Governance
CORPORATE GOVERNANCE GUIDELINES
BUSINESS DEVELOPMENT COMPANY (“BDC”) BACKGROUND
Business Development Companies or BDCs, have been recognized as distinct entities from traditional investment companies since their creation in 1980. While an investment company primarily engages in investing, reinvesting, or trading in securities, a BDC operates differently. BDCs are restricted from investing in publicly traded securities and instead focus on “Permissible assets,” which are securities acquired through non-public offerings or other transactions as determined by the Commission’s rules.
Moreover, BDCs are required to provide managerial assistance to the companies they invest in, effectively becoming part of their management structure. In essence, BDCs function as venture capital companies that invest in private businesses. Due to their operational nature, BDCs enjoy exemptions from certain provisions of the 40 Act, as they perform duties more akin to operating companies rather than traditional investment firms.
In essence, every BDC operates as an operating company rather than a mutual fund or traditional investment company. It can function as a Venture Capital fund, an LBO fund, or a mezzanine lending institution. Being an operating company, a BDC requires strong leadership to effectively run its operations.
In a typical investment company, the officers, such as the President, Chairman, and Secretary, primarily handle administrative tasks, while a team of stock or bond pickers manages the investment operations of the mutual fund. However, in a BDC, the team’s expertise lies in identifying and investing in private companies, negotiating investment terms, actively participating on the board of directors of the invested companies, assisting with marketing strategies, addressing production issues, selecting management personnel, and engaging in various activities that give the BDC some management control over its portfolio companies.
It is challenging for an independent director who is not fully dedicated to the portfolio companies to effectively lead the board of a BDC. As the private investor, the BDC team oversees the operations of the invested companies. The Chairman of the Board in a BDC has the responsibility to communicate and explain portfolio activities to the board of directors. This distinction arises because BDCs operate differently from traditional investment companies, underscoring the rationale for the Chairman not being an independent board member.
BASIC BOARD OF DIRECTORS RESPONSIBILITIES
The primary responsibility of the Board of Directors is to oversee the management of the Corporation’s business and affairs in the best interests of the BDC. In addition to supervising management and exercising business judgment to act in the BDC’s best interests, the directors are responsible for regularly evaluating the BDC’s strategic direction, management policies, and the effectiveness of policy implementation.
Meetings of the Board of Directors and Committees Thereof: Directors are expected to prepare for and use reasonable efforts to participate in all meetings of the Board of Directors and of the committees on which they serve. Each of the Board of Directors and the committees thereof shall meet as frequently as necessary to properly discharge its responsibilities, provided that the full Board of Directors shall meet at least four times per year.
The Chairman and Chief Executive Officer shall prepare the agenda for each meeting of the Board of Directors. While the agenda will initially be set by the Chairman and Chief Executive Officer, each director is encouraged to suggest the inclusion of items on the agenda.
Information and data that are important to the understanding of the Board of Directors of the business to be conducted at its meetings and those of the committees thereof should, to the extent practical, be distributed in writing to the directors sufficiently in advance of the meeting to permit meaningful review, and directors are expected to review the provided materials in advance of each meeting. Directors should not hesitate to ask questions, raise concerns or request additional time or information. Upon request, the BDC’s officers will make appropriate personnel available to answer any questions a director may have about any aspect of the BDC’s business.
Independent Directors: The Majority of the Board of Directors shall be “Independent Directors” who are members of the Board of Directors who (i) are not “interested persons” (as defined in the Investment Company Act of 1940, as amended (the “1940 Act”)) of the BDC and (ii) meet any other applicable requirements of the Securities and Exchange Commission (the “SEC”) and any other applicable laws, rules and regulations with respect to independence, as determined by the Board of Directors. Members of the Audit Committee must also satisfy the independence requirements of Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Board Interaction with Institutional Investors, Research Analysts and Media: As a general rule, management shall speak on behalf of the BDC. Comments and other statements from the entire Board of Directors, if appropriate, will generally be made by the Chairman and Chief Executive Officer. In normal circumstances, each director shall refer all inquiries from third parties to the Chairman and Chief Executive Officer.
COMPOSITION AND SELECTION OF THE BOARD OF DIRECTORS
Size and Composition of the Board of Directors: The current size of the Board of Directors is seven. The Board of Directors will assess its size from time-to-time to determine whether its size continues to be appropriate and may from time-to-time increase or decrease its size in accordance with the governing documents of the BDC.
Membership Criteria for the Board of Directors: The Board of Directors shall have a majority of directors who are Independent Directors. The Board of Directors shall monitor its compliance with the 1940 Act and Exchange Act requirements for director independence on an ongoing basis. Each Independent Director is expected to notify the Chairman of the Board of Directors and the Chairman of the Nominating and Corporate Governance Committee, as soon as reasonably practicable, in the event that his or her personal circumstances change in a manner that may affect the evaluation of the Board of Directors of such director’s independence.
The Nominating and Corporate Governance Committee is responsible for reviewing with the Board of Directors, on an annual basis, the composition of the Board of Directors as a whole, and whether the BDC is being well served by the directors taking into account the director’s independence, age, skills, experience and availability for service to the BDC. The Nominating and Corporate Governance Committee shall consider and recommend director nominees to the Board of Directors in accordance with the policies and principles in its charter.
Membership on Other Boards: Directors may at their own discretion sit on other Boards of Directors but must inform the Chairman of such Board of Directors and the Chairman of the Nominating and Corporate Governance Committee in advance of accepting an invitation to serve on such Boards of Directors of a company and whose securities may or may not be traded on a national securities exchange or other comparable foreign securities exchange.
Term Limits and Mandatory Retirement: The Board of Directors has not established any term limits to an individual’s membership on the Board of Directors. The Nominating and Corporate Governance Committee shall, as part of its annual assessment of the composition of the Board of Directors, review a director’s continued service on the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Composition and Responsibilities:The Board of Directors will have at all times an Audit Committee, a Nominating and Corporate Governance Committee and any other committees the Board of Directors deems appropriate. All of the members of the Audit Committee and the Nominating and Corporate Governance Committee will be Independent Directors. The members of the Audit Committee and the Nominating and Corporate Governance Committee will be appointed by the Board of Directors upon recommendation of the Nominating and Corporate Governance Committee based on each committee’s member qualification standards. Consideration should be given to the desires, experience, qualifications, attributes and skills of individual directors. The Chairman of each committee will be appointed by that committee.
COMMITTEES OF THE BOARD OF DIRECTORS
Composition and Responsibilities:The Board of Directors will have at all times an Audit Committee, a Nominating and Corporate Governance Committee and any other committees the Board of Directors deems appropriate. All of the members of the Audit Committee and the Nominating and Corporate Governance Committee will be Independent Directors. The members of the Audit Committee and the Nominating and Corporate Governance Committee will be appointed by the Board of Directors upon recommendation of the Nominating and Corporate Governance Committee based on each committee’s member qualification standards. Consideration should be given to the desires, experience, qualifications, attributes and skills of individual directors. The Chairman of each committee will be appointed by that committee.
CHARTERS
DIRECTOR ACCESS TO OFFICERS, EMPLOYEES AND INDEPENDENT ADVISORS
Access to Management and Employees: Directors have full and unrestricted access to officers and employees of the BDC.
Access to Independent Advisors: The Board of Directors and each committee have the power to hire independent legal, financial or other advisors as they may deem necessary, with the approval of Unanimous consent of the Board of Directors.
The BDC shall provide sufficient funding to the Board of Directors and to each committee, as determined by the Board of Directors and each of its committees, to exercise their functions and provide compensation for the services of their advisors and, in the case of the Audit Committee, independent accountants.