PLEDGE AND ESCROW AGREEMENT
THIS PLEDGE AND ESCROW AGREEMENT (the "Agreement") is made and entered
into as of ________________, 2005 (the "Effective Date") by and among
COMPLIANCE SYSTEMS CORPORATION, a corporation organized and existing under
the laws of the State of Delaware (the "Pledgor"), XXXXXXXXXX EQUITY
PARTNERS, LTD., (the "Pledgee"), and XXXXX XXXXXXXX, ESQ., as escrow agent
("Escrow Agent").
RECITALS:
WHEREAS, in order to secure the full and prompt payment when due
(whether at the stated maturity, by acceleration or otherwise) of all of the
Company's obligations (the "Obligations") to the Pledgee or any successor to
the Pledgee under this Agreement, the Securities Purchase Agreement of even
date herewith between the Pledgor and the Pledgee (the "Securities Purchase
Agreement"), the Convertible Debentures (the "Convertible Debentures") issued
or to be issued by the Company to the Pledgee, either now or in the future,
up to a total of One Million Dollars($1,000,000) of principal, plus any
interest, costs, fees, and other amounts owed to the Pledgee thereunder, the
Security Agreement of even date herewith between the Pledgor and the Pledgee
(the "Security Agreement"), and all other contracts entered into between the
parties hereto (collectively, the "Transaction Documents"), the Pledgor has
agreed to irrevocably pledge to the Pledgee ____________ (________) shares
(the "Pledged Shares") of the Pledgor's common stock.
NOW, THEREFORE, for and in consideration of the mutual covenants,
agreements, warranties, and representations herein contained, and for other
good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
TERMS AND CONDITIONS
1. Pledge and Transfer of Pledged Shares.
1.1. The Pledgor hereby grants to Pledgee a security interest in
all Pledged Shares as security for Pledgor's obligations under the
Convertible Debentures. Simultaneously with the execution of the Transaction
Documents, the Pledgor shall deliver to the Escrow Agent stock certificates
representing the Pledged Shares, together with duly executed stock powers or
other appropriate transfer documents executed in blank by the Pledgor (the
"Transfer Documents"), and such stock certificates and Transfer Documents
shall be held by the Escrow Agent until the full payment of all amounts due
to the Pledgee under the Convertible Debentures and through repayment in
accordance with the terms of the Convertible Debentures, or the termination
or expiration of this Agreement.
2. Rights Relating to Pledged Shares. Upon the occurrence of an
Event of Default (as defined herein), the Pledgee shall be entitled to vote
the Pledged Shares, to receive dividends and other distributions thereon, and
to enjoy all other rights and privileges incident to the ownership of the
Pledged Shares.
3. Release of Pledged Shares from Pledge. Upon the payment of all
amounts due to the Pledgee under the Convertible Debentures by repayment in
accordance with the terms of the Note, the parties hereto shall notify the
Escrow Agent to such effect in writing. Upon receipt of such written notice
for payment of the amounts due to the Pledgee under the Convertible
Debentures, the Escrow Agent shall return to the Pledgor the Transfer
Documents and the certificates representing the Pledged Shares, (collectively
the "Pledged Materials"), whereupon any and all rights of Pledgee in the
Pledged Materials shall be terminated. Notwithstanding anything to the
contrary contained herein, upon full payment of all amounts due to the
Pledgee under the Convertible Debentures, by repayment in accordance with the
terms of the Note, this Agreement and Pledgee's security interest and rights
in and to the Pledged Shares shall terminate.
4. Event of Default. An "Event of Default" shall be deemed to have
occurred under this Agreement upon an Event of Default under the Transaction
Documents.
5. Remedies. Upon and anytime after the occurrence of an Event of
Default, the Pledgee shall have the right to provide written notice of such
Event of Default (the "Default Notice") to the Escrow Agent, with a copy to
the Pledgor. As soon as practicable after receipt of the Default Notice, the
Escrow Agent shall deliver to Pledgee the Pledged Materials held by the
Escrow Agent hereunder. Upon receipt of the Pledged Materials, the Pledgee
shall have the right to (i) sell the Pledged Shares and to apply the proceeds
of such sales, net of any selling commissions, to the Obligations owed to the
Pledgee by the Pledgor under the Transaction Documents, including, without
limitation, outstanding principal, interest, legal fees, and any other
amounts owed to the Pledgee, and exercise all other rights and (ii) any and
all remedies of a secured party with respect to such property as may be
available under the Uniform Commercial Code as in effect in the State of New
Jersey. To the extent that the net proceeds received by the Pledgee are
insufficient to satisfy the Obligations in full, the Pledgee shall be
entitled to a deficiency judgment against the Pledgor for such amount. The
Pledgee shall have the absolute right to sell or dispose of the Pledged
Shares in any manner it sees fit and shall have no liability to the Pledgor
or any other party for selling or disposing of such Pledged Shares even if
other methods of sales or dispositions would or allegedly would result in
greater proceeds than the method actually used. The Escrow Agent shall have
the absolute right to disburse the Pledged Shares to the Pledgee in batches
not to exceed 9.9% of the outstanding capital of the Pledgor (which limit may
be waived by the Pledgee providing not less than 65 days' prior written
notice to the Escrow Agent). The Pledgee shall return any Pledged Shares
released to it and remaining after the Pledgee has applied the net proceeds
to all amounts owed to the Pledgee.
5.1. Each right, power and remedy of the Pledgee provided for in
this Agreement or any other Transaction Document shall be cumulative and
concurrent and shall be in addition to every other such right, power or
remedy. The exercise or beginning of the exercise by the Pledgee of any one
or more of the rights, powers or remedies provided for in this Agreement or
any other Transaction Document or now or hereafter existing at law or in
equity or by statute or otherwise shall not preclude the simultaneous or
later exercise by the Pledgee of all such other rights, powers or remedies,
and no failure or delay on the part of the Pledgee to exercise any such
right, power or remedy shall operate as a waiver thereof. No notice to or
demand on the Pledgor in any case shall entitle it to any other or further
notice or demand in similar or other circumstances or constitute a waiver of
any of the rights of the Pledgee to any other further action in any
circumstances without demand or notice. The Pledgee shall have the full power
to enforce or to assign or contract is rights under this Agreement to a third
party.
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5.2. Demand Registration Rights. In addition to all other
remedies available to the Pledgee, upon an Event of Default, the Pledgor
shall promptly, but in no event more than thirty (30) days after the date of
the Default Notice, file a registration statement to register with the
Securities and Exchange Commission the Pledged Shares for the resale by the
Pledgee. The Pledgor shall cause the registration statement to remain in
effect until all of the Pledged Shares have been sold by the Pledgee.
6. Concerning the Escrow Agent.
6.1. The Escrow Agent undertakes to perform only such duties as
are expressly set forth herein and no implied duties or obligations shall be
read into this Agreement against the Escrow Agent.
6.2. The Escrow Agent may act in reliance upon any writing or
instrument or signature which it, in good faith, believes to be genuine, may
assume the validity and accuracy of any statement or assertion contained in
such a writing or instrument, and may assume that any person purporting to
give any writing, notice, advice or instructions in connection with the
provisions hereof has been duly authorized to do so. The Escrow Agent shall
not be liable in any manner for the sufficiency or correctness as to form,
manner, and execution, or validity of any instrument deposited in this
escrow, nor as to the identity, authority, or right of any person executing
the same; and its duties hereunder shall be limited to the safekeeping of
such certificates, monies, instruments, or other document received by it as
such escrow holder, and for the disposition of the same in accordance with
the written instruments accepted by it in the escrow.
6.3. Pledgee and the Pledgor hereby agree, to defend and
indemnify the Escrow Agent and hold it harmless from any and all claims,
liabilities, losses, actions, suits, or proceedings at law or in equity, or
any other expenses, fees, or charges of any character or nature which it may
incur or with which it may be threatened by reason of its acting as Escrow
Agent under this Agreement; and in connection therewith, to indemnify the
Escrow Agent against any and all expenses, including attorneys' fees and
costs of defending any action, suit, or proceeding or resisting any claim
(and any costs incurred by the Escrow Agent pursuant to Sections 6.4 or 6.5
hereof). The Escrow Agent shall be vested with a lien on all property
deposited hereunder, for indemnification of attorneys' fees and court costs
regarding any suit, proceeding or otherwise, or any other expenses, fees, or
charges of any character or nature, which may be incurred by the Escrow Agent
by reason of disputes arising between the makers of this escrow as to the
correct interpretation of this Agreement and instructions given to the Escrow
Agent hereunder, or otherwise, with the right of the Escrow Agent, regardless
of the instructions aforesaid, to hold said property until and unless said
additional expenses, fees, and charges shall be fully paid. Any fees and
costs charged by the Escrow Agent for serving hereunder shall be paid by the
Pledgor.
6.4. If any of the parties shall be in disagreement about the
interpretation of this Agreement, or about the rights and obligations, or the
propriety of any action contemplated by the Escrow Agent hereunder, the
Escrow Agent may, at its sole discretion deposit the Pledged Materials with
the Clerk of the United States District Court of New Jersey, sitting in
Newark, New Jersey, and, upon notifying all parties concerned of such action,
all liability on the part of the Escrow Agent shall fully cease and
terminate. The Escrow Agent shall be indemnified by the Pledgor, the Company
and Pledgee for all costs, including reasonable attorneys' fees in connection
with the aforesaid proceeding, and shall be fully protected in suspending all
or a part of its activities under this Agreement until a final decision or
other settlement in the proceeding is received.
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6.5. The Escrow Agent may consult with counsel of its own choice
(and the costs of such counsel shall be paid by the Pledgor and Pledgee) and
shall have full and complete authorization and protection for any action
taken or suffered by it hereunder in good faith and in accordance with the
opinion of such counsel. The Escrow Agent shall not be liable for any
mistakes of fact or error of judgment, or for any actions or omissions of any
kind, unless caused by its willful misconduct or gross negligence.
6.6. The Escrow Agent may resign upon ten (10) days' written
notice to the parties in this Agreement. If a successor Escrow Agent is not
appointed within this ten (10) day period, the Escrow Agent may petition a
court of competent jurisdiction to name a successor.
6.7 Conflict Waiver. The Pledgor hereby acknowledges that the
Escrow Agent is general counsel to the Pledgee, a partner in the general
partner of the Pledgee, and counsel to the Pledgee in connection with the
transactions contemplated and referred herein. The Pledgor agrees that in
the event of any dispute arising in connection with this Agreement or
otherwise in connection with any transaction or agreement contemplated and
referred herein, the Escrow Agent shall be permitted to continue to represent
the Pledgee and the Pledgor will not seek to disqualify such counsel and
waives any objection Pledgor might have with respect to the Escrow Agent
acting as the Escrow Agent pursuant to this Agreement.
6.8 Notices. Unless otherwise provided herein, all demands,
notices, consents, service of process, requests and other communications
hereunder shall be in writing and shall be delivered in person or by
overnight courier service, or mailed by certified mail, return receipt
requested, addressed:
If to the Pledgor, to: Compliance Systems Corporation
00 Xxxxx Xxxx
Xxxx Xxxx, XX 00000
Attention: Xxxx Xxxxxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
With a copy to: Xxxxxxxxxxx & Xxxxxxxx Xxxxxxxxx Xxxxxx, LLP
000 Xxxxx Xxxxxxxx Xxxxxxxxx, Xxxxx 0000
Xxxxx, Xxxxxxx 00000
Attention: Xxxxxxx X. Xxxxxx, Esq.
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
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If to the Pledgee: Xxxxxxxxxx Equity Partners, Ltd.
000 Xxxxxx Xxxxxx, Xxxxx 0000
Xxxxxx Xxxx, XX 00000
Attention: Xxxx X. Xxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
With copy to: Xxxxx Xxxxxxxx, Esq.
000 Xxxxxx Xxxxxx, Xxxxx 0000
Xxxxxx Xxxx, XX 00000
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
Any such notice shall be effective (a) when delivered, if delivered by hand
delivery or overnight courier service, or (b) five (5) days after deposit in
the United States mail, as applicable.
7. Binding Effect. All of the covenants and obligations contained
herein shall be binding upon and shall inure to the benefit of the respective
parties, their successors and assigns.
8. Governing Law; Venue; Service of Process. The validity,
interpretation and performance of this Agreement shall be determined in
accordance with the laws of the State of New Jersey applicable to contracts
made and to be performed wholly within that state except to the extent that
Federal law applies. The parties hereto agree that any disputes, claims,
disagreements, lawsuits, actions or controversies of any type or nature
whatsoever that, directly or indirectly, arise from or relate to this
Agreement, including, without limitation, claims relating to the inducement,
construction, performance or termination of this Agreement, shall be brought
in the state superior courts located in Xxxxxx County, New Jersey or Federal
district courts located in Newark, New Jersey, and the parties hereto agree
not to challenge the selection of that venue in any such proceeding for any
reason, including, without limitation, on the grounds that such venue is an
inconvenient forum. The parties hereto specifically agree that service of
process may be made, and such service of process shall be effective if made,
pursuant to Section 8 hereto.
9. Enforcement Costs. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged
dispute, breach, default or misrepresentation in connection with any
provisions of this Agreement, the successful or prevailing party or parties
shall be entitled to recover reasonable attorneys' fees, court costs and all
expenses even if not taxable as court costs (including, without limitation,
all such fees, costs and expenses incident to appeals), incurred in that
action or proceeding, in addition to any other relief to which such party or
parties may be entitled.
10. Remedies Cumulative. No remedy herein conferred upon any party
is intended to be exclusive of any other remedy, and each and every such
remedy shall be cumulative and shall be in addition to every other remedy
given hereunder or now or hereafter existing at law, in equity, by statute,
or otherwise. No single or partial exercise by any party of any right, power
or remedy hereunder shall preclude any other or further exercise thereof.
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11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute the same instrument.
12. No Penalties. No provision of this Agreement is to be
interpreted as a penalty upon any party to this Agreement.
13. JURY TRIAL. EACH OF THE PLEDGEE AND THE PLEDGOR HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT WHICH IT MAY HAVE
TO A TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION BASED
HEREON, OR ARISING OUT OF, UNDER OR IN ANY WAY CONNECTED WITH THE DEALINGS
BETWEEN PLEDGEE AND PLEDGOR, THIS PLEDGE AND ESCROW AGREEMENT OR ANY DOCUMENT
EXECUTED IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO OR
THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER
IN CONTRACT, TORT, EQUITY OR OTHERWISE.
[SIGNATURE PAGE FOLLOWS; REMAINDER OF PAGE INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, the parties hereto have duly executed this Pledge
and Escrow Agreement as of the date first above written.
XXXXXXXXXX EQUITY PARTNERS, LTD.
By: Yorkville Advisors, LLC
Its: General Partner
By:
---------------------------
Name: Xxxx Xxxxxx
Title: Portfolio Manager
COMPLIANCE SYSTEMS CORPORATION
By:
---------------------------
Name: Xxxx Xxxxxxxxx
Title: Chairman
ESCROW AGENT
By:
---------------------------
Name: Xxxxx Xxxxxxxx, Esq.
