NewStar Financial DEF 14A 2009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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NEWSTAR FINANCIAL, INC.
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS to be held May 13, 2009
The 2009 annual meeting of the stockholders of NewStar Financial, Inc., a Delaware corporation, will be held at the offices of Edwards Angell Palmer & Dodge LLP at 111 Huntington Avenue, 20th floor, Boston Massachusetts, on May 13, 2009 at 10:00 a.m. for the following purposes:
Only stockholders of record at the close of business on April 2, 2009 will be entitled to vote at the annual meeting or at any adjournment.
It is important that your shares be represented at the meeting. Therefore, whether or not you plan to attend the meeting, please complete your proxy card and return it in the enclosed envelope, which requires no postage if mailed in the United States. If you attend the meeting and wish to vote in person, your proxy will not be used.
Dated: April 13, 2009
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON MAY 13, 2009.
This proxy statement and our annual report to security holders are available at www.vfnotice.com/newstarfin
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT VOTING
The Board of Directors of NewStar Financial, Inc. (NewStar or the Company) is soliciting your proxy for use at the 2009 annual meeting of stockholders to be held on Wednesday May 13, 2009 and at any adjournment of the meeting. This proxy statement and the accompanying proxy card are first being sent or given to stockholders of NewStar on or about April 13, 2009.
Who can vote. You may vote your shares of NewStar common stock at the annual meeting if you were a stockholder of record at the close of business on April 2, 2009. On that date, there were 49,160,708 shares of common stock outstanding. You are entitled to one vote for each share of common stock that you held on the record date.
How to vote your shares. You may vote your shares either by proxy or by attending the meeting and voting in person. If you choose to vote by proxy, please complete, date, sign and return the proxy card in the enclosed postage prepaid envelope. The proxies named in the proxy card will vote your shares as you have instructed. If you sign and return the proxy card without indicating how your votes should be cast, the proxies will vote your shares in favor of the proposal described in this proxy statement, as recommended by our Board of Directors. Even if you plan to attend the meeting, please complete and mail your proxy card to ensure that your shares are represented at the meeting. If you attend the meeting, you can still revoke your proxy by voting in person. If your shares are held in a brokerage or bank account, you must make arrangements with your broker or bank to vote your shares in person.
Proposals to be considered at the annual meeting. The principal business expected to be transacted at the meeting, as more fully described below, will be the reelection of nine directors whose current terms end at the annual meeting in 2009.
Quorum. A quorum of stockholders is required to transact business at the meeting. A majority of the outstanding shares of common stock entitled to vote, represented at the meeting in person or by proxy, constitutes a quorum for the transaction of business.
Number of votes required. Each director nominee must receive a plurality of the votes cast to be reelected.
Abstentions and broker non-votes. Abstaining from voting would have no effect on the results of voting for directors. Brokers will have voting discretion for shares registered in their own name in the election of directors. Accordingly, broker non-votes (which occur when a broker cannot vote a customers shares registered in the brokers name because the customer did not send the broker instructions on how to vote on the matter and the broker is barred by law or stock exchange regulations from exercising its discretionary voting authority in the particular matter) will have no effect on the results of voting.
Discretionary voting by proxies on other matters. We do not know of any proposal, other than the election of directors, that may be presented at the 2009 annual meeting. If another matter is properly presented for consideration at the meeting, the persons named in the accompanying proxy card will exercise their discretion in voting on the matter.
How you may revoke your proxy. You may revoke the authority granted by your executed proxy card at any time before we exercise it by either (i) filing with our Corporate Secretary, Robert K. Brown, a written revocation or a duly executed proxy card bearing a later date, or (ii) by voting in person at the meeting. If your shares are held in a brokerage account, you must make arrangements with your broker or bank to revoke your proxy.
Expenses of solicitation. We will bear all costs of soliciting proxies. We will, upon request, reimburse brokers, custodians and fiduciaries for out-of-pocket expenses incurred in forwarding proxy solicitation materials to the beneficial owners of stock held in their names. In addition to solicitations by mail, our directors, officers
and employees may solicit proxies from stockholders in person or by other means of communication, including telephone, facsimile and e-mail, without additional remuneration. We may retain a proxy solicitation firm to assist in the solicitation of proxies. We will bear all reasonable fees and expenses if such a firm is retained.
Householding of Annual Meeting Materials. Some banks, brokers and other nominee record holders may be householding our proxy statements and annual reports. This means that only one copy of our proxy statement and annual report to stockholders may have been sent to multiple stockholders in your household. We will promptly deliver a separate copy of either document to you if you call or write us at the following address or telephone number: NewStar Financial, Inc., 500 Boylston St., Suite 1600, Boston, MA 02116, Attn: Corporate Secretary, telephone: (617) 848-2500. If you want to receive separate copies of the proxy statement or annual report to stockholders in the future, or if you are receiving multiple copies and would like to receive only one copy per household, you should contact your bank, broker, or other nominee record holder, or you may contact us at the above address and telephone number. Our annual report is also available on our website at www.newstarfin.com.
No Appraisal Rights. There are no appraisal rights associated with any of the proposals being considered at the annual meeting.
PROPOSAL 1: ELECTION OF DIRECTORS
Our Board of Directors has fixed the number of directors at nine. These nine members are listed below and are nominees for reelection at the annual meeting. You may only vote for nine persons for election as directors.
As detailed more fully below in the section below entitled Certain Relationships and Transactions, among the investors in a private placement transaction that closed in two separate tranches on November 29, 2007 and January 18, 2008 was Union Square Partners, L.P. (now known as Capital Z Partners III, L.P.) As part of the private placement transaction, we entered into a side letter agreement dated November 12, 2007 with Union Square Partners, L.P. in which we granted Union Square Partners, L.P. the right to nominate one member to our Board of Directors, so long as they meet certain requirements. On February 1, 2009 Capital Z Partners III, L.P. informed us that they have nominated Bradley E. Cooper, one of our incumbent directors, as their Board nominee for 2009.
The number of directors is subject to increase or decrease by action of the Board. All directors are elected to serve one-year terms and until their successors are elected and qualified. Each of the incumbent directors has been nominated for reelection by the Board of Directors, and each has consented to serve if elected. However, if any nominee is unable to serve, proxies will be voted for any other candidate nominated by the Board. The Board recommends a vote FOR each of the nominees.
The following table contains biographical information about the nominees for director.
SHARES HELD BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table shows the amount of our Common Stock beneficially owned as of April 2, 2009 by (i) each person or group who is known by us to own beneficially more than 5% of our Common Stock, (ii) each current member of our Board and each of the executive officers named in the Summary Compensation Table in the Executive Compensation Section of this Proxy Statement above, and (iii) all current members of our Board and our current executive officers as a group.
Compensation Discussion and Analysis
The following discussion addresses the Companys executive compensation program generally, with particular focus on the executive officers whose compensation for 2008 is shown in the Summary Compensation Table on Page 21 ( the named executive officers).
Executive Compensation Philosophy
The Company believes that an effective leadership team plays a critical role in the creation of sustained shareholder value and believes its success in the highly-competitive financial services marketplace is directly correlated to its ability to continue to attract and retain top-tier talent. The Company believes that executive compensation should enable the Company to attract, motivate, reward and retain superior management talent and should reflect the following core principles:
The unprecedented market events of 2008 played a pivotal role in the Companys executive compensation program. The economy deteriorated dramatically during 2008 as the United States entered a recession. Higher unemployment, a decline in housing prices, an increase in default rates across a wide range of asset classes and an overall decrease in lending continued to strain the economy. The financial services industry changed significantly through bankruptcies, consolidations, mergers, and substantial government aid, legislation and regulation.
While NewStar, like many others, has been impacted by the broader economic slowdown, the Company continued to benefit from the strategic actions of the executive team to position the Company to operate effectively through a range of business conditions, including times of severe economic stress. In contrast with most of our industry, the Companys 2008 results represented four quarters of profitability and an increase in book value per share year over year. These results were largely attributable to the Companys consistent focus on credit quality, conservative capital structure, simple business strategy and aggressive management of expenses, including a reduction in 2008 incentive compensation payments.
In addition, the Company took an important step towards completion of its depository strategy in January 2009 when it entered into a definitive agreement to acquire Southern Commerce Bank, N.A and filed the necessary applications with the Federal Reserve to become a bank holding company. The proposed acquisition of Southern Commerce represents a significant step in the Companys depository strategy of accessing new and sustained sources of liquidity and the transition to a bank holding company.
The Compensation Committees decisions on compensation for 2008 reflect the significant challenges financial institutions face in the current and anticipated economic environment, and recognize the actions taken by the executive team to navigate these difficult times. The Companys performance in volatile market conditions influenced the level of compensation paid to the named executive officers for 2008 services in a number of ways:
Each of these factors, as well as the other elements of the Companys executive compensation program, is discussed in greater detail below.
Executive Compensation Program
The following chart details the elements of our current executive compensation program:
As a financial services company, our core business inherently involves a degree of risk, and it is our responsibility to ensure that we have the appropriate risk management culture and controls to manage this risk for the benefit of our shareholders. The Companys executive compensation program is designed to discourage inappropriate risk-taking in a number of ways. First, the structure of the executive compensation program provides a balance of fixed and variable compensation, cash and equity-based compensation, and annual and long-term compensation. This mix encourages a balanced focus on near-term objectives and the creation of shareholder value over the long-term. Next, the Companys annual incentive compensation program is based on the Companys performance against a pre-established operating plan and not on a targeted level of stock price appreciation. In addition, determination of individual awards under the annual incentive plan is based on an evaluation of each executives performance, both on an absolute and a relative basis, which takes into account performance against longer-term measures, such as credit quality over time.
In addition, the Companys stock ownership requirements detailed above, coupled with an emphasis on annual equity awards subject to multi-year vesting requirements, closely align executive interests with those of shareholders over the longer term. The components of each executives compensation package are further detailed below.
Finally, the Company has recognized the vital importance of conducting its business in accordance with the highest ethical standards and in full compliance with all applicable laws. To that end, in addition to our general Code of Conduct applicable to all employees, each named executive officer is subject to, and must annually certify compliance with, a Supplemental Code of Ethics that holds senior management to a standard that includes, among other things, the duty to provide fair, accurate and timely disclosure in reports that the Company files with the SEC or other public communications and the responsible use, and proper controls, of Company assets. A copy of both codes of conduct can be found on our website at www.newstarfin.com.
Comparable Market Analysis
The Committee reviews third-party analysis of the compensation practices of financial institutions in general, ranging from other publicly traded competitors to private investment funds/hedge funds to business development companies and real estate investment trusts, which provide similar services to our target customers, to ensure the Companys compensation practices remain market competitive. Given the lack of publicly available data for many of the Companys direct competitors for talent, the Committee does not rely on third-party benchmarking to determine compensation levels for each element of the Companys executive compensation program. Instead, the Committee considers a number of factors in making compensation determinations for the named executive officers including Corporate, line of business and individual performance, retention needs, internal pay equity and broader economic and market conditions. Furthermore, given the unprecedented market dislocation that took place during the course of 2008, and the rapidly shifting landscape in the Companys competitive market, the Committee placed heavier emphasis on both absolute and relative business performance, individual achievement of strategic objectives and the overall economic condition in making 2008 executive compensation determinations.
Base salaries represent the fixed component of each executive officers compensation and are determined primarily by:
The following chart sets forth base salary as a percentage of total target cash compensation and illustrates that base salary is determined with the intention that base salary will not represent the largest part of a named executive officers total cash compensation.
The Compensation Committee reviews the base salaries for the named executive officers on a regular basis (at least annually). In determining annual base salary adjustments for the named executive officers, the Committee uses its discretion based on the factors noted above as well as an assessment of each individuals contributions and any significant changes in responsibilities during the course of the year, as opposed to applying a formulaic approach.
Following an assessment of each named executive officers performance and review of competitive market practices, in February of 2008 the Committee determined that the base salaries for Messrs. Conway, Schmidt-Fellner and Bray should be increased to be competitive with the base salary levels for positions of like responsibility at firms in the Companys competitive market for talent. In keeping with the philosophy that executive compensation should be both performance-based and externally competitive, as well as balanced to discourage excessive risk-taking, the Committee approved base salary increases for Messrs. Conway, Schmidt-Fellner and Bray. As a result, on February 12, 2008, Mr. Conways base salary was increased from $400,000 to $475,000, Mr. Schmidt-Fellners base salary was increased from $350,000 to $400,000 and Mr. Brays base salary was increased from $300,000 to $350,000. All base salary increases were effective April 1, 2008.
The base salary for Mr. Clemmens, who was named as an executive officer of the Company on May 14, 2008, was increased from $325,000 to $350,000 in recognition of his increased responsibility and expanded role in the operation of the business during the course of 2007 and 2008. Mr. Dobies base salary did not change in 2008 as the Committee determined the level of base pay to be in line with what was offered for like positions at other firms in the Companys competitive market for talent.
As the Company generally does not expect that the difficult financial market and poor economic outlook will improve in the short term, at its February 4, 2009 meeting, the Committee determined that base salaries for the named executive officers would remain at 2008 levels at this time. As executive compensation trends in the marketplace continue to evolve in the wake of changing economic and regulatory conditions, the Committee will revisit the overall design of the Companys executive compensation program, including base salaries, to ensure that the Companys program remains in line with its overall objectives.
Annual Incentive Compensation Program
Principles and Philosophy
In accordance with the Companys belief that executive compensation should emphasize pay for performance, significant portions of total compensation are designed to be variable based on performance. The bonus plan is based on achievement of specific business goals and rewards performance at the Company, line of business and individual level.
The first step in the 2008 bonus process was the establishment of Company goals and objectives for the fiscal year. The Board of Directors and its various Committees, based on input from management, established an operating plan for the year that contained both quantitative and qualitative goals and objectives. These goals and objectives included adjusted earnings, growth and return measures and the credit quality of the portfolio. Performance objectives were then established for each executive officer. These objectives supported the achievement of the Companys annual plan and included company, line of business and individual goals. The
emphasis placed on the achievement of business line and individual goals is higher for executive officers with production responsibilities, while there is a stronger emphasis placed on Company performance for those executive officers with primarily corporate responsibilities.
Establishing Incentive Compensation Targets
The target bonus pool was established by the Committee early in the year by determining an appropriate payout ratio of incentive compensation as a percentage of corporate pre-tax, pre-incentive adjusted earnings. The payout ratio represents a balance that enables the Company to attract, motivate, reward and retain superior management talent while providing for an appropriate level of shareholder return.
In February 2008, the Compensation Committee established target corporate pre-tax, pre-incentive adjusted earnings of $81.3 million, which the Committee considered an ambitious growth goal for the Company in difficult economic conditions. The bonus payout ratio for the named executive officers as a percentage of that target was then set at 6.4%, or $5.2 million. The Committee felt that this 6.4% ratio represented a balance between management and shareholder return in light of the Companys relatively early development stage and the ambitious level of the targeted earnings in a challenging economic climate.
Individual incentive compensation targets for executive officers were then determined based on a number of factors including the size of the overall pool, the individuals position, and an assessment of the relative difficulty of achieving the plan objectives. The goal is to establish targets that reward superior performance while driving profitability within the Companys business plan. The 2008 incentive compensation targets for the named executive officers are detailed below.
Measurement of Performance against Targets and Allocation of Incentive Compensation Pool
In determining the level of funding for the 2008 incentive pool, the Committee utilized a pre-established funding mechanism which calculated incentive pool funding relative to the Companys performance against the targeted level of pre-tax, pre-incentive adjusted earnings. Under the funding mechanism, if the Company performed within +/- 15% of the performance target, the incentive pool would be funded in a linear fashion as a percentage of planned earnings. However, if the Company underperformed the performance target by more than 15%, a decelerator would be applied to pool funding. The Committee has the authority to modify the calculated funding based to its determination of an appropriate payout relative to broader market conditions as well as the achievement of the Companys strategic goals and objectives.
In 2008 the Company generated approximately $59.0 million in actual pre-tax, pre-incentive adjusted earnings, which was 26% below the targeted level. Due to the decelerator embedded in the funding mechanism, this level of performance generated incentive pool funding of $3.4 million for the named executive officers , which was 34% below the targeted level. In making its final determination of 2008 incentive pool funding the Committee considered many factors in addition to this level of performance, which represented four quarters of profitability for the Company in an extremely challenging economic environment. The Committee also considered the Companys entry into a definitive agreement to acquire Southern Commerce Bank, N.A., a significant step towards completion of the Companys depository strategy; and the efforts of the executive management team in effectively managing the Company through deteriorating market conditions during the course of 2008. The Committee also weighed the Companys performance relative to the plan against the goals of retention and motivation of a top-tier management team. Finally, the Committee reviewed the components of each executives incentive compensation package, including the balance between cash and long-term equity awards, relative to the overall compensation expense to support the Companys incentive award program.
The CEO recommended to the Committee that despite strong earnings in a difficult environment, incentive pool funding for 2008 should be further reduced to manage operating expense, emphasize long-term objectives and performance and demonstrate strong alignment between management and shareholders during a challenging market environment. The CEO proposed that the remaining funds be made available to both support enhancements to the Companys long-term incentive Plan in 2009 (as detailed below, under Equity Incentives) and fund ongoing operations.
The Committee agreed with the CEO and exercised its discretion to further reduce 2008 incentive payments, approving aggregate incentive payments of $2.3 million, to be paid to the named executive officers in accordance with the terms and conditions of the Companys 2006 Incentive Plan (as detailed in the Summary Compensation Table on Page 21). This level of payout was 56% below target incentive levels for 2008 and 39% below actual incentive payments received in 2007.
In addition, the Committee also supported the CEOs recommendation that all employees, including named executive officers, determined to be eligible for bonuses in excess of $50,000 receive payment via a combination of cash and restricted stock, subject to multi-year vesting provisions to encourage retention and assure measured risk taking. As a result, of the $2.3 million in incentives approved by the Committee, 80%, or $1.84 million, was paid to the named executive officers in cash with the remaining 20% settled in restricted stock. This represented a departure from prior practice, as historically incentive bonuses have been paid exclusively in cash.
Once the level of incentive pool funding was established, the Committee then reviewed the performance of the Company and discussed the performance and compensation of each of the named executive officers. This past year, as is the case generally, the CEO and/or the Head of Human Resources, as applicable attended Committee meetings but were not present for the executive sessions or for any discussion of their own compensation. The CEO provided the Committee with a performance assessment and compensation recommendation for each named executive officer (other than himself). The assessment included a summary of how the Company performed against the stated plan objectives, and how each named executive officer performed against their respective performance objectives, which included origination volume, fee income, and credit measures as well as strategic growth and marketing initiatives. The recommendations were then considered by the Committee and in turn, discussed in executive session with the other independent directors of the Board. With respect to the CEO, the independent directors of the Committee met in executive session under the direction of the Committee Chairman to conduct a performance review of the CEO based on his contribution to the Companys performance and other growth and/or leadership accomplishments. The Committee then presented their recommendation for CEO pay to the other independent Directors of the Board.
With respect to Messrs. Conway, Schmidt-Fellner and Bray, the Committee focused consideration on the overall performance of the Company despite extremely challenging market conditions including significant progress with respect to the Companys depository strategy that resulted in a definitive agreement to acquire Southern Commerce Bank, N.A. in January 2009, management of liquidity levels during the year, earnings and the overall credit quality of the Companys portfolio. With respect to Messrs. Dobies and Clemmens, individual and line of business goals were evaluated based on the overall performance of the Middle Market portfolio, which included the credit quality of the loans originated in both the current and prior years. The Committee made its determination after considering such measures collectively rather than assigning weight to any one objective.
The following table summarizes the Committees determination of 2008 incentive compensation for the named executive officers:
Long-term Equity Incentives
The Company believes that equity ownership is a critical component of executive compensation as it aligns management and shareholder interests, focuses executive officers on increasing franchise value over the long-term and promotes long-term retention. All named executive officers are eligible for annual equity awards as part of total compensation. The Company primarily utilizes seven-year non-qualified stock options, which typically vest in equal installments over a period of three years from the date of grant to support its annual award program. The Committee believes that the use of stock options most closely connects managements interests with those of shareholders as stock options will only deliver value to the named executive officer when the Companys share price exceeds the exercise price of the option.
The Committee may, in its discretion, also grant restricted stock and other equity-based awards under the terms and conditions of the Companys 2006 Incentive Plan. The restricted stock described above that was used to pay a portion of 2008 bonuses was issued pursuant to the 2006 Incentive Plan.
In determining the level of equity incentives awarded to each named executive officer, the Committee considers a number of factors, including the individuals performance, market levels of total compensation for similar positions, total stock ownership and constraints if any, presented by market volatility and/or limitations in the amount of equity authorized to be issued under the Companys 2006 Incentive Plan. As detailed above, in 2008 the Committee believed that a higher percentage of compensation should be made to its employees in the form of long-term equity awards and, therefore, reduced incentive pool funding for cash bonuses and paid a portion of 2008 incentives in restricted stock.
Stock option grants made to the named executive officers in 2008 are detailed in the Grants of Plan-Based Awards Table on Page 22. The 2008 stock option awards have a seven-year term and vest annually in three equal installments beginning on the first anniversary of the grant date.
2009 Option Exchange Program
During the course of 2008, the Committee conducted an extensive review of the Companys long-term incentive program to determine if the level and mix of equity awards granted under the Companys 2006 Incentive Plan continued to achieve the stated objective of providing market competitive, long-term incentives to retain and motivate top management talent. Based on its assessment, the Committee determined that the levels of equity ownership of the Companys key executives were significantly below market competitive levels due to a combination of three factors:
Based on a thorough review, the Committee concluded that the current levels of equity incentives available to senior executives did not meet the overall objectives of the Companys long-term incentive program. The Committee believed near-term action was warranted to address this imbalance and as such, has taken a number of steps to improve the Companys long-term incentive program.
On January 28, 2009, our shareholders approved an increase of approximately 4.5 million additional shares to be authorized under the Companys 2006 Incentive Plan, as previously recommended by the Committee. The Committee recommended approving this increase to allow the Company to continue to provide market competitive equity-based awards to key executives to motivate their performance by granting them an equity stake in the Company, foster retention by granting awards that are subject to multi-year vesting provisions and provide an incentive for executives to achieve long-range performance goals aligned with the interests of our shareholders without excessive risk-taking.
On March 18, 2009 the Committee used a portion of the newly authorized shares to grant a special, one-time option award to key executives, including the named executive officers. The Committee granted options to purchase approximately 2.7 million option awards. The options were seven-year, non-qualified stock options subject to a three year, pro-rata vesting schedule with exercise prices equal to the fair market value of the Companys stock on the date of grant. To be eligible for this one-time award, the Committee required the executives to surrender a portion of their outstanding option holdings in exchange for the new grant to minimize the dilutive impact and maximize the Companys tax benefit of the new issuance. In addition, each executive also agreed to enter into a lock-up agreement whereby 50% of the net proceeds from the exercise of options granted as part of this exchange would be held by the Company for the duration of the executives employment with the Company and for a twelve month period thereafter. If, during the one year following termination, an executive were to violate the covenant not to compete with, or solicit employees from, the Company, the amount of his proceeds held by the Company would be forfeited.
The Company attempts to minimize the use of additional executive officer benefits or perquisites. The only on-going perquisite provided to executive officers is reimbursement of office parking in selected geographies. This parking subsidy is available at some level to all employees within those selected geographies to allow the company to be market competitive when recruiting talent.
Stock Ownership Requirements
Each executive officer entered into a stock ownership agreement whereby the executive officer agreed that for a period of one year following any termination of employment, he would hold 25% of his transferable incentive equity (all vested options and shares of restricted stock that are no longer subject to forfeiture). If, during the one year following termination, he were to violate the covenant not to compete with the Company, the amount of transferable stock that he is then obligated to hold would be forfeited. The lock-up applies only to those shares received by the executive officer as equity compensation during his employment with the Company and does not apply to any personal investment in NewStar stock. In addition, options issued as part of the option exchange described above are subject to a more restrictive lock-up agreement arrangement, the terms of which have been set forth above. The Company believes the stock ownership requirements ensure that executive officers have a significant long-term ownership stake in the Company and that their interests are aligned with shareholders interests. In addition, the Company has adopted a policy on hedging under which executive officers are prohibited from hedging their economic exposures to the NewStar stock that they own.
Deductibility Cap on Executive Compensation
U.S. federal income tax law (Section 162(m)) prohibits publicly-traded companies from taking a tax deduction for certain compensation paid in excess of $1,000,000 to the companys CEO and four other most highly compensated employees. However, the statute exempts qualifying performance-based compensation from the deduction limit provided certain requirements are met. In January 2009, shareholders approved an amendment and restatement of our 2006 Incentive Plan, which reflected clarifying language and limitations to ensure that certain awards made under the Plan will be performance-based Awards intended to qualify for the performance-based compensation exception under Section 162(m). The Companys policy is to qualify incentive compensation programs for full corporate deductibility, to the extent feasible and consistent with the Companys overall compensation goals and objectives.
In December 2006, the Company entered into employment agreements with each of the named executive officers. The named executive officer employment agreements reflect a balance between the interests of shareholders and management, and are intended to support the retention and sustained high morale of the executive team. In determining the elements of the named executive officer employment agreements, the Committee considered the costs associated with each term and condition, and balanced the financial cost against the intrinsic benefit of retaining a highly-cohesive management team. Each of the employment agreements has substantially similar terms, which reflect the following elements:
The named executive officer employment agreements also contain change-in-control provisions for the named executive officers. In addition to preserving productivity and retention in a change-of-control of the Company, the provisions are intended to align executive officer and shareholder interests by enabling executive officers to consider corporate transactions that are in the best interest of the shareholders without undue concern over whether such transactions may jeopardize the executive officers own employment. The benefits provided under the change-in-control agreements mimic those described above with the following exceptions:
The employment agreements of Messrs. Conway, Schmidt-Fellner and Bray provide that, for so long as the Companys stock is traded on an established securities market, if any of the payments, awards or benefits payable to the executive officer are subject to a golden parachute excise tax under Sections 280G and 4999 of the Internal Revenue Code (IRC), the Company will provide the executive officer with a gross-up payment so that the executive officer will receive the same economic terms he would have received if there were no excise tax. The effects of Sections 280G and 4999 generally are unpredictable and can have widely divergent and unexpected effects based on an executive officers personal compensation history. Therefore, to provide a predictable and equal level of benefit across individuals without regard to the effect of the excise tax, the Committee determined that it was appropriate to pay the cost of this excise tax plus an amount needed to pay income taxes due on such additional payment. This practice is consistent with competitive pay packages and ensures the executive officer will receive the three years base salary and estimated cash incentive less only ordinary income taxes on that amount. The amounts payable under these agreements, calculated as if termination had occurred on December 31, 2008, are shown under the Potential Payments upon Termination of Employment or Change-in-Control, section of this proxy statement beginning on Page 23.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management and, based on this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.
By the Compensation Committee,
Frank R. Noonan, Chair
T. Kimball Brooker, Jr.
Bradley E. Cooper
Brian L.P. Fallon
The following table sets forth information concerning compensation awarded to, earned by or paid during the year ended December 31, 2008 to the Companys (i) Chief Executive Officer and President, (ii) Chief Financial Officer, and (iii) the three other most highly compensated executive officers of the Company at December 31, 2008. These five officers are referred to as the named executive officers in this proxy statement.
Summary Compensation Table
Grants of Plan-Based Awards during 2008
Outstanding Equity Awards at Fiscal Year-End for Fiscal 2008
The following table details the outstanding holdings of each named executive officer at December 31, 2008.
Option Exercises and Stock Vested for Fiscal 2008
The following table details the number of restricted shares that vested and the value realized upon vesting in 2008 for each named executive officer. None of the named executive officers exercised any stock options during 2008.
Potential Payments upon Termination of Employment or Change-in-Control for Fiscal 2008
The following tables describe the potential payments and benefits under the Companys executive officer employment agreements to which each named executive officer would have been entitled upon termination of employment or change of control, calculated as if each such event had occurred on December 31, 2008.
Name of Executive: Timothy J. Conway
Name of Executive: John K. Bray
Name of Executive: Robert T. Clemmens
As described in the Compensation Discussion and Analysis under Employment Agreements on Page 18, the Company entered into employment agreements with each of the named executive officers listed above upon the completion of the Companys initial public offering in December of 2006. The table above assumes a termination of employment that would trigger payments or other benefits to the named executive officers under the existing employment agreements, based on the named executive officers compensation, benefits, age, and years of service as of December 31, 2008. All valuations of restricted stock are based upon the closing price ($3.99) of NewStar stock on December 31, 2008, the last day of trading in the fiscal year. The value of the continued health benefits detailed in the table above assumes the extension of the named executive officers current benefits election and program coverage. Circumstances in which these benefits may be paid include an involuntary termination without cause, a voluntary termination by the named executive officer for good reason, retirement, following the Companys failure to renew the employment agreement, death or disability and finally, an involuntary termination of the named executive officer following a change-in-control.
A termination of an executive officer by the Company is for cause if it is for any of the following reasons: (i) willful and continued failure of the executive officer to perform substantially the executive officers duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the executive officer by the Board of Directors, which specifically identifies the manner in which the Board of Directors believes that the executive officer has not substantially performed his duties, or (ii) willful engagement in illegal conduct or gross misconduct by the executive officer that is materially and demonstrably injurious to the Company or its affiliates, or (iii) conviction of the executive officer or a plea of guilty or nolo contendere by the executive officer to a felony, or (iv) a material breach of the executive officers obligation under his confidentiality and/or non-compete obligations. No act or failure to act on the part of an executive officer is considered willful unless it is done, or omitted to be done, by the executive officer in bad faith or without reasonable belief that the executive officers actions or omission was in the best interests of the Company.
A termination by the executive officer is for good reason if it results from any of (i) a reduction by the Company in the executive officers annual base salary (ii) a forced relocation by Company of the executive officers place of employment to a location greater than twenty five (25) miles from his initial place of employment, (iii) a material diminution by the Company in the executive officers principal duties and responsibilities. For Messrs. Conway, Schmidt-Fellner and Bray, good reason may also be triggered if the named executive officer is not the CEO, CIO or CFO, respectively, of a publicly-traded company.
In the event of an involuntary termination without cause or voluntary termination for good reason, Messrs. Conway, Schmidt-Fellner and Bray are entitled to a severance payment equal to two years base salary plus two
years cash bonus (calculated at the higher of the bonus paid to the named executive officer in the prior fiscal year or the average bonus paid during the three previous fiscal years). In addition, each would receive two years of accelerated vesting of equity awards, and would be entitled to continued health benefits and outplacement services for the two-year severance period. Options would remain exercisable for a period of ninety days following the end of the two-year severance period. Messrs. Dobies and Clemmens would receive substantially similar terms over a one-year severance period. Each would be entitled to a severance payment equal to one years base salary plus cash bonus. Each would also receive one year of accelerated vesting of equity awards, and would be entitled to continued health benefits and outplacement services for the one-year severance period. Their options would also remain exercisable for a period of ninety days following the end of the one-year severance period.
If termination is due to the retirement of the executive officer, or at the option of the executive officer following a failure of the Company to renew the employment agreement, each executive officer would be eligible to receive accelerated vesting of restricted stock and the continued vesting of options in the same manner that the options would vest had the executive officer continued his employment with the Company during the vesting period. The acceleration of vesting due to the Companys failure to renew is limited to the equity holdings of the executive officer at the time of the initial public offering in December of 2006 and does not apply to any future equity awards the executive officer may receive. Further, upon a failure to renew, executive officers would have one year to exercise options beyond the normal termination date; upon retirement, the executive officer would have a period equal to the full length of the remaining option term to exercise any vested options. Finally, each executive officer would retain the option to participate in employer-sponsored healthcare at the retirees sole expense. None of the executive officers were eligible to retire as of December 31, 2008 because retirement is conditioned on being age 55 or older and being employed with the Company for five or more years following our initial public offering. Likewise, because the employment agreements for Messrs. Conway, Schmidt-Fellner and Bray do not expire until December 2009, and the employment agreements for Messrs. Dobies and Clemmens were automatically renewed, none of the executive officers were eligible for the accelerated vesting of restricted stock, continued vesting of options, extension of option exercisability and eligibility to participate in employer-sponsored healthcare upon the Companys failure to renew the agreement as of December 31, 2008.
A termination of employment due to death or disability would entitle each named executive officer to full acceleration of vesting on all equity awards and a one-year period following the date of termination to exercise any options.
In each of the events so noted above, the named executive officer would also be entitled to any accrued but unpaid salary and/or vacation time and a pro-rated bonus for the current fiscal year.
Each employment agreement contains change-in-control provisions for the named executive officer. The change of control provisions require a double-trigger, meaning payments are made only if the named executive officer suffers a covered termination of employment within two years following a change-in-control. Change-in-control provisions for Messrs. Conway, Schmidt-Fellner and Bray mimic the awards made under an involuntary termination without cause, with the exception that the severance period is extended from two to three years and each named executive officer would receive full acceleration of all equity awards. Similarly, Messrs. Dobies and Clemmens would be entitled to a two-year severance period and full acceleration of all equity awards.
Upon a change-in-control, executive officers may be subject to certain excise taxes under section 280G of the Internal Revenue Code. The Company has agreed that so long as the Companys stock is traded on an established securities market, if any of the payments, awards or benefits payable to Messrs. Conway, Schmidt-Fellner and Bray are subject to a golden parachute excise tax, the Company will provide the named executive officer with a gross-up payment so that the named executive officer will receive the same economic terms they would have received if there were no excise tax. The amounts shown in the table are based upon a 280G excise tax rate of 20%, a 35% federal income tax rate, a 5.3% state income tax rate and a 1.45% Medicare tax rate.
Equity Compensation Plan Information
The Companys 2006 Incentive Plan is a stockholder-approved plan under which the Company may grant stock options, restricted stock, other equity-related awards, and performance awards. The Company also has individual stockholder-approved plans with certain members of the Companys management team that were put into place in December 2006 in connection with the Companys Initial Public Offering. The number of shares of Common Stock issuable upon exercise of outstanding options granted to employees and non-employee directors, as well as the number of shares remaining available for future issuance under these plans at December 31, 2008 is summarized in the following table:
BOARD OF DIRECTORSDIRECTOR COMPENSATION
Each of the Companys independent, non-management directors receives director fees of $50,000 per year, and each committee chairman receives an additional $25,000 per year. Members of our board of directors are also reimbursed for their usual and customary expenses incurred in connection with attending all board and committee meetings. Non-management directors receive annual grants of restricted stock and/or options to purchase shares of our common stock. Non-management directors receive 5,000 shares of restricted stock and options to purchase up to 5,000 shares of common stock upon re-election to a new term of service each year at the Companys annual meeting. Non-management directors who serve as the Chairperson of a Committee of the board also receive an additional 10,000 stock options. The restricted stock vests over five years with 15% vesting on each of the first and second anniversaries of the grant date, 20% vesting on the third anniversary and 25% vesting on each of the fourth and fifth anniversaries. The options granted vest ratably over three years with the first 33% vesting on the first anniversary of the date of grant.
The following aggregate numbers of restricted stock and options awards were outstanding as of December 31, 2008 for each director in the table:
Board of Directors
The Board of Directors has determined that all our directors, other than Messrs. Conway and Schmidt-Fellner, are independent under the criteria established by Nasdaq, and that all the members of the Audit Committee also meet the additional independence requirements of the Securities and Exchange Commission. None of these directors have a relationship which, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
The Board of Directors held ten meetings during 2008. Independent directors regularly meet in executive session in which only independent directors are present. During 2007, each of our incumbent directors attended at least 75% of the aggregate of all meetings of the Board of Directors and all meetings of the committees of the Board of Directors on which such director served. All Board members whose terms continue after the annual meeting of stockholders are expected to attend the annual meeting of stockholders, subject to special circumstances. Each member of our Board of Directors attended our 2008 annual meeting.
The Board has standing Audit, Compensation, Nominating and Corporate Governance and Risk Policy Committees.
The Audit Committee assists the Board of Directors in fulfilling its oversight responsibilities for accounting and financial reporting compliance, including reviewing the financial information provided to the stockholders and others, our accounting policies, disclosure controls and procedures and internal accounting and financial controls, and the audit process. In undertaking these responsibilities, the Committee meets with management and with the independent auditor (including meeting privately, without management present) to discuss the financial statements, our financial reporting policies and procedures, and our internal control over financial reporting. The Committee reports on such matters to our Board. The Committee reviews the performance of the independent auditor in the annual financial statement audit and assesses the independence of the auditor. The Committee is directly responsible for the appointment (and where appropriate, replacement), evaluation and compensation of the independent auditor.
The Audit Committee operates under a written charter, which is available on our website at www.newstarfin.com. It has adopted procedures for the handling of complaints regarding accounting, internal controls and auditing matters. Until November 20, 2008, the Audit Committee consisted of Messrs. Noonan (Chair), Mr. Gormley, and Ms. OHara. On November 20, 2008 Brian L.P. Fallon was appointed to the Companys Board of Directors and to serve as a member of the Audit Committee. Since that time, the Committee has consisted of Messrs. Noonan (Chair) and Fallon and Ms. OHara. Mr. Noonan and Ms. OHara each qualify as an audit committee financial expert, as defined in Securities and Exchange Commission rules. The Audit Committee met six times during 2008.
Information About our Registered Public Accounting Firm
Upon the recommendation of the Audit Committee, the Board of Directors appointed the independent registered public accounting firm of KPMG LLP as independent auditor to conduct the annual audit of our financial statements for 2008. KPMG LLP is an internationally recognized independent registered public accounting firm that has audited the Companys financial statements since the Companys inception in 2004. Representatives of KPMG LLP are expected to attend the annual meeting and be available to respond to appropriate questions. They will also have the opportunity to make a statement if they desire.
The aggregate fees billed for each of the last two fiscal years for professional services rendered by KPMG LLP were as follows:
Our Audit Committee must pre-approve all audit-related and non-audit (including tax) services performed by the independent auditor in order to assure that these services do not impair the auditors independence. Certain types of services may not be performed by the independent auditor at all, as they are inconsistent with independence. Any such approval must be given by the Audit Committee or by any member or members to whom the Committee has delegated that authority. The Audit Committee does not delegate its responsibility to approve services performed by the independent auditor to any member of management.
The standard applied by the Audit Committee in determining whether to grant approval of any type of non-audit service, or of any specific engagement to perform a non-audit service, is whether the services to be performed, the compensation to be paid therefore and other related factors are consistent with the independent auditors independence under guidelines of the Securities and Exchange Commission, the Public Company Accounting Oversight Board and applicable professional standards. Relevant considerations include whether the work product is likely to be subject to, or implicated in, audit procedures during the audit of our financial statements, whether the independent auditor would be functioning in the role of management or in an advocacy role, whether the independent auditors performance of the service would enhance our ability to manage or control risk or improve audit quality, whether such performance would increase efficiency because of the independent auditors familiarity with our business, personnel, culture, systems, risk profile and other factors, and whether the amount of fees involved, or the proportion of the total fees payable to the independent auditor in the period that is for non-audit services, would tend to reduce the independent auditors ability to exercise independent judgment in performing the audit.
Taking into consideration these fees and services, KPMG LLP has informed the Company that they are not aware of any relationship with the Company that, in their professional judgment, may reasonably be thought to bear on the independence of KPMG LLP.
2008 Audit Committee Report
The Committee reviewed and discussed the audited financial statements for 2008 with management and with KPMG LLP. In this process, the Committee met with KPMG LLP, with and without management present, to discuss the results of their examinations, our critical accounting policies and the overall quality of our financial reporting, as well as our internal control over financial reporting.
The Committee discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees. In addition, the Committee discussed with the independent auditors their independence from us and our management, including the matters in the letter and written disclosures received from KPMG LLP as required by applicable requirements of the Public Company Oversight Board. The Audit Committee also considered whether the independent auditors provision of non-audit services is compatible with maintaining the independent auditors independence.
Based on the Committees discussions with management and the independent auditors and the Committees review of KPMG LLPs report to the Committee, the Committee recommended to the Board of Directors that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ending December 31, 2008 for filing with the Securities and Exchange Commission.
By the Audit Committee,
Frank R. Noonan, Chair
Brian L.P. Fallon
Maureen P. OHara
The Compensation Committee establishes our compensation philosophy and assists the Board in overseeing our compensation policies and practices. The Compensation Committee consists solely of independent directors. The Committee determines and approves the compensation of our executive officers, reviews and approves management incentive compensation policies and programs and equity compensation programs for employees, and administers those policies and programs. Its responsibilities include setting corporate goals and objectives relevant to compensation of executive officers, evaluating the executive officers performance against those goals and objectives at least annually, approving all grants of awards, including the award of shares or share options, under our equity incentive plan, and reviewing the form and amount of director compensation at least annually. The Compensation Committee operates under a written charter, which is available on our website at www.newstarfin.com.
Until November 20, 2008, the Compensation Committee consisted of Messrs. Noonan (Chair), Brooker, and Cooper. On November 20, 2008 Brian L.P. Fallon was appointed to the Companys Board of Directors and to serve as a member of the Compensation Committee. Since that time, the Committee has consisted of Frank R. Noonan (Chair), Kimball T. Brooker Jr., Bradley E. Cooper and Brian L.P. Fallon. The Compensation Committee met six times during 2008.
The Compensation Committee meets early each year to establish the goals and targets applicable to the executive officers annual incentive compensation for the current year, as well as to determine the results for the year that has just ended. Other compensation decisions are made throughout the year, as circumstances warrant. The Committee may delegate to executive officers of the Company the power to make certain awards under the 2006 Incentive Plan other than to directors and executive officers and all determinations under the 2006 Incentive Plan with respect thereto, provided that the Committee fixes the maximum amount of such awards for all such recipients and a maximum for any one recipient. For further information about the Compensation Committees activities, see Compensation Discussion and Analysis above.
To support its decision-making processes, the Compensation Committee may engage an independent compensation consultant with respect to the structure and competitiveness of the Companys executive compensation programs, as well as the programs consistency with the Companys executive compensation philosophy. The Committee has engaged Towers Perrin to assist in the development of our compensation programs. The Committee has the sole authority to hire and fire all outside compensation consultants providing information and advice to the Committee. At the request of the Committee, management will make specific proposals to the Committee regarding compensation for executive officers. Management works with the Committees outside consultant to ensure that the consultant has access to the appropriate information to enable the consultant to complete its analyses for the Committee. Management ensures that the consultants invoices are paid from Company funds. Members of management, including the Chief Executive Officer and Head of Human Resources, participate in Compensation Committee meetings as requested by the Committee to present and discuss the material. All decisions on executive compensation are made by the Compensation Committee in executive session without management present. Managements role in setting 2008 compensation is described in more detail in the Compensation Discussion & Analysis section of this proxy statement.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves on the compensation committee or board of directors of any other company of which any of our directors is an executive officer.
As detailed more fully below in the section entitled Certain Relationships and Transactions, among the investors in a private placement transaction that closed in two separate tranches on November 29, 2007 and January 18, 2008 was Union Square Partners, L.P., Corsair III Financial Services Capital Partners, L.P. and Corsair III Financial Services Offshore 892 Partners, L.P. Bradley E. Cooper, one of our directors and member of our Compensation Committee, is an officer and co-owner of the ultimate entity delegated investment authority for Union Square Partners, L.P., (which has subsequently changed its name to Capital Z Partners III, L.P.) which purchased 4,000,000 of the shares of our common stock issued in the private placement for a total purchase price of $40,000,000. As part of the transaction Union Square Partners, L.P. was also granted nomination and management rights by the Company in separate side letter agreements entered into in connection with the private placement. T. Kimball Brooker, Jr., one of our directors and member of our Compensation Committee, was also an officer of the entity delegated investment authority for the Corsair II Capital portfolio at the time of the private placement. Mr. Brooker was affiliated with Corsair III Financial Services Capital Partners, L.P. and Corsair III Financial Services Offshore 892 Partners, L.P., entities which purchased an aggregate of 4,000,000 of the shares of our common stock issued in the private placement for a total purchase price of $40,000,000.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee assists the Board of Directors in identifying and reviewing individuals qualified to serve as directors and recommending candidates for election to the Board and in developing and overseeing implementation of our corporate governance. The Committee was established following our initial public offering at the end of 2006. Its members are Ms. OHara (Chair) and Messrs. Brooker and Cooper. The Committee operates under a written charter, which is available on our website at www.newstarfin.com. In 2008 the Nominating and Corporate Governance Committee met two times.
The Nominating and Corporate Governance Committee will seek new nominees for election to the Board, when necessary, through a variety of channels, including the engagement of director search firms and less formal recommendations through business and personal contacts. Director search firms engaged by the Committee will generally be paid a retainer to identify and screen candidates meeting specifications established by the Committee for a particular Board nominee search. Such specifications will change from one search to another based on the Committees determination of the Board composition needs at the time a particular search is initiated.
The Nominating and Corporate Governance Committee will evaluate any candidate recommended for nomination as a director, whether proposed by a stockholder or identified through the Committees own search processes, about whom it is provided appropriate information. In evaluating a candidate, the Committee must, at a minimum, determine that the candidate is capable of discharging his or her fiduciary duties to the stockholders of the Company. The Committee will determine whether the particular nomination would be consistent with our governance policies and criteria, including without limitation the following: the candidates current level of, and on-going commitment to, education regarding the responsibilities of a member of a Board of Directors; whether the candidate has the time available to commit to responsibilities as a member of the Board; and the existence of any financial relationship with the Company other than that arising as an employee, as a Board member and/or as a stockholder.
If a candidate is presented to the Nominating and Corporate Governance Committee at a time when it has established specifications for a particular Board search, the Committee will consider whether the candidate satisfies the established specifications. More generally, the Committee will consider a candidates skills, character, leadership experience, business experience and judgment, and familiarity with relevant industry, national and international issues in light of the backgrounds, skills and characteristics of the current Board and
the needs of the Companys business. Finally, the Committee must consider whether a nominee (in conjunction with the existing Board members) will assist the Company in meeting the requirements of applicable law, the rules of the Securities and Exchange Commission, the Nasdaq Global Market listing standards, and the Internal Revenue Code regarding the independence, sophistication and skills of the members of the Board of Directors and the Audit, Compensation and Nominating and Corporate Governance Committees.
In order to recommend a candidate for consideration by the Nominating and Corporate Governance Committee, a stockholder must provide the Committee with the candidates name, background and relationship with the proposing stockholder, a brief statement outlining the reasons the candidate would be an effective director and information relevant to the considerations described above. Such information should be sent to the Nominating and Corporate Governance Committee of NewStar Financial, Inc., 500 Boylston Street, Boston, MA 02116, Attn: Corporate Secretary. In addition to the above, the Committee may request further information, in its discretion.
On February 1, 2009 the Company received from Capital Z Partners III, L.P. their nomination of Bradley E. Cooper as a director pursuant to the nomination rights that the Company had previously granted to Capital Z Partners III, L.P. The Committee has nominated Mr. Cooper for reelection as a director.
Risk Policy Committee
The Risk Policy Committee reports to and assists the Board of Directors in overseeing and reviewing information regarding our credit risk management framework, including the significant policies, procedures and practices employed to manage credit risk. Its members are Messrs. Thornburgh (Chair), Conway and Bralver. The Committee operates under a written charter, which is available on our website at www.newstarfin.com. In 2008 the Committee met three times.
Code of Ethics
We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, and other senior financial officers. This code sets forth written standards that are reasonably designed to deter wrongdoing and to promote: honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in our other public communications; compliance with applicable governmental laws, rules and regulations; the prompt internal reporting of violations of the code to an appropriate person or persons; and accountability for adherence to the code. The text of this code of ethics is posted on our website at www.newstarfin.com in the Investor Relations section under the Corporate Governance sub-section under the heading Committees and Charters, where we may also disclose any amendments to and waivers of the code. At the same location, we have also posted our Code of Business Conduct and ethics, which applies to all our employees and directors.
Certain Relationships and Transactions
The governance rules of the NASDAQ Global Market require us to conduct an appropriate review of any transactions and relationships with the Company in which any of the following have a direct or indirect material interest: any of our directors or executive officers, any nominee for director, and any of the members of their immediate families. Since our initial public offering, the Audit Committee of our Board of Directors has had the responsibility of reviewing and approving any such related person transactions and relationships.
Our Chief Financial Officer is primarily responsible for the development and implementation of processes and controls to obtain information from the directors and executive officers with respect to related person transactions and for then determining, based on the facts and circumstances, whether the Company or a related person has a direct or indirect material interest in the transaction. The Audit Committee will review all such
transactions and relationships of which it has knowledge and will approve or ratify those it considers appropriate. Transactions that are determined to be directly or indirectly material to the Company or a related person will be disclosed in our proxy statement. In the course of its review of a disclosable related person transaction, the Audit Committee will consider the nature of the related persons interest in the transaction, the material terms of the transaction, including, without limitation, the amount and type of transaction, the importance of the transaction to the related person, the importance of the transaction to the Company, whether the transaction would impair the judgment of a director or executive officer to act in the best interest of the Company, and any other matters the Committee deems appropriate. Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction, although such director may be counted in determining the presence of a quorum at a meeting of the Committee that considers the transaction.
Among the investors in the private placement transaction that closed in two separate tranches on November 29, 2007 and January 18, 2008, Union Square Partners, L.P. (now known as Capital Z Partners III, L.P.), Corsair III Financial Services Capital Partners, L.P. and Corsair III Financial Services Offshore 892 Partners, L.P. are entities affiliated with members of our board of directors and, therefore, the private placement and related transactions were approved by an independent committee of our Board of Directors. Bradley E. Cooper, one of our directors, is an officer and co-owner of the ultimate entity delegated investment authority for Union Square Partners, L.P., which subsequently changed its name to Capital Z Partners III, L.P., which purchased 4,000,000 of the shares of our common stock issued in the private placement for a total purchase price of $40,000,000. As part of the transaction Capital Z. Partners III, L.P. was also granted nomination and management rights by the Company in separate side letter agreements entered into in connection with the private placement. Mr. Cooper is also an officer and co-owner of the ultimate entity delegated investment authority for the Capital Z entities that collectively maintained beneficial ownership of 5,709,972 shares of our common stock prior to the private placement. T. Kimball Brooker, Jr., one of our directors, was an officer of the entity delegated investment authority for the Corsair II Capital portfolio. Richard E. Thornburgh, another of our directors, is also an officer of Corsair Capital LLC. At the time of the private placement Mr. Brooker and Mr. Thornburgh were affiliated with Corsair III Financial Services Capital Partners, L.P. and Corsair III Financial Services Offshore 892 Partners, L.P., entities which purchased an aggregate of 4,000,000 of the shares of our common stock issued in the private placement for a total purchase price of $40,000,000.
During 2006, the Company made a loan in the aggregate amount of $16.0 million based on market terms to Advantage Business Media LLC, a company whose Board of Directors includes Blair Schmidt-Fellner, the brother of Peter Schmidt-Fellner, our Chief Investment Officer and member of our Board of Directors. At December 31, 2008, the loan balance outstanding and amount of committed funds were $10.2 million and $11.5 million, respectively. The largest aggregate amount of principal outstanding under this loan during 2008 was $12.2 million. The interest rate on the loan is 9.00%, and Advantage Business Media LLC paid $2,407,813 in aggregate principal payments and $1,017,486 in aggregate interest payments during 2008.
Pursuant to an Investment Management Agreement dated August 3, 2005, the Company serves as investment manager of the NewStar Credit Opportunities Fund, Ltd. (the Fund), a Cayman Islands exempted company limited by shares incorporated under the provisions of The Companies Law of the Cayman Islands. The Fund pays the Company a management fee, payable monthly in arrears, based on the carrying value of the total gross assets attributable to the applicable series of each class of shares at the end of each month. For the years ended December 31, 2008, 2007 and 2006 and for the period August 22, 2005 through December 31, 2005, the Fund paid the Company asset management fees of $6.3 million, $5.3 million, $1.4 million and $.02 million, respectively.
All of the foregoing relationships and transactions were approved by the Audit Committee of our Board of Directors.
Stockholder Communications to the Directors
Security holders may communicate with the NewStar Board of Directors by mailing a communication to the entire Board or to one or more individual directors in care of the Corporate Secretary, NewStar Financial, Inc., 500 Boylston St., Suite 1600, Boston, MA 02116. All communications from security holders to Board members (other than communications soliciting the purchase of products and services) will be promptly relayed to the Board members to whom the communication is addressed.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and persons owning more than 10% of our registered equity securities to file with the SEC reports of their initial ownership and of changes in their ownership of our common stock and to provide us with copies of all Section 16(a) reports they file. To our knowledge, based solely on our review of copies of reports furnished to us and written representations that no other reports were required during 2008, our directors, officers and 10% stockholders complied with all Section 16(a) filing requirements except for the following: OZ Management filed one late Form 4 reporting one transaction.
Deadlines for Stockholder Proposals
Assuming the 2010 annual meeting is not more than 30 days before or 30 days after May 13, 2010:
Notices of stockholder proposals and nominations should be given in writing to NewStar Financial, Inc., at its principal place of business, 500 Boylston St., Suite 1600, Boston, MA 02116, Attn: Corporate Secretary.
NEWSTAR FINANCIAL, INC.
Proxy Solicited on Behalf of the Board of Directors for Annual Meeting on May 13, 2009.
The undersigned stockholder of NewStar Financial, Inc. (NewStar), hereby appoints Timothy J. Conway and John K. Bray, or either of them, with full power of substitution, to be the attorneys and proxies of the undersigned at the Annual Meeting of Stockholders of NewStar to be held at 10:00 a.m. on May 13, 2009 at the offices of Edwards Angell Palmer & Dodge LLP, 111 Huntington Avenue, Boston, Massachusetts, or at any adjournment thereof, on the proposal contained in the Notice of the Annual Meeting of Stockholders, with all powers the undersigned would possess if personally present at said meeting, or at the postponement or adjournment thereof.
You are encouraged to specify your choices by marking the appropriate boxes, SEE REVERSE SIDE, but you need not mark any boxes if you wish to vote in accordance with the Board of Directors recommendation. The proxies cannot vote your shares unless you sign and return this card.
PLEASE VOTE, DATE AND SIGN THIS PROXY ON THE OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
THIS IS YOUR PROXY. YOUR VOTE IS IMPORTANT.
(Continued, and to be signed on reverse side)
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON MAY 13, 2009
This proxy statement and our annual report to security holders are available at www.vfnotice.com/newstarfin
q DETACH PROXY CARD HERE q
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED
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Please sign this proxy exactly as your name appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney, administrator, trustee or guardian, please give full title as such.