Allied Capital Corp, which is selling itself to rival Ares Capital Corp, plans to declare a special dividend of 20 cents a share if shareholders approve the merger deal.

Allied's board will declare the dividend, which has already been cleared by Ares Capital, to shareholders of record on date of the approval, the companies said in a joint statement.

The company, which has not paid a dividend since the fourth quarter of 2008, will pay the special dividend from the fee savings generated by repaying its private notes in full by Jan. 31.

However, on a conference call with analysts and shareholders, an Allied executive said the company may not be in a position to pay dividend for the rest of the year and potentially longer, if the deal with Ares does not go through.

Business development companies are required by regulators to pay out a certain portion of their taxable income in dividends.

Allied, which has been trying to restructure billions of dollars in debt, said with $570 million in debt maturing next year, it will need to continue selling assets in order to pay down debt.

Allied has divested about $523 million in assets since the transaction was announced in October last year.

Selling the higher cash generating assets would hurt its profits and limit its ability to pay dividends, the company said.

However, the situation could be reversed if the merger with Ares goes through.

The combined company would have access to debt capital and equity markets on more favorable terms and increase liquidity, leading to resumption of dividend payments for Allied shareholders, the two companies said.

We expect the transaction will be accretive to our net asset value and core earnings per share in the first year, Ares Capital Chief Executive Michael Arougheti said on the call.

Ares Capital said it expects about 25 employees from Allied to join them on a permanent basis, and said many will remain for a shorter duration to ensure orderly transition.

No executive officer of Allied will continue in that position upon closing, Ares said.

Allied had earlier shot down a competing bid from Prospect Capital Corp, saying the offer was not superior to its deal with Ares Capital.

Prospect had said it would pursue all available options, including going directly to Allied shareholders, if Allied board declines its offer.

Shares of Allied were up more than 2 percent at $4.52 on the New York Stock Exchange, while those of Ares were trading flat at $13.62 on Nasdaq in afternoon trade. (Reporting by Archana Shankar in Bangalore; Editing by Aradhana Aravindan and Anil D'Silva)