the annual meeting in the year 2018, but not include the proposal in our proxy statement, or to nominate a person to the Board, must also give written notice to our corporate secretary at the address set forth in the preceding paragraph, no later than February 16, 2018.

58


 

Reduce Duplicate Mailings

We are required to provide an annual report and proxy statement or notice of availability of these materials to all shareholders of record. If you have more than one account in your name or at the same address as other shareholders, we or your broker may discontinue mailings of multiple copies.

Once you have received notice from the account holder or us that they or we will discontinue sending multiple copies to the same address, you will receive only one copy until you are notified otherwise or until you revoke your consent. If you received only one copy of this proxy statement and annual report or notice of availability of these materials and you wish to receive a separate copy for each shareholder at your household, or if, at any time, you wish to resume receiving separate proxy statements or annual reports or notices of availability, or if you are receiving multiple statements and reports and wish to receive only one, please notify the account holder if your shares are held in street name or us if you hold registered shares in your name. You can notify us by sending a written request to Capital Southwest Corporation, 5400 LBJ Freeway, Suite 1300, Dallas, Texas 75240, Attention: Secretary, or by contacting us at (214) 238‑5700, and we will promptly deliver materials as requested.

 

59


 

Appendix A

Plan of Conversion

 

 

 


 

PLAN OF CONVERSION
OF
CAPITAL SOUTHWEST CORPORATION,
A TEXAS CORPORATION
TO
CAPITAL SOUTHWEST CORPORATION,
A MARYLAND CORPORATION

This Plan of Conversion (the “ Plan of Conversion ”) is adopted as of this [2] day of [August], 2017, by Capital Southwest Corporation, a Texas corporation (the “ Company ”), to effect its conversion into Capital Southwest Corporation, a Maryland corporation (the “ Converted Company ”).

WHEREAS, the Company is a corporation duly organized and existing under the laws of the State of Texas;

WHEREAS, the Company’s directors deem it advisable and in the best interest of the Company and its shareholders to convert to a corporation duly organized and existing under the laws of the State of Maryland (the “ Conversion ”), pursuant to the terms, provisions and conditions set forth in this Plan of Conversion and in accordance with Sections 10.101 and 10.103 of the Business Organizations Code of the State of Texas (the “ Texas Code ”), and Sections 3‑901 et seq. of the Maryland General Corporation Law (the “ MGCL ”); and

WHEREAS, the Company’s board of directors has authorized, approved and adopted the form, terms and provisions of this Plan of Conversion and submitted this Plan of Conversion to the Company’s shareholders for approval, and the Company’s shareholders have approved this Plan of Conversion.

NOW THEREFORE, in consideration of the foregoing, the conversion will take place pursuant to the following terms and conditions:

1.

Conversion; Effect of Conversion.

a.

At the Effective Time (as hereinafter defined), the Company will be converted into the Converted Company, pursuant to, and in accordance with, Sections 10.101 and 10.103 of the Texas Code, and Sections 3‑901 et seq. of the MGCL, whereupon the previous organizational form of the Company will cease, and the Company will continue its existence in the organizational form of the Converted Company, which will be subject to the laws of the State of Maryland.

b.

At the Effective Time, by virtue of the Conversion and without any further action on the part of the Company or its shareholders, the Converted Company shall, for all purposes of the laws of the State of Texas and the State of Maryland, be deemed to be the same entity as the Company. At the Effective Time, by virtue of the Conversion and without any further action on the part of the Company or its shareholders, for all purposes of the laws of the State of Maryland, all of the rights, privileges and powers of the Company, and all property, real, personal and mixed, and all debts due to the Company, as well as all other things and causes of action belonging to the Company, shall remain vested in the Converted Company and shall be the property of the Converted Company and the title to any real property vested by deed or otherwise in the Company shall not revert or be in any way impaired by reason of the Conversion; but all rights of creditors and all liens upon any property of the Company shall be preserved unimpaired, and all debts, liabilities and duties of the Company shall remain attached to the Converted Company at the Effective Time, and may be enforced against the Converted Company to the same extent as if said debts, liabilities and duties had originally been incurred or contracted by the Converted Company in its capacity as a corporation of the State of Maryland. The rights, privileges, powers and interests in property of the Company, as well as the debts, liabilities and duties of the Company, shall not be deemed, as a consequence of the Conversion, to have been transferred to the Converted Company at the Effective Time for any purpose of the laws of the State of Maryland.

A-1


 

c.

The Company shall not be required to wind up its affairs or pay its liabilities and distribute its assets, and the Conversion shall not be deemed a dissolution of the Company and shall constitute a continuation of the existence of the Company in the form of a Maryland corporation. The Converted Company is the same entity as the Company. The Conversion shall not be deemed to affect any obligations or liabilities of the Company incurred prior to the Conversion or the personal liability of any person incurred prior to the Conversion

d.

At the Effective Time, the name of the Converted Company shall be: Capital Southwest Corporation.

e.

The Company intends for the Conversion to constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code, as amended.

2.

Filings . As promptly as practicable following the date hereof, the Company shall cause the Conversion to be effective by:

a.

executing and filing (or causing to be executed and filed) a Certificate of Conversion pursuant to Section 10.154 of the Texas Code substantially in the form set forth on Exhibit A hereto (the “ Texas Certificate of Conversion ”) with the Secretary of State of the State of Texas (the “ Texas Secretary of State ”);

b.

executing and filing (or causing to be executed and filed) Articles of Conversion pursuant to Section 3‑903 of the MGCL substantially in the form set forth on Exhibit B hereto with the State Department of Assessments and Taxation of Maryland (the “ Maryland SDAT ”); and

c.

acknowledging and filing (or causing to be executed, acknowledged and filed) Articles of Incorporation of Capital Southwest Corporation substantially in the form set forth on Exhibit C hereto (the " Maryland Articles of Incorporation ") with the Maryland SDAT.

3.

Effective Time . The Conversion shall become effective upon the later to occur of (a) the filing with and acceptance by the Texas Secretary of State of the Texas Certificate of Conversion and (b) the filing with and acceptance by the Maryland SDAT of the Articles of Conversion (the time of the effectiveness of the Conversion, the " Effective Time ").

4.

Conversion of Shares of Common Stock . At the Effective Time, each share of common stock in the Company, par value $0.25 per share (the “ Company Common Stock ”) issued and outstanding immediately prior to the Effective Time shall automatically, by virtue of the Conversion and without any further action on the part of the Company or any other person or entity, be converted into one share of the Converted Company, par value .$0.25 per share (the “ Converted Company Common Stock ”).

5.

Effect of Conversion on Outstanding Stock Options . At the Effective Time, each option to acquire shares of Company Common Stock outstanding immediately prior to the Effective Time shall automatically, by virtue of the Conversion and without any further