UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] 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 under Rule 14a-12
HIGHLAND FLOATING RATE ADVANTAGE FUND
-------------------------------------
(Name of Registrant as Specified in its Charter)
------------------------------------------------
(Name of Person(s) filing Proxy Statement, if other than the Registrant)
Payment of filing fee (check the approximate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
HIGHLAND FLOATING RATE ADVANTAGE FUND
13455 NOEL ROAD, SUITE 800
DALLAS, TEXAS 75240
[_______], 2007
Dear Shareholder:
NOTICE IS HEREBY GIVEN that a SPECIAL MEETING OF SHAREHOLDERS (the
"Special Meeting") of Highland Floating Rate Advantage Fund (the "Fund"), a
Massachusetts business trust, will be held on [_______], 2007 at [_]:00 a.m.,
Central Time, at the offices of Highland Capital Management, L.P., 13455 Noel
Road, Suite 800, Dallas, Texas 75240.
The Special Meeting is being held to consider and vote on the following
proposals:
PROPOSAL 1:
To approve an Agreement and Plan of Reorganization, pursuant to which the
Fund would be reorganized into a newly formed Delaware statutory trust,
also named Highland Floating Rate Advantage Fund; and
PROPOSAL 2:
To transact such other business as may properly come before the Special
Meeting and any adjournments thereof.
Shareholders of record of the Fund at the close of business on [_______],
2007 (the "Record Date") are entitled to notice of, and to vote on, the
proposal(s) at the Special Meeting or any adjournment thereof. Shareholders are
invited to attend in person. If you plan to attend the Special Meeting, please
indicate this on the enclosed proxy card and return it promptly in the enclosed
envelope. You may also cast your vote by completing, signing, and returning the
enclosed proxy card by mail in the envelope provided. Whether you will be able
to attend or not, PLEASE VOTE so that a quorum will be present at the Special
Meeting.
YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. YOU
CAN VOTE EASILY AND QUICKLY BY MAIL OR IN PERSON. A SELF-ADDRESSED, POSTAGE-PAID
ENVELOPE HAS BEEN ENCLOSED FOR YOUR CONVENIENCE. PLEASE HELP AVOID THE EXPENSE
OF A FOLLOW-UP MAILING BY VOTING TODAY!
We appreciate your participation and prompt response in these matters and
thank you for your continued support.
Sincerely,
James D. Dondero
PRESIDENT
IMPORTANT NOTICE
At a Special Meeting of Shareholders of Highland Floating Rate Advantage
Fund (the "Fund") to be held on [_______], 2007 (the "Special Meeting"),
shareholders will have the opportunity to vote on a proposal relating to the
Fund. We recommend that you read the entire enclosed Proxy Statement, which
describes the proposal in more detail. For your convenience, we have provided
some "Questions and Answers" to assist you in reviewing the proposal.
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING
AND THE PROXY STATEMENT
Q. WHY IS THE FUND HOLDING A SPECIAL MEETING?
A. You are being asked to consider a proposal to reorganize the Fund into
a newly formed Delaware statutory trust called Highland Floating Rate
Advantage Fund ("New Fund") ("Reorganization"). The New Fund will have
the same name and a substantially identical investment program as the
Fund. However, it will be organized as a Delaware statutory trust. The
Board of Trustees of the Fund ("Fund Board") and New Fund will be
identical. In addition, the Fund's existing investment adviser,
Highland Capital Management, L.P. ("Highland"), administrator,
independent registered public accounting firm and other service
providers will continue to serve in same roles for the New Fund under
agreements that are substantially identical to the agreements for the
Fund.
Q. WHY SHOULD I VOTE IN FAVOR OF THE REORGANIZATION?
A. The Reorganization is being proposed because Highland and the Fund Board
believe that the Delaware statutory trust form of organization offers a
number of advantages over the Massachusetts form of organization. As a
result of these advantages, the Delaware statutory trust organizational
form has been increasingly used by funds, including a number of the funds
in the family of funds managed by Highland.
Q. HOW DOES THE FUND BOARD RECOMMEND THAT I VOTE?
A. After careful consideration of the proposal, the Fund Board, including
those members who are not "interested persons" (as defined in the
Investment Company Act of 1940, as amended) of the Fund or New Fund,
approved the proposal and recommend that you vote in favor of the
proposal. The reasons for the Fund Board's recommendation are discussed in
more detail in the enclosed Proxy Statement.
Q. WHAT HAPPENS IF THE PROPOSAL IS NOT APPROVED?
A. If shareholders of the Fund do not approve the Reorganization, the Fund
will continue to operate as a Massachusetts business trust.
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Q. WHO CAN I CALL IF I HAVE QUESTIONS?
A. We will be pleased to answer your questions about this proxy solicitation.
Please call the Fund toll free at [______________].
Q. WHO IS ELIGIBLE TO VOTE?
A. You are entitled to vote at the meeting and any adjournment if you owned
shares of the Fund at the close of business on [_______], 2007.
Q. HOW DO I VOTE?
A. You may use the enclosed postage-paid envelope to mail your proxy card or
you may attend the Special Meeting in person. You may also vote by phone
by calling [________] the proxy solicitor, The Altman Group, at [______].
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HIGHLAND FLOATING RATE ADVANTAGE FUND
13455 NOEL ROAD, SUITE 800
DALLAS, TEXAS 75240
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [_______], 2007
To the Shareholders:
A SPECIAL MEETING OF SHAREHOLDERS (the "Special Meeting") of Highland
Floating Rate Advantage Fund (the "Fund"), a Massachusetts business trust, will
be held on [_______], 2007 at [_]:00 a.m., Central Time, at the offices of
Highland Capital Management, L.P., 13455 Noel Road, Suite 800, Dallas, Texas
75240 for the following purposes:
PROPOSAL 1:
To approve an Agreement and Plan of Reorganization, pursuant to which the
Fund would be reorganized into a newly formed Delaware statutory trust,
also named Highland Floating Rate Advantage Fund; and
PROPOSAL 2:
To transact such other business as may properly come before the Special
Meeting and any adjournments thereof.
Shareholders of record at the close of business on [_______], 2007 are
entitled to notice of, and to vote at, the Special Meeting. Your attention is
called to the accompanying Proxy Statement. Regardless of whether you plan to
attend the Special Meeting, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY CARD PROMPTLY so that a quorum will be present and a maximum number of
shares may be voted. If you are present at the Special Meeting, you may change
your vote, if desired, at that time.
By the Order of the Board of
Trustees
M. Jason Blackburn, Treasurer and
Secretary
Dated: [_______], 2007
YOUR BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS
THAT YOU VOTE IN FAVOR OF THE PROPOSAL.
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HIGHLAND FLOATING RATE ADVANTAGE FUND
13455 NOEL ROAD, SUITE 800
DALLAS, TEXAS 75240
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [_______], 2007
This Proxy Statement is furnished in conjunction with the solicitation of
proxies by the Board of Trustees of Highland Floating Rate Advantage Fund (the
"Fund"), a Massachusetts business trust, for voting at a special meeting of
shareholders (the "Special Meeting") of the Fund to be held on [_______], 2007
at [_]:00 a.m., Central Time, at the offices of Highland Capital Management,
L.P., 13455 Noel Road, Suite 800, Dallas Parkway, Dallas, Texas 75240 for the
following purposes:
PROPOSAL 1:
To approve an Agreement and Plan of Reorganization ("Agreement"), pursuant
to which the Fund would be reorganized into a newly formed Delaware
statutory trust ("Reorganization"), also named Highland Floating Rate
Advantage Fund ("New Fund," and together with the Fund, the "Funds"); and
PROPOSAL 2:
To transact such other business as may properly come before the Special
Meeting and any adjournments thereof.
SOLICITATION OF PROXIES
This solicitation of proxies is being made by the Board of Trustees of
the Fund ("Fund Board"). Solicitation of proxies is being made primarily by
the mailing of this Notice and Proxy Statement with its enclosures on or
about [_______], 2007. Shareholders of record at the close of business on
[_______], 2007 (the "Record Date") are entitled to notice of, and to vote
at, the Special Meeting. Shareholders of the Fund whose shares are held by
nominees, such as brokers, can vote their proxies by contacting their
respective nominees. In addition to the solicitation of proxies by mail,
officers and agents of the Fund and its affiliates may, without additional
compensation, solicit proxies by telephone, telegraph, facsimile, or oral
communication. Solicitation may also be made by The Altman Group, a paid
proxy solicitation firm. The costs of soliciting the proxies, estimated to
be approximately $[_____], will be borne by the Fund.
A shareholder may revoke the accompanying proxy at any time prior to its
use by filing with the Fund a written revocation or duly executed proxy bearing
a later date. In addition, any shareholder who attends the Special Meeting in
person may vote by ballot at the Special Meeting, thereby canceling any proxy
previously given. The persons named in the accompanying proxy will vote as
directed by the proxy, but in the absence of voting directions in any proxy that
is signed and returned, they intend to vote "FOR" the proposal and any
adjournments of the Special Meeting needed to achieve a quorum, or if a quorum
is present but sufficient votes to approve the proposal have not been received,
the persons named as proxies may propose one or more adjournments of the Special
Meeting to permit further solicitation of proxies. It is expected that no other
matter will be presented at the Special Meeting.
If you have questions regarding the Special Meeting agenda or the
execution of the proxy, call a representative toll-free at (877) 665-1287.
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VOTING RIGHTS
Shareholders of the Fund at the close of business on the Record Date will
be entitled to be present and to vote at the Special Meeting and any
adjournments thereof with respect to their shares owned as of the Record Date.
Shareholders of the Fund will be entitled to cast one vote on the proposal and
any adjournment of the Special Meeting for each share owned on the Record Date
and a proportionate fractional vote for each fractional share owned on the
Record Date. As of the Record Date, the Fund had the following shares
outstanding, which equals the number of votes to which the shareholders of the
Fund are entitled:
Class A [_________]
Class B [_________]
Class C [_________]
Class Z [_________]
Thirty percent (30%) of the outstanding shares of the Fund on the Record
Date, represented in person or by proxy, must be present to constitute a quorum
for purposes of acting on the proposal.
If a quorum for the Fund is not present at the Special Meeting, or if a
quorum is present but sufficient votes to approve the proposal have not been
received, the persons named as proxies may propose one or more adjournments of
the Special Meeting to permit further solicitation of proxies. Any adjournment
will require the affirmative vote of a majority of the shares represented at the
Special Meeting in person or by proxy. In that case, the persons named as
proxies will vote FOR such an adjournment all proxies that they are required or
entitled to vote for the proposal and will vote AGAINST such an adjournment all
proxies that they are required to vote against the proposal.
The Fund expects that, before the Special Meeting, broker-dealer firms
holding shares of the Fund in "street name" for their customers will request
voting instructions from their customers and beneficial owners. The Fund
understands that under the rules of the New York Stock Exchange broker-dealers
that are members of the New York Stock Exchange will not be able to vote on the
Reorganization on behalf of customers and beneficial owners from whom they have
not received voting instructions.
In determining whether a quorum is present, the Fund will count shares
represented by proxies that reflect abstentions as shares that are present and
entitled to vote. Since these shares will be counted as present, but not as
voting in favor of the proposal, for purposes other than adjournment, these
shares will have the same effect as if they were voted against the proposal.
"Broker non-votes" are shares held by brokers or nominees as to which (i) the
broker or nominee does not have discretionary voting power and (ii) the broker
or nominee has not received instructions from the beneficial owner or other
person who is entitled to instruct how the shares will be voted. "Broker
non-votes" will not be treated as present for any purpose inasmuch as there is
no matter to be considered at the Special Meeting on which they may be voted by
the broker or nominee.
YOU MAY OBTAIN A COPY, WITHOUT CHARGE, OF THE FUND'S ANNUAL REPORT FOR THE
FISCAL YEAR ENDED AUGUST 31, 2006 AND THE SEMI-ANNUAL REPORT FOR THE SIX MONTHS
ENDED FEBRUARY 28, 2007 BY WRITING THE FUND c/o PFPC Inc., P.O. Box 9840,
Providence, RI 02940 or by calling toll-free at (877) 665-1287.
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PROPOSAL 1:
-----------
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION
OVERVIEW
HOW WILL THE FUND BE REORGANIZED?
At meetings of the Fund Board held on December 8, 2006 and April 16, 2007,
the Fund Board considered the Reorganization. Based on factors described below,
the Fund Board approved, on behalf of the Fund, an Agreement and Plan of
Reorganization pursuant to which the Fund would be reorganized into the New
Fund, a newly formed Delaware statutory trust. The form of the Agreement is
attached to this Proxy Statement as Appendix A.
WHAT ARE SHAREHOLDERS BEING ASKED TO APPROVE?
Shareholders of the Fund are now being asked to approve the Agreement. If
shareholders of the Fund approve the Agreement, the Trustees and officers of the
Fund will implement the Agreement on behalf of the Fund at a date and time that
the Fund Board deems appropriate ("Closing Date"). No Closing Date has been set
forth in the Agreement, however, it is currently expected that the
Reorganization for the Fund will take place by the end of [_________]. This date
may be adjusted in accordance with the Agreement.
The Agreement contemplates:
o the transfer of all of the assets of the Fund to the New Fund in
exchange for shares of beneficial interest (referred to simply as
"shares") of the New Fund;
o the assumption by the New Fund of all of the liabilities of the Fund;
o the distribution to shareholders of each class of the Fund, in exchange
for his or her shares of the Fund, of the same number of full and
fractional shares of the corresponding class of the New Fund having an
aggregate net asset value equal to the aggregate net asset value of the
full and fractional shares of that class of the Fund held by that
shareholder at the close of business on the Closing Date; and
o the subsequent complete termination of the Fund.
For a more detailed discussion of the terms of the Agreement, please see
"SUMMARY OF THE AGREEMENT" below.
If approved, the Reorganization will have the following effects with
respect to the New Fund:
(1) The same Trustees of the Fund will serve as Trustees for the New
Fund.
(2) The New Fund will enter into a new investment advisory agreement
with Highland Capital Management, L.P. ("Highland") that is
substantially identical to the agreement currently in place with
respect to the Fund. The investment advisory fee rate for the New
Fund will be the same as that currently in effect for the Fund.
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(3) Distribution plan will be adopted in accordance with Rule 12b-1
under the Investment Company Act of 1940, as amended (the "1940
Act") with respect to the New Fund and its classes, which is
substantially identical to the existing plan.
(4) Shareholders will be deemed to have approved, to the extent
necessary, any actions required to terminate the Fund.
Shareholders of the Fund are not being asked to vote separately on these
matters. Voting "FOR" the proposal constitutes shareholder approval of the
actions described above. More information on each of these matters is discussed
under "COMPARISON OF THE NEW FUND AND THE FUND" below.
WHY IS THE FUND BOARD RECOMMENDING APPROVAL OF THE AGREEMENT?
The Fund Board has determined that investment companies formed as Delaware
statutory trusts have certain advantages over investment companies organized as
Massachusetts business trusts. As a result of these advantages, the Delaware
statutory trust organizational form has been increasingly used by funds,
including a number of the funds in the family of funds managed by Highland. In
unanimously approving the Agreement and recommending that shareholders of the
Fund also approve the Agreement, the Fund Board was provided with and evaluated
such information as it reasonably believed necessary to consider the proposed
Reorganization. The Fund Board determined that (1) the interests of the Fund's
shareholders would not be diluted as a result of the Reorganization and (2) the
Reorganization would be in the best interests of the Fund and its shareholders.
Key factors considered by the Fund Board include:
o In recent years, many mutual funds have reorganized as Delaware
statutory trusts. Highland informed the Fund Board that the
Delaware statutory trust form of organization provides more
flexibility with respect to the administration of the New Fund,
which potentially could lead to greater operating efficiencies and
lower expenses for shareholders of the New Fund; greater certainty
regarding limiting the liability of shareholders for the
obligations of the trust or its trustees; and greater flexibility
in structuring shareholder voting rights and shareholder meetings.
o Highland informed the Fund Board that the New Fund may be able to
realize greater operating efficiencies because the Reorganization
would permit the New Fund to operate under uniform, modern and
flexible governing documents that would streamline the governance
process and could reduce costs associated with Fund governance and
compliance monitoring.
o Highland informed the Fund Board that the Reorganization will not
result in any material change in the investment objectives or
principal investment strategies of the Fund.
o Highland informed the Fund Board that there was no anticipated
material effect on the Fund's annual operating expenses and
shareholder fees and services as a result of the Reorganization.
o Highland informed the Fund Board that there were no anticipated
direct or indirect federal income tax consequences of the
Reorganization to Fund shareholders.
WHAT EFFECT WILL THE REORGANIZATION HAVE ON THE FUND AND ITS SHAREHOLDERS?
The Reorganization will not result in any material change in the
investment objectives or principal investment strategies of the Fund. The
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investment adviser, portfolio managers and other service providers will remain
the same. The services provided by those service providers will be the same as
those currently being provided to the Fund.
Immediately after the Reorganization, shareholders of the Fund will own
shares of the corresponding class of the New Fund that are equal in number and
in value to the shares of the Fund that were held by those shareholders
immediately prior to the closing of the Reorganization ("Closing"). For example,
if you currently own 100 Class A shares of the Fund, immediately after the
Closing, you would own 100 Class A shares of the New Fund having the same net
asset value as your original 100 shares of the Fund.
As a result of the Reorganization, shareholders of the Fund, which is a
Massachusetts business trust, will become shareholders of the New Fund, which
will be a Delaware statutory trust. For a comparison of certain attributes of
these entities that may affect shareholders of the Fund, please see "COMPARISON
OF THE NEW FUND AND THE FUND--HOW WILL THE NEW FUND BE ORGANIZED?" below.
WILL THERE BE ANY SALES LOAD, COMMISSION OR OTHER TRANSACTIONAL FEE IN
CONNECTION WITH THE REORGANIZATION?
No. The full value of your shares of the Fund will be exchanged for shares
of the same class of the New Fund without any sales load, commission or other
transactional fee being imposed.
WHAT WILL BE THE FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION?
As a condition to consummation of the Reorganization, the Fund will
receive an opinion from Kirkpatrick & Lockhart Preston Gates Ellis LLP to the
effect that neither the Fund nor its shareholders will recognize any gain or
loss as a result of the Reorganization. As a general matter, the holding period
for, and the aggregate tax basis in, the New Fund's shares a shareholder
receives pursuant to the Reorganization will include the holding period for, and
will be the same as the aggregate tax basis in, the Fund shares the shareholder
holds immediately prior to the Reorganization (provided the shareholder holds
the shares as capital assets on the Closing Date). Also, the New Fund's holding
period for, and tax basis in, each asset the Fund transfers to it will include
the Fund's holding period for, and be the same as the New Fund's tax basis in,
that asset immediately prior to the Reorganization. Please see "SUMMARY OF THE
AGREEMENT--WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED
REORGANIZATION" below for further information.
WHO IS BEARING THE EXPENSES RELATED TO THE REORGANIZATION?
The Fund will bear the expenses associated with the Reorganization.
SUMMARY OF THE AGREEMENT
WHAT ARE THE MATERIAL TERMS AND CONDITIONS OF THE AGREEMENT?
The terms and conditions under which the Reorganization would be completed
are contained in the Agreement. The following summary of the Agreement is
qualified in its entirety by reference to the Agreement itself, the form of
which is attached to this Proxy Statement as Appendix A.
The Agreement provides that the New Fund will acquire all of the assets of
the Fund in exchange solely for shares of the New Fund and the New Fund's
assumption of the Fund's liabilities. The Agreement further provides that, as
promptly as practicable after the Closing Date, the Fund will distribute to its
9
shareholders, by class, the shares of the New Fund it receives in the
Reorganization.
The number of full and fractional shares of the New Fund you will receive
in the Reorganization will be equal in value, as calculated at the close of
business (4:00 p.m. Eastern Time) on the Closing Date, to the number of full and
fractional shares of the Fund you own on the Closing Date and will be of the
same class as the shares you own on the Closing Date. The New Fund will not
issue certificates representing the New Fund shares issued in connection with
such exchange.
After such distribution, the Fund will take all necessary steps under
applicable state law, its governing documents, and any other applicable law to
effect a complete termination or dissolution of the Fund.
The Agreement may be terminated, and the Reorganization may be abandoned,
at any time prior to its consummation, before or after approval by the Fund
shareholders, if circumstances should develop that, in the Fund Board's opinion,
make proceeding with the Reorganization inadvisable with respect to the Fund.
The completion of the Reorganization also is subject to various conditions,
including completion of all necessary filings with the SEC; the receipt of all
material consents, orders and permits of federal, state, and local regulatory
authorities necessary to consummate the Reorganization; delivery of a legal
opinion regarding the federal tax consequences of the Reorganization; and other
customary corporate and securities matters. Subject to the satisfaction of those
conditions, the Reorganization will take place immediately after the close of
business on the Closing Date. The Agreement provides that either the Fund or the
New Fund may waive compliance with any of the covenants or conditions made
therein for the benefit of the Fund or New Fund, as applicable, if such waiver
will not have a material adverse effect on the Fund's shareholders other than
the requirements that: (1) all necessary filings shall have been made and all
material consents, orders and permits shall have been obtained as contemplated
in the Agreement and (2) the Fund and the New Fund receive an opinion of counsel
that the transactions contemplated by the Agreement will constitute a tax-free
reorganization for federal income tax purposes.
WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION?
The Reorganization is intended to qualify for federal income tax purposes
as a tax-free reorganization under section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code").
As a condition to consummation of the Reorganization, the Fund and New
Fund will receive an opinion from Kirkpatrick & Lockhart Preston Gates Ellis LLP
to the effect that, based on the facts and assumptions stated therein as well as
certain representations of the Fund and New Fund and conditioned on the
Reorganization being completed in accordance with the Agreement, for federal
income tax purposes, with respect to the Reorganization and the Fund
participating therein:
(1) the Reorganization will qualify as a "reorganization" (as defined
in section 368(a)(1)(F) of the Code), and the Fund will be a "party
to a reorganization" (within the meaning of section 368(b) of the
Code);
(2) the Fund will not recognize gain or loss on the Reorganization;
(3) the shareholders will not recognize any gain or loss on the
exchange of shares of the Fund for shares of the New Fund;
(4) the holding period for, and tax basis in, the shares of the New
Fund a shareholder receives pursuant to the Reorganization will
include the holding period for, and will be the same as the
aggregate tax basis in, the shares of the Fund the shareholder
holds immediately prior to the Reorganization (provided the
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shareholder holds the shares as capital assets on the applicable
Closing Date); and
(5) the New Fund's holding period for, and tax basis in, each asset the
Fund transfers to it will include the Fund's holding period for,
and will be the same as the New Fund's tax basis in, that asset
immediately prior to the Reorganization.
Notwithstanding clauses (2) and (5), such opinion may state that no
opinion is expressed as to the effect of the Reorganization on the Fund or the
shareholders with respect to any transferred asset as to which any unrealized
gain or loss is required to be recognized for federal income tax purposes on the
termination or transfer thereof under a mark-to-market system of accounting.
The foregoing description of the federal income tax consequences of the
Reorganization does not take into account the particular circumstances of any
shareholder. If the Reorganization fails to meet the requirements of section
368(a)(1)(F), a shareholder could realize a gain or loss on the transaction.
Shareholders are therefore urged to consult their tax advisers as to the
specific consequences to them of the Reorganization, including the applicability
and effect of state, local, foreign and other taxes.
COMPARISON OF THE NEW FUND AND THE FUND
HOW WILL THE NEW FUND BE ORGANIZED?
The Fund is currently organized as a Massachusetts business trust. If the
Reorganization is approved, the Fund will redomicile by merging into the New
Fund, which will be a Delaware statutory trust governed by its own Declaration
of Trust and By-Laws. The operations of the Fund and New Fund are also governed
by applicable state and federal law.
WHAT WILL HAPPEN TO THE FUND'S CURRENT BOARD OF TRUSTEES?
The Trustees of the New Fund are expected to be the same as the Trustees
of the Fund. The approval of the Agreement will constitute shareholder approval
of the Fund's current Board of Trustees to the same positions with the New Fund.
HOW DOES THE NEW FUND COMPARE TO THE FUND'S CURRENT LEGAL STRUCTURE?
Under the Agreement and Declaration of Trust and By-Laws of the New Fund,
the Trustees of the New Fund will have more flexibility than Trustees of the
Fund and, subject to applicable requirements of the 1940 Act and Delaware law,
broader authority to act, as further described below. The increased flexibility
may allow the Trustees of the New Fund to react more quickly to changes in
competitive and regulatory conditions and, as a consequence, may allow the New
Fund to operate in a more efficient and economical manner and may reduce the
circumstances in which shareholder approval would be required.
Importantly, the Trustees of the New Fund will have the same fiduciary
obligations to act with due care and in the interest of the New Fund and its
shareholders as do the Trustees of the Fund with respect to the Fund and its
shareholders.
In addition, Delaware law may provide more certainty with regard to the
personal liability of Fund shareholders and Trustees of the Fund for the
obligations of the Fund. Under Massachusetts law, Fund shareholders and Trustees
of the Fund could, under certain circumstances, be held personally liable for
the obligations of the Fund. The governing instruments of the Fund, which is a
Massachusetts business trust, included language that limited the liability of
Fund shareholders and Trustees of the Fund but there are no express provisions
11
under Massachusetts law relating to the limitation of liability of shareholders
or trustees. Delaware law contains express language limiting the personal
liability of shareholders and trustees. In addition, consistent with Delaware
law, the governing instruments of the New Fund will include language that limits
the liability of New Fund shareholders and Trustees of the New Fund.
Certain other similarities and differences between these entities are
summarized at Appendix C, although this is not a complete comparison.
Shareholders should refer to the provisions of the governing documents directly
for a more thorough comparison. Copies of the governing documents are available
to shareholders without charge upon written request to 13455 Noel Road, Suite
800, Dallas, Texas 75240.
WHAT WILL HAPPEN TO THE FUND'S CURRENT INVESTMENT ADVISORY AGREEMENT WITH
HIGHLAND?
The approval of the Agreement will constitute shareholder approval of the
New Fund's investment advisory agreement with Highland. This means that if the
Agreement is approved by shareholders and the Reorganization occurs, the New
Fund will enter into a new investment advisory agreement with Highland that will
be substantially identical to the current advisory agreement with the Fund.
WILL THE ADVISORY RATES FOR THE NEW FUND BE DIFFERENT?
No. The investment advisory fee rate for the New Fund will be the same as
the investment advisory fee rate of the Fund. The Fund pays a monthly advisory
fee at an annual rate of 0.65% of the average daily managed assets of the Fund
for the first $1 billion, 0.60% of the average daily managed assets of the Fund
for the next $1 billion, and 0.55% of the average daily managed assets of the
Fund over $2 billion. "Average daily managed assets" of the Fund means the
average daily value of the total assets of the Fund less all accrued liabilities
of the Fund (other than the aggregate amount of any outstanding borrowings
constituting financial leverage).
WHAT WILL HAPPEN TO THE FUND'S CURRENT DISTRIBUTION PLAN?
The Fund currently has a distribution plan in accordance with Rule 12b-1
under the 1940 Act for its Class A, Class B and Class C shares. Approval of the
Agreement will constitute shareholder approval of the distribution plan for the
New Fund. The terms of the distribution plan for the New Fund will be
substantially identical to the current distribution plan for the Fund.
HOW WILL THE FUND'S INVESTMENT OBJECTIVE AND INVESTMENT STRATEGIES CHANGE?
If the Reorganization is approved, the New Fund's investment objective and
investment strategies will remain the same.
THE BOARD RECOMMENDS THAT THE SHAREHOLDERS OF THE FUND VOTE "FOR"
APPROVAL OF THE AGREEMENT.
VOTE REQUIRED
Thirty percent (30%) of the outstanding shares of the Fund on the Record
Date, represented in person or by proxy, must be present to constitute a quorum
for purposes of acting on the proposal. If a quorum is present, a majority of
all votes cast on the proposal is sufficient to approve the Agreement.
12
OTHER BUSINESS
The Board knows of no business other than that specifically mentioned in
the Notice of Special Meeting of Shareholders that will be presented for
consideration at the Special Meeting. If other business should properly come
before the Special Meeting, the proxy holders will vote thereon in their
discretion.
GENERAL INFORMATION
BENEFICIAL OWNERS
Appendix B to this Proxy Statement lists the persons that, to the
knowledge of the Fund, owned beneficially 5% or more of the outstanding shares
of any class of the Fund as of the Record Date. The Trustees and officers of the
Fund, in the aggregate, owned less than one (1) per centum of the Fund's
outstanding shares as of the Record Date. The Fund Board is aware of no
arrangements, the operation of which at a subsequent date may result in a change
in control of the Fund.
EXPENSES
The expenses incurred in connection with the solicitation of proxies for
the Special Meeting, including preparation, filing, printing, mailing,
solicitation, legal fees, out-of-pocket expenses and expenses of any proxy
solicitation firm will be paid by the Fund.
ADVISER
The adviser to the Fund is Highland Capital Management, L.P. Its
business address is 13455 Noel Road, Suite 800, Dallas, Texas 75240.
Highland is registered as an investment adviser under the Investment
Advisers Act of 1940. As of [_____] Highland had $[___] billion in assets under
management. Highland's principal office address is 13455 Noel Road, Suite 800,
Dallas, Texas 75240.
Highland's principal executive officers and general partners and their
principal occupations are shown below. The address of each such person is the
same as that of Highland.
NAME PRINCIPAL OCCUPATION
James Dondero............ President and Managing Partner
Mark Okada............... Chief Investment Officer
Todd Travers............. Senior Portfolio Manager
Strand Advisors, Inc..... General Partner
Highland is controlled by Strand Advisors, Inc., which in turn is
controlled by James Dondero and Mark Okada through their direct and indirect
ownership or control of all of the voting securities of Strand Advisors, Inc.
ADMINISTRATOR/SUB-ADMINISTRATOR
Highland provides administration services to the Fund for a monthly
administration fee at the annual rate of 0.20% of the Fund's average daily
managed assets. Under a separate Sub-Administration Services Agreement, Highland
has delegated certain administrative functions to PFPC Inc. ("PFPC"), 760 Moore
Road, King of Prussia, Pennsylvania, 19406.
13
ACCOUNTING SERVICES AGENT
PFPC provides accounting services to the Fund pursuant to an Accounting
Services Agreement dated October 18, 2004.
DISTRIBUTOR
Fund shares are offered for sale through PFPC Distributors, Inc., 760
Moore Road, King of Prussia, Pennsylvania 19406.
TRANSFER AGENT
PFPC is the agent of the Fund for the transfer of shares, disbursement of
dividends, and maintenance of shareholder accounting records.
CUSTODIAN
PFPC Trust Company, 8800 Tinicum Boulevard, Philadelphia, Pennsylvania
19153, is the custodian of the Fund. PFPC Trust Company, among other things,
attends to the collection of principal and income and payment for and collection
of proceeds of securities and other investments bought and sold.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered public accounting firm of the Fund is
PricewaterhouseCoopers LLP. Its business address is 2001 Ross Avenue, Suite
1800, Dallas, Texas 75201. Representatives of PricewaterhouseCoopers LLP are not
expected to be present at the Meeting but have been given the opportunity to
make a statement if they so desire and will be available should any matter arise
requiring their presence.
SHAREHOLDER PROPOSALS
The Fund is not required to hold annual meetings of shareholders and
currently does not intend to hold such meetings unless shareholder action is
required in accordance with the 1940 Act. A shareholder proposal, to be
considered for inclusion in the proxy statement at any subsequent meeting of
shareholders, must be submitted a reasonable time before the proxy statement for
such meeting is printed and mailed. No shareholder proposals have been submitted
and accordingly any shareholder wishing to make a proposal should do it
sufficiently in advance of any subsequent meeting of shareholders.
SHAREHOLDER COMMUNICATIONS
Shareholders may communicate with the Trustees as a group or individually.
Any such communications should be sent to the Fund Board or to an individual
Trustee in writing, care of the secretary of the Fund, at 13455 Noel Road, Suite
800, Dallas, Texas 75240. The secretary of the Fund may determine not to forward
any letter to the Fund Board or to a Trustee that does not relate to the
business of the Fund.
14
PROXY STATEMENT DELIVERY
"Householding" is the term used to describe the practice of delivering one
copy of a document to a household of shareholders instead of delivering one copy
of a document to each shareholder in the household. Shareholders of the Fund who
share a common address and who have not opted out of the householding process
should receive a single copy of this Proxy Statement together with one proxy
card for each account. If you received more than one copy of this Proxy
Statement, you may elect to household in the future; if you received a single
copy of this Proxy Statement, you may opt out of householding in the future; and
you may, in any event, obtain an additional copy of this Proxy Statement by
writing to the Fund at the following address: 13455 Noel Road, Suite 800,
Dallas, Texas 75240, or by calling the Fund at the following number: (877)
665-1287.
OFFICERS OF THE FUND AND HIGHLAND
The principal executive officers of the Fund are James D. Dondero,
President; Mark Okada, Executive Vice President; R. Joseph Dougherty, Senior
Vice President; M. Jason Blackburn, Secretary and Treasurer; and Michael S.
Minces, Chief Compliance Officer. Each officer's mailing address is c/o Highland
Capital Management, L.P., 13455 Noel Road, Suite 800, Dallas, Texas 75240. Mr.
Dondero is the President and Managing Partner of, and Mr. Okada is the Chief
Investment Officer of, Highland.
PROMPT EXECUTION AND RETURN OF THE ENCLOSED PROXY IS REQUESTED. A
PRE-ADDRESSED, POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
M. Jason Blackburn,
Secretary and Treasurer
[_______], 2007
15
APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("AGREEMENT") is made as of
_________ __, 2007 between HIGHLAND FLOATING RATE ADVANTAGE FUND, a Delaware
statutory trust ("NEW FUND"), and HIGHLAND FLOATING RATE ADVANTAGE FUND, a
Massachusetts business trust ("OLD FUND"). Each of New Fund and Old Fund is
sometimes referred to herein as a "FUND."
Each Fund wishes to effect a reorganizations described in section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended ("CODE"), and
intends this Agreement to be, and adopts it as, a "PLAN OF REORGANIZATION"
within the meaning of the regulations under the Code ("REGULATIONS"). The
reorganization will involve Old Fund's changing its identity, form, and place of
organization by (1) transferring all its assets to New Fund (which is being
established solely for the purpose of acquiring such assets and continuing Old
Fund's business) in exchange solely for voting shares of beneficial interest
("SHARES") in New Fund and New Fund's assumption of all Old Fund's liabilities,
(2) distributing those shares PRO RATA to Old Fund's shareholders in exchange
for their shares therein and in complete liquidation thereof, and (3)
terminating Old Fund (all the foregoing transactions involving Old Fund and New
Fund being referred to herein collectively as a "REORGANIZATION"), all on the
terms and conditions set forth herein.
Each Fund's Board of Trustees (each, a "BOARD"), in each case including a
majority of its members who are not "interested persons" (as that term is
defined in the Investment Company Act of 1940, as amended ("1940 ACT")) thereof,
(1) has duly adopted and approved this Agreement and the transactions
contemplated hereby and (2) has determined that participation in the
Reorganization is in the best interests of its Fund and that the interests of
the existing shareholders of its Fund will not be diluted as a result of the
Reorganization.
Old Fund offers four classes of voting shares of common stock, designated
Class A, Class B, Class C and Class Z shares ("CLASS A OLD FUND SHARES," "CLASS
B OLD FUND SHARES," "CLASS C OLD FUND SHARES" and "CLASS Z OLD FUND SHARES,"
respectively, and collectively, "OLD FUND SHARES"). New Fund will offer four
classes of voting shares of beneficial interest, also designated Class A, Class
B, Class C and Class Z shares ("CLASS A NEW FUND SHARES," "CLASS B NEW FUND
SHARES," "CLASS C NEW FUND SHARES" and "CLASS Z NEW FUND SHARES," respectively,
and collectively, "NEW FUND SHARES"). The rights, powers, privileges, and
obligations of each class of New Fund Shares will be identical to those of the
similarly designated class of Old Fund Shares.
In consideration of the mutual promises contained herein, the Funds agree
as follows:
1. PLAN OF REORGANIZATION AND TERMINATION
--------------------------------------
1.1. Subject to the requisite approval of Old Fund's shareholders and the
terms and conditions set forth herein, Old Fund shall assign, sell, convey,
transfer, and deliver all of its assets described in paragraph 1.2 ("ASSETS") to
New Fund. In exchange therefor, New Fund shall:
(a) issue and deliver to Old Fund the number of full and fractional New
Fund Shares equal to the number of full and fractional Old Fund Shares
then outstanding (all references herein to "fractional" shares meaning
fractions rounded to the third decimal place), and
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(b) assume all of Old Fund's liabilities described in paragraph 1.3
("LIABILITIES").
Such transactions shall take place at the CLOSING (as defined in paragraph 2.1).
1.2 The Assets shall consist of all assets and property that Old Fund owns
at the EFFECTIVE TIME (as defined in paragraph 2.1). These assets and property
include all cash, cash equivalents, securities, commodities, futures interests,
receivables (including interest and dividends receivable), claims and rights of
action, rights to register shares under applicable securities laws, books and
records, and deferred and prepaid expenses shown as assets on Old Fund's books.
1.3 The Liabilities shall consist of all of Old Fund's liabilities, debts,
obligations, and duties of whatever kind or nature existing at the Effective
Time, whether absolute, accrued, or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at that time, and
whether or not specifically referred to in this Agreement. Notwithstanding the
foregoing, Old Fund shall endeavor to discharge all its known liabilities,
debts, obligations, and duties before the Effective Time.
1.4 At or prior to the Closing, New Fund shall redeem the INITIAL SHARE
(as defined in paragraph 5.4) for $10.00 each. At the Effective Time (or as soon
thereafter as is reasonably practicable), Old Fund shall distribute the New Fund
Shares it receives pursuant to paragraph 1.1(a) to its shareholders of record
determined as of the Effective Time (each, a "SHAREHOLDER"), in proportion to
their Old Fund Shares then held of record and in exchange for their Old Fund
Shares, and shall completely liquidate. That distribution shall be accomplished
by NEW FUND's transfer agent's opening accounts on New Fund's share transfer
books in the Shareholders' names and transferring those New Fund Shares thereto.
Pursuant to such transfer, each Shareholder's account shall be credited with the
number of full and fractional New Fund Shares equal to the number of full and
fractional Old Fund Shares that Shareholder holds at the Effective Time. All
issued and outstanding Old Fund Shares, including any represented by
certificates, shall simultaneously be canceled on Old Fund's share transfer
books. New Fund shall not issue certificates representing the New Fund Shares
issued in connection with the Reorganization.
1.5 As soon as reasonably practicable after distribution of the New Fund
Shares pursuant to paragraph 1.4, but in all events within six months after the
Effective Time, Old Fund shall be dissolved, liquidated, and terminated and any
further actions shall be taken in connection therewith as required by applicable
law.
1.6 Any reporting responsibility of Old Fund to a public authority,
including the responsibility for filing regulatory reports, tax returns, and
other documents with the Securities and Exchange Commission ("COMMISSION"), any
state securities commission, any federal, state, and local tax authorities, and
any other relevant regulatory authority, is and shall remain its responsibility
up to and including the date on which it is terminated.
1.7 Any transfer taxes payable on issuance of New Fund Shares in a name
other than that of the registered holder on Old Fund's share transfer books of
the Old Fund Shares actually or constructively exchanged therefor shall be paid
by the person to whom those New Fund Shares are to be issued, as a condition of
that transfer.
2. CLOSING AND EFFECTIVE TIME
--------------------------
2.1 The Reorganization, together with related acts necessary to consummate
the same ("CLOSING"), shall occur at the Funds' offices on [_____], 2007 or at
such other place and/or on such other date as to which the Funds may agree. All
acts taking place at the Closing shall be deemed to take place simultaneously
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immediately after the close of business (I.E., 4:00 p.m., Eastern time) on the
date thereof ("EFFECTIVE TIME").
2.2 Old Fund shall direct the custodian for its assets ("CUSTODIAN") to
deliver at the Closing a certificate of an authorized officer stating that (a)
the Assets have been delivered in proper form to New Fund within two business
days before or at the Effective Time and (b) all necessary taxes in connection
with the delivery of the Assets, including all applicable federal and state
stock transfer stamps, if any, have been paid or provision for payment has been
made. Each of Old Fund's portfolio securities represented by a certificate or
other written instrument shall be transferred and delivered by Old Fund as of
the Effective Time for New Fund's account duly endorsed in proper form for
transfer in such condition as to constitute good delivery thereof. The Custodian
shall deliver as of the Effective Time by book entry, in accordance with the
customary practices of the Custodian and any securities depository (as defined
in Rule 17f-4 under the 1940 Act) in which any Assets are deposited, the Assets
that are deposited with such depositories. The cash to be transferred by Old
Fund shall be delivered by wire transfer of federal funds at the Effective Time.
2.3 Old Fund shall direct its transfer agent to deliver at the Closing a
certificate of an authorized officer stating that Old Fund's share transfer
books contain the number of full and fractional outstanding Old Fund Shares each
Shareholder owned immediately before the Closing.
2.4 Old Fund shall deliver to New Fund at the Closing a certificate of an
authorized officer of Old Fund setting forth information (including adjusted
basis and holding period, by lot) concerning the Assets, including all portfolio
securities, on Old Fund's books immediately before the Effective Time.
2.5 Each Fund shall deliver to the other at the Closing a certificate
executed in its name by its President or a Vice President in form and substance
reasonably satisfactory to the recipient and dated the date of the Closing, to
the effect that the representations and warranties it made in this Agreement are
true and correct at the Effective Time except as they may be affected by the
transactions contemplated by this Agreement.
3. REPRESENTATIONS AND WARRANTIES
------------------------------
3.1 Old Fund represents and warrants to New Fund as follows:
(a) Old Fund is a trust operating under a written instrument or declaration
of trust, the beneficial interest under which is divided into
transferable shares, organized under the laws of the Commonwealth of
Massachusetts (a "MASSACHUSETTS BUSINESS TRUST") that is duly organized
and validly existing under such laws and has the power to own all its
properties and assets and to carry on its business as described in its
current registration statement on Form N-2; and its Agreement and
Declaration of Trust, including all amendments thereto ("DECLARATION"),
is on file with that commonwealth's Secretary of State.
(b) Old Fund is duly registered as a non-diversified, closed-end management
investment company under the 1940 Act, and such registration will be in
full force and effect at the Effective Time and no proceeding has been
instituted to suspend such registration;
(c) At the Effective Time, Old Fund will have good and marketable title to
the Assets and full right, power, and authority to sell, assign,
transfer, and deliver the Assets hereunder free of any liens or other
encumbrances (except securities that are subject to "securities loans"
as referred to in section 851(b)(2) of the Code or that are restricted
to resale by their terms); and on delivery and payment for the Assets,
New Fund will acquire good and marketable title thereto;
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(d) Old Fund is not engaged currently, and Old Fund's execution, delivery,
and performance of this Agreement will not result, in (1) a material
violation of the Declaration or Old Fund's By-Laws (collectively, "OLD
FUND GOVERNING DOCUMENTS") or of any agreement, indenture, instrument,
contract, lease, or other undertaking to which Old Fund is a party or by
which it is bound or (2) the acceleration of any obligation, or the
imposition of any penalty, under any agreement, indenture, instrument,
contract, lease, judgment, or decree to which Old Fund is a party or by
which it is bound;
(e) All material contracts and other commitments of Old Fund (other than
this Agreement and certain investment contracts, including options,
futures, and forward contracts) will terminate, or provision for
discharge of any liabilities of Old Fund thereunder will be made, at or
before the Effective Time, without either Fund's incurring any liability
or penalty with respect thereto and without diminishing or releasing any
rights Old Fund may have had with respect to actions taken or omitted or
to be taken by any other party thereto before the Closing;
(f) No litigation, administrative proceeding, action, or investigation of or
before any court, governmental body, or arbitrator is presently pending
or, to its knowledge, threatened against Old Fund with respect to any of
its properties or assets that, if adversely determined, would materially
and adversely affect its financial condition or the conduct of its
business; and Old Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to
the provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects its business or
its ability to consummate the transactions herein contemplated, except
as otherwise disclosed to New Fund;
(g) Old Fund's Statement of Assets and Liabilities, Statements of Operations
and Changes in Net Assets, and Portfolio of Investments (collectively,
"Statements") at and for the year ended on August 31, 2006 ("2006
STATEMENTS"), have been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm ("PWC"); the 2006
Statements and Old Fund's unaudited Statements at and for the six-month
period ended on February 28, 2007, present fairly, in all material
respects, Old Fund's financial condition as of the respective dates
thereof in accordance with generally accepted accounting principles
consistently applied ("GAAP"); and to Old Fund's management's best
knowledge and belief, there are and will be no known contingent
liabilities, debts, obligations, or duties of Old Fund required to be
reflected on a balance sheet (including the notes thereto) in accordance
with GAAP as of such respective dates that are not disclosed therein;
(h) Since August 31, 2006, there has not been any material adverse change in
Old Fund's financial condition, assets, liabilities, or business, other
than changes occurring in the ordinary course of business, or any
incurrence by Old Fund of indebtedness maturing more than one year from
the date such indebtedness was incurred; for purposes of this
subparagraph, a decline in net asset value per Old Fund Share due to
declines in market values of securities Old Fund holds, the discharge of
Old Fund liabilities, or the redemption of Old Fund Shares by its
shareholders shall not constitute a material adverse change;
(i) At the Effective Time, all federal and other tax returns, dividend
reporting forms, and other tax-related reports of Old Fund required by
law to have been filed by such date (including any extensions) shall
have been filed and are or will be correct in all material respects, and
all federal and other taxes shown as due or required to be shown as due
on such returns and reports shall have been paid or provision shall have
been made for the payment thereof, and to the best of Old Fund's
knowledge, no such return is currently under audit and no assessment has
been asserted with respect to such returns;
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(j) For each taxable year of its operation, Old Fund has met (or, for its
current taxable year, will meet) the requirements of Subchapter M of
Chapter 1 of the Code for qualification as a regulated investment
company ("RIC") and has been (or will be) eligible to and has computed
(or will compute) its federal income tax under section 852 of the Code;
from the time Old Fund's Board approved the transactions contemplated by
this Agreement ("APPROVAL TIME") through the Effective Time, Old Fund
has invested and will invest its assets in a manner that ensures its
compliance with the foregoing; and Old Fund has no earnings and profits
accumulated in any taxable year in which the provisions of Subchapter M
did not apply to it;
(k) All issued and outstanding Old Fund Shares are, and at the Effective
Time will be, duly and validly issued and outstanding, fully paid, and
non-assessable by Old Fund and have been offered and sold in every state
and the District of Columbia in compliance in all material respects with
applicable registration requirements of the Securities Act of 1933, as
amended ("1933 ACT"), and state securities laws; all issued and
outstanding Old Fund Shares will, at the Effective Time, be held by the
persons and in the amounts set forth in Old Fund's share transfer books,
as provided in paragraph 2.3; and Old Fund does not have outstanding any
options, warrants, or other rights to subscribe for or purchase any Old
Fund Shares, nor is there outstanding any security convertible into any
Old Fund Shares;
(l) Old Fund incurred the Liabilities, which are associated with the Assets,
in the ordinary course of its business;
(m) Old Fund is not under the jurisdiction of a court in a "title 11 or
similar case" (as defined in section 368(a)(3)(A) of the Code);
(n) Not more than 25% of the value of Old Fund's total assets (excluding
cash, cash items, and U.S. government securities) is invested in the
stock and securities of any one issuer, and not more than 50% of the
value of such assets is invested in the stock and securities of five or
fewer issuers;
(o) Old Fund's current prospectus and statement of additional information,
and each prospectus and statement of additional information including
Old Fund used at all times prior to the date hereof, (1) conform in all
material respects to the applicable requirements of the 1933 Act and the
1940 Act and the rules and regulations of the Commission thereunder and
(2) as of the date on which they were issued did not contain, and as
supplemented by any supplement thereto dated before or at the Effective
Time do not contain, any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading;
(p) Each of the Proxy Statement (as defined in paragraph 4.5) (other than
written information New Fund provided for inclusion therein) and Old
Fund's registration statement under the 1933 Act and the 1940 Act did
not, on its effective date, and will not, at the Effective Time and at
the time of the Shareholders Meeting (as defined in paragraph 4.1),
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such
statements were made, not misleading;
(q) The New Fund Shares are not being acquired for the purpose of any
distribution thereof, other than in accordance with the terms hereof;
and
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(r) The Old Fund's Declaration permits the Old Fund to vary its
shareholders' investment; and the Old Fund does not have a fixed pool of
assets, but rather is a managed portfolio of securities, and its
investment adviser, Highland Capital Management, L.P. ("ADVISER"), will
have the authority to buy and sell securities for it.
3.2 NEW FUND REPRESENTS AND WARRANTS TO OLD FUND AS FOLLOWS:
(a) New Fund is a statutory trust that is duly organized, validly existing,
and in good standing under the laws of the State of Delaware and has the
power to own all its properties and assets and carry on its business as
a non-diversified, closed-end management investment company; and its
Certificate of Trust has been duly filed in the office of the Secretary
of State thereof;
(b) Immediately after the Effective Time, New Fund will be duly registered
as a non-diversified, closed-end management investment company under the
1940 Act;
(c) New Fund has not commenced operations and will not do so until after the
Closing;
(d) Before the Closing, there will be no (1) issued and outstanding New Fund
Shares, (2) options, warrants, or other rights to subscribe for or
purchase any New Fund Shares, (3) securities convertible into any New
Fund Shares, or (4) any other securities issued by New Fund, except the
Initial Shares;
(e) No consideration other than New Fund Shares (and New Fund's assumption
of the Liabilities) will be issued in exchange for the Assets in the
Reorganization;
(f) New Fund is not engaged currently, and New Fund's execution, delivery,
and performance of this Agreement will not result, in (1) a material
violation of New Fund's Agreement and Declaration of Trust or By-Laws
(collectively, "NEW FUND GOVERNING DOCUMENTS") or of any agreement,
indenture, instrument, contract, lease, or other undertaking to which
New Fund is a party or by which it is bound or (2) the acceleration of
any obligation, or the imposition of any penalty, under any agreement,
indenture, instrument, contract, lease, judgment, or decree to which New
Fund is a party or by which it is bound;
(g) No litigation, administrative proceeding, action, or investigation of or
before any court, governmental body, or arbitrator is presently pending
or, to its knowledge, threatened against New Fund with respect to New
Fund or any of its properties or assets that, if adversely determined,
would materially and adversely affect its financial condition or the
conduct of its business; and New Fund knows of no facts that might form
the basis for the institution of such proceedings and is not a party to
or subject to the provisions of any order, decree, or judgment of any
court or governmental body that materially and adversely affects its
business or its ability to consummate the transactions herein
contemplated, except as otherwise disclosed to Old Fund;
(h) New Fund will meet the requirements of Subchapter M of Chapter 1 of the
Code for qualification as a RIC for its taxable year in which the
Reorganization occurs; and it intends to continue to meet all such
requirements for the next taxable year;
(i) There is no plan or intention for New Fund to be dissolved or merged
into another statutory or business trust or a corporation or any "fund"
thereof (as defined in section 851(g)(2) of the Code) following the
Reorganization;
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(j) Assuming the truthfulness and correctness of Old Fund's representation
and warranty in paragraph 3.1(n), immediately after the Reorganization,
(1) not more than 25% of the value of New Fund's total assets (excluding
cash, cash items, and U.S. government securities) will be invested in
the stock and securities of any one issuer and (2) not more than 50% of
the value of such assets will be invested in the stock and securities of
five or fewer issuers;
(k) The New Fund Shares to be issued and delivered to Old Fund, for the
Shareholders' accounts, pursuant to the terms hereof, (1) will at the
Effective Time have been duly authorized and duly registered under the
federal securities laws (and appropriate notices respecting them will
have been duly filed under applicable state securities laws) and (2)
when so issued and delivered, will be duly and validly issued and
outstanding New Fund Shares and will be fully paid and non-assessable by
New Fund;
(l) The Proxy Statement (only with respect to written information New Fund
provided for inclusion therein) will, on its effective date, at the
Effective Time, and at the time of the Shareholders Meeting, not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which such statements were
made, not misleading; and
(m) The New Fund's Agreement and Declaration of Trust permits the New Fund
to vary its shareholders' investment; and after it commences operations
the New Fund will not have a fixed pool of assets, but rather will be a
managed portfolio of securities, and its investment adviser, the
Adviser, will have the authority to buy and sell securities for it.
3.3 EACH FUND REPRESENTS AND WARRANTS TO THE OTHER AS FOLLOWS:
(a) No governmental consents, approvals, authorizations, or filings are
required under the 1933 Act, the Securities Exchange Act of 1934, as
amended ("1934 ACT"), the 1940 Act, or state securities laws for its
execution or performance of this Agreement, except for (1) the Old
Fund's amendment of its registration statement under the 1933 Act and
the 1940 Act and the amendment of its notification of registration filed
on Form N-8A under the 1940 Act to reflect the Reorganization and any
additional information necessary to comply with Rule 414 under the 1933
Act and (2) such consents, approvals, authorizations, and filings as
have been made or received or as may be required subsequent to the
Effective Time;
(b) The fair market value of the New Fund Shares each Shareholder receives
will be approximately equal to the fair market value of its Old Fund
Shares it actually or constructively surrenders in exchange therefor;
(c) The Shareholders will pay their own expenses (such as fees of personal
investment or tax advisers for advice regarding the Reorganization), if
any, incurred in connection with the Reorganization;
(d) The fair market value of the Assets on a going concern basis will equal
or exceed the Liabilities to be assumed by New Fund and those to which
the Assets are subject;
(e) None of the compensation received by any Shareholder who is an employee
of or service provider to Old Fund will be separate consideration for,
or allocable to, any of the Old Fund Shares that Shareholder held; none
of the New Fund Shares any such Shareholder receives will be separate
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consideration for, or allocable to, any employment agreement, investment
advisory agreement, or other service agreement; and the compensation
paid to any such Shareholder will be for services actually rendered and
will be commensurate with amounts paid to third parties bargaining at
arm's-length for similar services;
(f) Neither Fund will be reimbursed for any expenses incurred by it or on
its behalf in connection with the Reorganization unless those expenses
are solely and directly related to the Reorganization (determined in
accordance with the guidelines set forth in Rev. Rul. 73-54, 1973-1
C.B. 187) ("REORGANIZATION EXPENSES");
(g) Immediately following consummation of the Reorganization, the
Shareholders will own all the New Fund Shares and will own such shares
solely by reason of their ownership of the Old Fund Shares immediately
before the Reorganization; and
(h) Immediately following consummation of the Reorganization, New Fund will
hold the same assets - except for assets used to pay the Funds' expenses
incurred in connection with the Reorganization - and be subject to the
same liabilities that Old Fund held or was subject to immediately before
the Reorganization, plus any liabilities for such expenses; and such
excepted assets, together with the amount of all redemptions and
distributions (other than regular, normal dividends) Old Fund makes
immediately preceding the Reorganization, will, in the aggregate,
constitute less than 1% of its net assets.
(i) The execution, delivery and performance of this Agreement by each Fund
and the consummation of the transactions contemplated hereby are within
such Fund's corporate powers, and do not and will not materially violate
any provision of such Fund's Governing Documents or, to such Fund's
knowledge, violate any obligation of such Fund under the express terms
of any court order that names the Fund and is specifically directed to
it or its property. This Agreement constitutes a valid and binding
agreement of each Fund.
4. COVENANTS
4.1 Old Fund covenants to call a meeting of Old Fund's shareholders to
consider and act on this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated herein ("SHAREHOLDERS
MEETING").
4.2 Old Fund covenants that the New Fund Shares to be delivered hereunder
are not being acquired for the purpose of making any distribution thereof, other
than in accordance with the terms hereof.
4.3 Old Fund covenants that it will assist New Fund in obtaining
information New Fund reasonably requests concerning the beneficial ownership of
Old Fund Shares.
4.4 Old Fund covenants that it will turn over its books and records
(including all books and records required to be maintained under the 1940 Act
and the rules and regulations thereunder) to New Fund at the Closing.
4.5 Each Fund covenants to cooperate in preparing, in compliance with
applicable federal securities laws, a proxy statement on Schedule 14A relating
to the Reorganization to be furnished in connection with Old Fund's Board's
solicitation of proxies for use at the Shareholders Meeting ("PROXY STATEMENT").
4.6 Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
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delivered all assignments and other instruments, and will take or cause to be
taken further action, the other Fund deems necessary or desirable in order to
vest in, and confirm to, (a) New Fund, title to and possession of all the
Assets, and (b) Old Fund, title to and possession of the New Fund Shares to be
delivered hereunder, and otherwise to carry out the intent and purpose hereof.
4.7 New Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1934 Act, the 1940
Act, and state securities laws it deems appropriate to continue its operations
after the Effective Time.
4.8 Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
5. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all its obligations to be performed hereunder at or before the
Closing, (b) all representations and warranties of the other Fund contained
herein being true and correct in all material respects as of the date hereof
and, except as they may be affected by the transactions contemplated hereby, as
of the Effective Time, with the same force and effect as if made at and as of
such time, and (c) the following further conditions that, at or before such
time:
5.1 All necessary filings shall have been made with the Commission and
state securities authorities, and no order or directive shall have been received
that any other or further action is required to permit the parties to carry out
the transactions contemplated hereby. The Commission shall not have issued an
unfavorable report with respect to the Reorganization under section 25(b) of the
1940 Act nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the Commission and state securities authorities) either
Fund deems necessary to permit consummation, in all material respects, of the
transactions contemplated hereby shall have been obtained, except where failure
to obtain same would not involve a risk of a material adverse effect on either
Fund's assets or properties;
5.2 At the Effective Time, no action, suit, or other proceeding shall be
pending (or, to either Fund's knowledge, threatened to be commenced) before any
court, governmental agency, or arbitrator in which it is sought to enjoin the
performance of, restrain, prohibit, affect the enforceability of, or obtain
damages or other relief in connection with, the transactions contemplated
hereby;
5.3 The Funds shall have received an opinion of Kirkpatrick & Lockhart
Preston Gates Ellis LLP ("SPECIAL TAX COUNSEL") as to the federal income tax
consequences mentioned below ("TAX OPINION"). In rendering the Tax Opinion,
Special Tax Counsel may rely as to factual matters, exclusively and without
independent verification, on the representations and warranties made in this
Agreement, which Special Tax Counsel may treat as representations and warranties
made to it, and in separate letters addressed to it. The Tax Opinion shall be
substantially to the effect that, based on the facts and assumptions stated
therein and conditioned on consummation of the Reorganization in accordance with
this Agreement, for federal income tax purposes:
(a) New Fund's acquisition of the Assets in exchange solely for New Fund
Shares and its assumption of the Liabilities, followed by Old Fund's
distribution of those shares pro rata to the Shareholders actually or
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constructively in exchange for their Old Fund Shares, will qualify as a
"reorganization" (as defined in section 368(a)(1)(F) of the Code), and
each Fund will be "a party to a reorganization" within the meaning of
section 368(b) of the Code;
(b) Old Fund will recognize no gain or loss on the transfer of the Assets to
New Fund in exchange solely for New Fund Shares and New Fund's
assumption of the Liabilities or on the subsequent distribution of those
shares to the Shareholders in exchange for their Old Fund Shares;
(c) New Fund will recognize no gain or loss on its receipt of the Assets in
exchange solely for New Fund Shares and its assumption of the
Liabilities;
(d) New Fund's basis in each Asset will be the same as Old Fund's basis
therein immediately before the Reorganization, and New Fund's holding
period for each Asset will include Old Fund's holding period therefor;
(e) A Shareholder will recognize no gain or loss on the exchange of all its
Old Fund Shares solely for New Fund Shares pursuant to the
Reorganization;
(f) A Shareholder's aggregate basis in the New Fund Shares it receives in
the Reorganization will be the same as the aggregate basis in its Old
Fund Shares it actually or constructively surrenders in exchange for
those New Fund Shares, and its holding period for those New Fund Shares
will include, in each instance, its holding period for those Old Fund
Shares, provided the Shareholder holds them as capital assets at the
Effective Time; and
(g) For purposes of section 381 of the Code, New Fund will be treated as if
there had been no Reorganization. Accordingly, the Reorganization will
not result in the termination of Old Fund's taxable year, Old Fund's tax
attributes enumerated in section 381(c) of the Code will be taken into
account by New Fund as if there had been no Reorganization, and the part
of Old Fund's taxable year before the Reorganization will be included in
New Fund's taxable year after the Reorganization.
Notwithstanding subparagraphs (b) and (d), the Tax Opinion may state that no
opinion is expressed as to the effect of the Reorganization on the Funds or any
Shareholder with respect to any Asset as to which any unrealized gain or loss is
required to be recognized for federal income tax purposes at the end of a
taxable year (or on the termination or transfer thereof) under a mark-to-market
system of accounting;
5.4 Before the Closing, New Fund's Board shall have authorized the issuance
of, and New Fund shall have issued, one New Fund Share in each class ("INITIAL
SHARE") to the Adviser or an affiliate thereof in consideration of the payment
of $10.00 each to take whatever action it may be required to take as New Fund's
sole shareholder pursuant to paragraph 5.5;
5.5 New Fund shall have entered into, or adopted, as appropriate, an
investment advisory contract and other agreements and plans necessary for New
Fund's operation as a non-diversified, closed-end management investment company.
Each such contract and agreement shall have been approved by New Fund's Board
and, to the extent required by law (as interpreted by Commission staff
positions), by its trustees who are not "interested persons" (as defined in the
1940 Act) thereof and by the Adviser or its affiliate as New Fund's sole
shareholder; and
5.6 At any time before the Closing, either Fund may waive any of the
foregoing conditions (except those set forth in paragraphs 5.1, 5.3, 5.4, and
5.5) if, in the judgment of its Board, such waiver will not have a material
adverse effect on its Fund's shareholders' interests.
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6. EXPENSES
Subject to complying with the representation contained in paragraph 3.3(f),
the Reorganization Expenses shall be borne by the Old Fund. The Reorganization
Expenses include costs associated with obtaining any necessary order of
exemption from the 1940 Act, preparation of the Post-Effective Amendment,
printing and distributing New Fund's prospectus and Old Fund's proxy materials,
soliciting proxies, legal fees, accounting fees, securities registration fees,
and expenses of holding shareholders meetings. Notwithstanding the foregoing,
expenses shall be paid by the party directly incurring them if and to the extent
that the payment thereof by another person would result in such party's
disqualification as a RIC or would prevent the Reorganization from qualifying as
a tax-free reorganization.
7. ENTIRE AGREEMENT; NO SURVIVAL
Neither Fund has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
Funds. The representations, warranties, and covenants contained herein or in any
document delivered pursuant hereto or in connection herewith shall not survive
the Closing.
8. TERMINATION
This Agreement may be terminated, with respect to one or more
Reorganizations, at any time at or before the Closing:
8.1 By either Fund (a) in the event of the other Fund's material breach of
any representation, warranty, or covenant contained herein to be performed at or
before the Closing, (b) if a condition to its obligations has not been met and
it reasonably appears that such condition will not or cannot be met, (c) if a
governmental body issues an order, decree, or ruling having the effect of
permanently enjoining, restraining, or otherwise prohibiting consummation of the
Reorganization, or (d) if the Closing has not occurred on or before _______ __,
2007, or such other date as to which the Funds agree; or
8.2 By the Funds' mutual agreement.
In the event of termination under paragraphs 8.1(c) or 8.2, neither Fund (nor
its trustees, officers, or shareholders) shall have any liability to the other
Fund.
9. AMENDMENTS
The Funds may amend, modify, or supplement this Agreement at any time in
any manner they mutually agree on in writing, notwithstanding Old Fund's
shareholders' approval thereof; provided that, following such approval no such
amendment, modification, or supplement shall have a material adverse effect on
the Shareholders' interests.
10. SEVERABILITY
Any term or provision of this Agreement that is invalid or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms and provisions of this Agreement in any
other jurisdiction.
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11. MISCELLANEOUS
11.1 This Agreement shall be construed and interpreted in accordance with
the internal laws of the State of Delaware; provided that, in the case of any
conflict between those laws and the federal securities laws, the latter shall
govern.
11.2 Nothing expressed or implied herein is intended or shall be construed
to confer on or give any person, firm, trust, or corporation other than each
Fund and its respective successors and assigns any rights or remedies under or
by reason of this Agreement.
11.3 Notice is hereby given that this instrument is executed and delivered
on behalf of each Fund's trustees solely in their capacities as trustees and not
individually. Each Fund's obligations under this instrument are not binding on
or enforceable against any of its trustees, officers, or shareholders but are
only binding on and enforceable against the Fund's property. Each Fund, in
asserting any rights or claims under this Agreement, shall look only to the
other Fund's property in settlement of such rights or claims and not to the
property of any other series of the other Fund or to such trustees, officers, or
shareholders.
11.4 This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become effective
when one or more counterparts have been executed by each Fund and delivered to
the other Fund. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed and
delivered by its duly authorized officer as of the day and year first written
above.
HIGHLAND FLOATING RATE ADVANTAGE FUND,
a Delaware statutory trust
By:
------------------------------
Name:
Title:
HIGHLAND FLOATING RATE ADVANTAGE FUND,
a Massachusetts business trust
By:
------------------------------
Name:
Title:
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APPENDIX B
BENEFICIAL OWNERS OF FUND SHARES
IN EXCESS OF FIVE PER CENTUM
As of the Record Date, to the knowledge of management of the Fund, no
person owned beneficially more than five (5) per centum of the outstanding
shares of any class of the Fund, except as set forth below:
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner Beneficial Ownership Class
- -------------- ------------------- ------------------- -----------
B-1
APPENDIX C
SUMMARY OF DIFFERENCES BETWEEN SHARES OF
THE FUND AND NEW FUND
The following is a discussion of only certain principal differences between
the governing documents of the Fund, a Massachusetts business trust, and the New
Fund, a Delaware statutory trust, and is not a complete description of either
Fund's governing documents. Shareholders should refer to the provisions of the
governing documents directly for a more thorough comparison. Copies of the
governing documents are available to shareholders without charge upon written
request to 13455 Noel Road, Suite 800, Dallas, Texas 75240.
ORGANIZATION AND CAPITAL STRUCTURE
The Fund is a Massachusetts business trust (an "MBT"). An MBT is an
unincorporated business association organized under a Massachusetts statute
governing business trusts (the "MASSACHUSETTS STATUTE"). The Fund's operations
are governed by its Declaration of Trust (the "MA DECLARATION") and its By-Laws
(the "MA BY-LAWS"), both as they may have been amended from time to time. The
business and affairs of the Fund are managed under the supervision of its Board
of Trustees.
The shares of beneficial interest of the Fund have no par value. The MA
Declaration authorizes an unlimited number of shares, which may be divided into
separate and distinct classes.
The New Fund will be organized as a Delaware statutory trust (a "DST"). A
DST is an unincorporated association organized under the Delaware Statutory
Trust Act (the "DELAWARE ACT"). Like an MBT, the New Fund's operations will be
governed by its Declaration of Trust (the "DE DECLARATION") and its By-Laws (its
"DE BY-LAWS"). The business and affairs of the New Fund also will be managed
under the supervision of its Board of Trustees.
The shares of beneficial interest of the New Fund will be issued without
par value. The DE Declaration will authorize an unlimited number of shares,
which may be divided into separate and distinct classes. The New Fund's classes
will be identical to those of the Fund.
MEETINGS OF SHAREHOLDERS AND VOTING RIGHTS
Neither the MA Declaration nor the MA By-Laws require the Fund to hold an
annual shareholders' meeting. A meeting may be called by the Fund's Board of
Trustees, the president of the Fund, or upon written request of shareholders
entitled to cast at least 10% of all outstanding shares of the Fund.
The MA Declaration provides that, except when a larger quorum is required
by applicable law, 30% of the outstanding shares entitled to vote shall
constitute a quorum at a shareholders' meeting. The MA Declaration provides that
shareholders are entitled to one vote for each whole share that they own, and a
proportionate fractional vote for each fractional share that they hold. When a
quorum is present at a meeting, a majority of the shares voted shall decide any
questions and a plurality of votes shall elect a trustee, except when a larger
vote is required by any provision of the Fund's governing documents or by
applicable law.
Neither the DE Declaration nor the DE By-Laws will require the New Fund to
hold an annual shareholders' meeting. A meeting may be called by the New Fund's
Board of Trustees, the president of the New Fund, the chairperson of the New
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Fund or upon written request of shareholders entitled to cast at least 51% of
all outstanding shares of the New Fund. No meeting may be called at the request
of shareholders to consider any matter that is substantially the same as a
matter voted upon at a shareholders' meeting held during the preceding twelve
(12) months, unless requested by holders of a majority of all outstanding shares
entitled to vote at such meeting.
The DE Declaration provides that, except when a larger quorum is required
by applicable law, 30% of the outstanding shares entitled to vote shall
constitute a quorum at a shareholders' meeting. The DE Declaration provides that
shareholders are entitled to one vote for each whole share that they own, and a
proportionate fractional vote for each fractional share that they hold. When a
quorum is present at a meeting, a majority of the shares voted shall decide any
questions and a plurality of votes shall elect a trustee, except when a larger
vote is required by any provision of the Fund's governing documents or by
applicable law.
DIVIDENDS AND DISTRIBUTIONS
The MA Declaration provides that Fund shareholders are entitled to receive
distributions of income and capital gains in the manner, at the time and on the
terms set by the Fund's Board of Trustees. The DE Declaration provides that the
New Fund shareholders will be entitled to receive dividends and distributions
when, if and as declared by the New Fund's Board of Trustees. For both MBTs and
DSTs, dividends and distributions may be paid in cash, kind or in shares of the
Funds, and the Boards may retain such amounts as they may deem necessary or
desirable for the conduct of each Fund's affairs.
ELECTION OF TRUSTEES
Under the MA Declaration and DE Declaration, there is no cumulative voting
for the election of trustees. The governing instruments for both Funds provide
that a plurality of the shares present and entitled to vote at a meeting will
elect trustees, provided a quorum is present.
LIMITATION OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OFFICERS
The Massachusetts Statute does not include an express provision relating to
the limitation of liability of the beneficial owners or the trustees of an MBT.
The MA Declaration provides all persons extending credit to, contracting with or
having any claim against the Fund shall look only to the assets of the Fund for
payment under such credit, contract or claim; and neither the shareholders nor
the trustees, nor any of the Fund's officers, employees or agents, whether past,
present or future, shall be personally liable therefor. In addition, the MA
Declaration provides that the Fund Trustees are not be responsible or liable for
any neglect or wrongdoing of any officer, agent, employee, adviser or principal
underwriter of the Fund, nor shall any Trustees be responsible for the act or
omission of any other Trustee. A Fund Trustee is not protected against any
liability to which such Trustee would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee. The MA Declaration requires
that notice of such disclaimer of liability be given in each note, bond,
contract, instrument, certificate or undertaking executed or made on behalf of
the Fund
Consistent with the Delaware Act, the DE Declaration provides that
shareholder of the New Fund will not be subject in such capacity to any personal
liability whatsoever to any person in connection with property of the New Fund
or the acts, obligations or affairs of the New Fund. Shareholders of the New
Fund will have the same limitation of personal liability as is extended to
stockholders of a private corporation for profit incorporated under the Delaware
C-2
corporate law. The DE Declaration provides that no Trustee or officer of the New
Fund shall be subject in such capacity to any personal liability whatsoever to
any person, save only liability to the New Fund or its shareholders arising from
bad faith, willful misfeasance, gross negligence or reckless disregard for his
duty to such person; and, subject to the foregoing exception, all such persons
shall look solely to the property of the New Fund for satisfaction of claims of
any nature arising in connection with the affairs of the New Fund. If any
shareholder, Trustee or officer of the New Fund, is made a party to any suit or
proceeding to enforce any such liability, subject to the foregoing exception, he
shall not, on account thereof, be held to any personal liability.
INDEMNIFICATION
The MA Declaration and DE Declaration provides for indemnification of any
shareholder against any loss and expense arising from personal liability solely
by reason of being or having been a shareholder and not because of his or her
acts or omissions or for some other reason.
The MA Declaration provides that the Fund shall indemnify each of its
Trustees and officers (hereinafter referred to as a "COVERED PERSON") against
all liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and counsel
fees reasonably incurred by any Covered Person in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
before any court or administrative or legislative body, in which such Covered
Person may be or may have been involved as a party or otherwise or with which
such person may be or may have been threatened, while in office or thereafter,
by reason of being or having been such a Trustee or officer, except that no
Covered Person shall be indemnified against any liability to the Fund or its
shareholders to which such Covered Person would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office.
The DE Declaration provides that the New Fund will indemnify each of its
Covered Persons against any liabilities and expenses, including amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and
reasonable counsel fees reasonably incurred by such Covered Person in connection
with the defense or disposition of any action, suit or other proceeding, whether
civil or criminal, before any court or administrative or investigative body in
which he may be or may have been involved as a party or otherwise or with which
he may be or may have been threatened, by reason of being or having been such a
Trustee or officer, except with respect to any matter as to which he shall not
have acted in good faith in the reasonable belief that his action was in the
best interest of the New Fund or, in the case of any criminal proceeding, as to
which he shall have had reasonable cause to believe that the conduct was
unlawful, provided, however, that no Covered Person shall be indemnified
hereunder against any liability to any person or any expense of such Covered
Person arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross
negligence, or (iv) reckless disregard of the duties involved in the conduct of
his position (the conduct referred to in such clauses (i) through (iv) being
sometimes referred to herein as "DISABLING CONDUCT"). The rights to
indemnification will continue as to a person who has ceased to be a Trustee or
officer of the New Fund and shall inure to the benefit of his or her heirs,
executors and personal and legal representatives.
PREEMPTIVE, DISSENTER'S AND OTHER RIGHTS
The MA Declaration provides that Fund shareholders shall have no preemptive
or other right to receive, purchase or subscribe for any additional shares or
other securities issued by the Fund. The DE Declaration provides that no
shareholder shall have any preference, preemptive, appraisal, conversion or
exchange rights except as specified by the Board of Trustees.
C-3
AMENDMENTS TO DECLARATION OF TRUST
The MA Declaration may be amended by an instrument in writing signed by a
majority of the trustees when authorized by the majority of outstanding shares.
The Board of Trustees may amend the MA Declaration, without the need for a
shareholder vote, for the purpose of changing the name of the Fund, supplying
any omission, curing any ambiguity or curing, correcting or supplementing any
defective or inconsistent provision in the MA Declaration.
The DE Declaration may be amended by a majority of the Trustees and, if
legally required, by approval of the amendment by shareholders.
INSPECTION RIGHTS
The MA Declaration and MA By-Laws have no provisions regarding inspection
rights. The DE Declaration provides that shareholders may inspect records to the
same extent as is permitted under Delaware corporate law.
TERMINATION AND DISSOLUTION
The MA Declaration provides that the Fund may be terminated at any time by
the vote of shareholders holding at least two-thirds of the shares entitled to
vote or by the Trustees by written notice to the shareholders. The DE
Declaration provides that the New Fund may be dissolved by vote of 80% of the
Trustees.
DERIVATIVE ACTIONS
The MA Declaration does not specifically address derivative actions. Under
the Delaware Act, a shareholder may bring a derivative action if trustees with
authority to do so have refused to bring the action or if a demand upon the
trustees to bring the action is not likely to succeed. A shareholder may bring a
derivative action only if the shareholder is a shareholder at the time the
action is brought and (1) was a shareholder at the time of the transaction
complained about, or (2) acquired the status of shareholder by operation of law
or an Acquiring Trust's governing instrument from a person who was a shareholder
at the time of the transaction.
A shareholder's right to bring a derivative action may also be subject to
additional standards and restrictions set forth in the New Fund's governing
instrument. The DE Declaration provides that a shareholder may bring a
derivative action on behalf of the New Fund only if the shareholder first makes
a pre-suit demand upon its Board of Trustees to bring the action, unless the
pre-suit demand is excused. A pre-suit demand shall only be excused if a
majority of the Board of Trustees, or a majority of any committee established to
consider the merits of the action, has a material personal financial interest in
the action at issue. A trustee shall not be deemed to have a material personal
financial interest in an action by virtue of receiving payment for serving on
the Board of Trustees of the New Fund or of one or more other investment
companies with the same or an affiliated investment adviser or underwriter.
C-4
FORM OF PROXY CARD
IMPORTANT
********************************
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE STRONGLY
URGE YOU TO REVIEW, COMPLETE AND RETURN YOUR BALLOT AS SOON AS POSSIBLE. YOUR
VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. PLEASE SIGN AND
DATE BEFORE MAILING.
This proxy card is SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES of Highland
Floating Rate Advantage Fund for the special meeting of shareholders to be held
at [_]:00 a.m. Central Time, on [_______], 2007 at the offices of Highland
Capital Management, L.P., 13455 Noel Road, Suite 800, Dallas, Texas 75240 (the
"Special Meeting").
The signers of this proxy card hereby appoint Mark Okada and M. Jason Blackburn
as proxies, each with the power to appoint his substitute and to vote the shares
held by the undersigned at the Special Meeting, and at any adjournment thereof,
in the manner directed with respect to the matter referred to in the Proxy
Statement for the Special Meeting, receipt of which is hereby acknowledged.
The Board of Trustees unanimously recommends a vote "FOR" the matter.
HIGHLAND FLOATING RATE ADVANTAGE FUND
Please be sure to sign and date this Proxy.
- --------------------------
Date
- --------------------------
Signature
- --------------------------
Signature (if held jointly)
[ ] CHECK HERE IF YOU PLAN TO ATTEND THE MEETING (___ PERSON(S) WILL ATTEND.)
THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY
WILL BE VOTED "FOR" THE MATTER.
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE FOLLOWING MATTER.
Please indicate your vote by marking the appropriate box. Example: [X]
1. To approve an Agreement and Plan of Reorganization, pursuant to which
Highland Floating Rate Advantage Fund would be reorganized into a newly formed
Delaware statutory trust, also named Highland Floating Rate Advantage Fund.
For Against Abstain
[ ] [ ] [ ]
MARK BOX FOR ADDRESS CHANGE AND NOTE NEW ADDRESS BELOW [ ]
PLEASE VOTE, SIGN AND DATE THIS PROXY CARD AND RETURN IT IN THE ENCLOSED
ENVELOPE.
NOTE: This proxy card must be signed exactly as your name(s) appear(s) hereon.
If you sign as an attorney, executor, guardian or in some representative
capacity as an officer of a corporation, please add titles as such. A proxy with
respect to shares held in the name of two or more persons shall be valid if
executed by one of them unless at or prior to exercise of such proxy Highland
Floating Rate Advantage Fund receives specific written notice to the contrary
from any one of them.