PLEDGE AND ESCROW AGREEMENT
THIS PLEDGE AND ESCROW AGREEMENT (the "Agreement") is made and entered
into as of March 8, 2006 (the "Effective Date") by and among COMPLIANCE SYSTEMS
CORPORATION, a corporation organized and existing under the laws of the State of
Nevada (formerly GSA Publications, Inc.) (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 Pledgor to the Pledgee in connection with the Securities Purchase Agreement,
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 Twenty
Million (20,000,000) 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 Convertible Debentures, 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 Convertible Debentures, 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.
5.1. Upon and anytime after the occurrence of an Event of Default,
the Pledgee shall have the right acquire the Pledged Shares in accordance with
the following procedure: (a) the Pledgee shall provide written notice of such
Event of Default (the "Default Notice") to the Escrow Agent, with a copy to the
Pledgor; (b) in a Default Notice the Pledgee shall specify the number of Pledged
Shares to be issued to the Plegdee, provided however, that the Pledgee shall not
have the right to acquire such number of Pledged Shares which would cause the
Pledgee, together with its affiliates, to beneficially own in excess of 9.99% of
the outstanding capital of the Pledgor (unless the Pledgee waives such
limitation by providing 65 days' advance written notice); and (c) as soon as
practicable after receipt of a Default Notice, the Escrow Agent shall deliver
the specified number of Pledged Shares along with the applicable Transfer
Documents to the Pledgor's Transfer Agent with instructions to issue such
Pledged Shares to the Pledgee in accordance with the Irrevocable Transfer Agent
Instructions of even date herewith, among the Pledgee, the Pledgor, the Escrow
Agent, and the Transfer Agent.
5.2. Upon receipt of the Pledged Shares issued to the Pledgee, 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 Pledgor shall remain liable for shortfalls, if any, that may exist
after the Pledgee has exhausted all remedies hereunder.
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5.3. 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.
5.4. 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.
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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.
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
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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
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.
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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.
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:
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Name: Xxxx Xxxxxx
Title: Portfolio Manager
COMPLIANCE SYSTEMS CORPORATION
By:
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Name: Xxxx Xxxxxxxxx
Title: Chairman
ESCROW AGENT
By:
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Name: Xxxxx Xxxxxxxx, Esq.
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