Unassociated Document


    NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS DEBENTURE NOR THE
SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.

     

    
      	
              Debenture
      No. 2010-[  ]

            	
              Issuance
      Date: [           ],
      2010

            
	
              $[            
      ]

            	 
      


    

    


    ZBB
Energy Corporation

    10%
Redeemable Subordinated Debenture

    Due
[__________], 2060

     

    Registered
Debentureholder:

    Socius CG
II, Ltd., a Bermuda exempted company

    


    ZBB
Energy Corporation, a Wisconsin corporation (the “Company”), for value
received, hereby promises to pay to the registered holder hereof (the “Debentureholder”),
the principal sum stated above plus accrued interest thereon, on the 50th
anniversary of the issuance date set forth above (the “Maturity Date”), upon
presentation and surrender of this Debenture at the principal corporate office
of the Company, or at such other place as the Debentureholder may designate, in
such coin or currency of the United States of America as at the time of payment
shall be legal tender for the payment of public and private
debts.  This debenture is being issued pursuant to the Securities
Purchase Agreement between the Company and the Debentureholder dated June 16,
2010 (the “SPA”).

     

    Interest
will accrue on a daily basis on the outstanding principal amount of this
Debenture from and including the date hereof at the rate equal to 10.0% per
annum, for the actual number of days elapsed, and shall be payable on the
Maturity Date or at such earlier time that payment of the entire principal sum
has been made or duly provided for.

     

    1.           General.

     

    a.           No
Registration.  The Debentureholder understands that: (i) this
Debenture has not been registered under the Securities Act of 1933, as amended
(the “Act”), or
any other federal or state law governing the issuance or transfer of securities
(herein collectively called the “securities laws”), (ii) the securities laws
impose substantial restrictions upon the transfer of any interest in this
Debenture, and (iii) the Company is not obligated to register this Debenture or
the securities acquired upon conversion of this Debenture under the securities
laws or otherwise take any action to facilitate or make possible any transfer of
any interest in this Debenture.

     

    
      
         


      

      
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    b.           Mutilated, Destroyed, Lost
and Stolen Debentures.  If (i) any mutilated Debenture is
surrendered to the Company or the Company receives evidence to its satisfaction
of the destruction, loss or theft of any Debenture, and (ii) there is delivered
to the Company such security or indemnity as may be required by the Company to
save the Company harmless, then the Company shall execute and deliver, in
exchange for or in lieu of any such mutilated, destroyed, lost or stolen
Debenture, a new Debenture of like tenor and principal amount, bearing a number
not contemporaneously outstanding.  Every new Debenture issued
pursuant to this Section 1(b) in lieu
of any destroyed, lost or stolen Debenture shall constitute an original
additional contractual obligation of the Company, whether or not the destroyed,
lost or stolen Debenture shall be at any time enforceable by anyone, and shall
be entitled to all the benefits hereof equally and proportionately with any and
all other Debentures duly issued.  The provisions of this Section 1(b) are
exclusive and shall preclude (to the extent lawful) all other rights and
remedies with respect to the replacement or payment of mutilated, destroyed,
lost or stolen Debentures.

     

    c.           Payment of Interest;
Interest Rights Preserved.  Interest on this Debenture which is
payable, and is punctually paid or duly provided for, on any interest payment
date shall be paid to the person in whose name this Debenture (or one or more
predecessor Debentures) is registered at the close of business on the business
day immediately prior to such payment date.  Each Debenture delivered
for transfer or in exchange for or in lieu of any other Debenture shall carry
the rights to interest accrued and unpaid, and to accrue, which were carried by
such other Debenture.

     

    d.           Persons Deemed
Owners.  The Company, and any agent of the Company, may treat
the person in whose name this Debenture is registered as the owner of this
Debenture for the purpose of receiving payment of principal and, subject to
Section 1(c),
interest on this Debenture and for all other purposes whatsoever, whether or not
this Debenture be overdue, and neither the Company nor any agent of the Company
shall be affected by notice to the contrary.

     

    e.           Cancellation.  This
Debenture when surrendered for payment, redemption, transfer, exchange or
conversion shall be delivered to the Debenture registrar for cancellation. The
Company may at any time deliver to the Debenture registrar for cancellation any
Debentures previously authenticated and delivered hereunder which the Company
may have acquired in any manner whatsoever, and all Debentures so delivered
shall be promptly cancelled by the Debenture registrar. No Debentures shall be
issued in lieu of or in exchange for any Debentures cancelled as provided in
this Section
1(e), except as expressly permitted. All cancelled Debentures held by the
Debenture registrar shall be disposed of as directed by the
Company.

     

    2.           Conversion.

     

    a.           Automatic Conversion to
Preferred Stock.

     

    (i)           Automatic
Conversion.  Immediately upon the authorization of shares of
Series A Preferred Stock of the Company, $0.01 par value per share (“Preferred Stock”), in
accordance with a Certificate of Designations in a form mutually agreed between
the Company and the Debentureholder prior to the issuance of this Debenture, the
entire face amount of this Debenture shall automatically convert into fully paid
and nonassessable shares of Preferred Stock.  The number of shares of
Preferred Stock issuable upon any conversion of this Debenture at any given time
shall be determined by dividing the principal amount of this Debenture, together
with any accrued but unpaid interest thereon, by $10,000.00.

     

    
      
         


      

      
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    (ii)           No
Registration.  The Debentureholder, by purchasing this
Debenture, understands that the Preferred Stock to be issued pursuant to the
conversion rights granted hereunder shall not have been registered under the
Act, nor is it the intent of the Company to so register said Preferred Stock and
that, to the extent required by applicable law, the certificates evidencing said
Preferred Stock shall bear a legend indicating that said shares are “restricted
securities” within the meaning of Rule 144 under the Act.

     

    (iii)          Restrictions on
Transfer.  The Debentureholder further understands that until
and unless said Preferred Stock is registered under the Act, the Act may be
construed to prohibit any public sale or transfer of any of the Preferred Stock
unless such public sale or transfer is effected in compliance with all
applicable laws.

     

    b.           Fundamental
Change.

     

    (i)           Conditional Conversion
Election.  For purposes of this Debenture, a “Fundamental Change”
shall be deemed to have occurred if there shall be: (A) any consolidation to
which the Company shall be a party, (B) any merger in which the Company shall
not survive, (C) any merger in which the Common Stock outstanding immediately
prior to such merger shall be exchanged for or converted into any cash,
securities or other property, (D) any complete liquidation of the Company or (E)
any partial liquidation of the Company for which the approval of the holders of
Common Stock is required or which is involuntary.  In connection with
any Fundamental Change, other than a merger of the Company for the purpose of
reincorporation in another jurisdiction without a material change in stock
ownership, the Debentureholder shall have the right at any time before the
consummation of the Fundamental Change to make a conditional election to convert
all or such portion of this Debenture as the Debentureholder shall desire into
Preferred Stock if the Fundamental Change is consummated and to participate
therein as if the Debentureholder had held such Preferred Stock on the date as
of which the holders of Preferred Stock entitled to participate therein shall be
selected, but not to convert this Debenture if the Fundamental Change is not
consummated. This Debenture converted pursuant to any conditional election made
pursuant to rights granted in this Section 2(b)(i) shall
be deemed to have been converted on the record date (or if there be no record
date, the point in time) used to determine the holders of Common Stock entitled
to participate in the Fundamental Change or other event giving rise to such
conditional election.

     

    (ii)           Fundamental Change
Adjustment.  As a condition to the consummation of any
Fundamental Change, lawful and adequate provision shall be made whereby the
Debentureholder, if such Debentureholder shall not make a conditional conversion
election pursuant to Section 2(b)(i) ,
will immediately after the consummation of such Fundamental Change have the
right to convert this Debenture into such shares of stock, securities or assets
which such Debentureholder could have received in such Fundamental Change if
such Debentureholder had made a conditional conversion of this Debenture
pursuant to Section
2(b)(i) . In each such case appropriate provision will be made with
respect to such Debentureholder’s rights and interests to the end that the
provisions of Section
2 shall thereafter be applicable in relation to any shares of stock,
securities or assets thereafter deliverable upon the conversion of this
Debenture to provide such Debentureholder with protections after such
Fundamental Change substantially equivalent to the protections provided by Section 2 prior to
such Fundamental Change.

     

    
      
         


      

      
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    3.           Subordination.

     

    a.           Extent of
Subordination.  The indebtedness evidenced by this Debenture
shall be subordinate in right of payment to any given Senior Obligation (as
defined below) in the manner and to the extent provided (i) in this Section 3 and (ii) in
any written commitment which the Company may at any time make in good faith with
respect to the given Senior Obligation.  Without limiting by
implication the generality of the preceding sentence, the Company shall have the
right to enter into commitments with respect to any given Senior Obligation
(either at the time such Senior Obligation shall be incurred or at any time
thereafter) which may preclude the Company from making payments on this
Debenture until all amounts on the Senior Obligation are satisfied or impose
other restrictions on the payment of this Debenture and all other persons
interested in this Debenture to the extent provided in such commitment, provided
that such commitment shall be made in good faith.

     

    b.           Senior
Obligations.  Any obligation of any kind that the Company may
at any time have (including, but not limited to, any obligation for borrowed
money, any contractual obligation, any guarantee of any kind, and any other
contingent obligation) shall be deemed to be a “Senior Obligation”
unless the terms governing such obligation expressly provide that such
obligation should not be deemed a “Senior Obligation” for purposes of this
Debenture.

     

    c.           Reorganization
Distribution.  If any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, is
made to creditors upon any total liquidation of the Company, whether voluntary
or involuntary, or upon any liquidation or reorganization of the Company in
bankruptcy, insolvency, receivership or other proceedings, then all amounts due
upon all Senior Obligations owed by the Company shall first be paid in full or
payment thereof duly provided for before the Debentureholder is entitled to
receive or retain any assets so paid or distributed in respect hereof; and upon
such liquidation or reorganization any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
which the Debentureholder would be entitled except for these provisions shall be
paid by the Company, or by any receiver, trustee in bankruptcy, liquidating
trustee, agent or other person making such payment or distribution, directly to
the holders of Senior Obligations (pro rata on the basis of the respective
amounts of the Senior Obligations held by such holders or their
representatives), until all such Senior Obligations are paid in full, in money
or money’s worth, after giving effect to any concurrent payment or distribution
to or for the holders of Senior Obligations, before any payment or distribution
is made to the Debentureholder. If any holder of any Senior Obligation receives
any payment or distribution which, except for the provisions of this Section 3(c), would
have been payable or deliverable with respect to this Debenture, the
Debentureholder shall be subrogated to the rights of the holder of such Senior
Obligation against the Company to the extent of the amount so paid.

     

    
      
         


      

      
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    d.           Rights
Reserved.  The provisions of this Section 3 are for the
purpose of defining the relative rights of the holders of Senior Obligations on
the one hand and the holder of this Debenture on the other
hand.  Nothing herein shall impair the Company’s obligation to the
holder of this Debenture to pay to such Debentureholder principal and interest
in accordance with the terms of this Debenture.  An amount shall be
deemed “past due” for the purpose of this Debenture if it shall not be paid when
its payment would have been due if this Section 3 had not
been applicable.  No provision of this Section 3 shall be
construed to prevent the holder of this Debenture from exercising all remedies
otherwise available under the terms of this Debenture or under applicable law
upon the occurrence of Default (including, but not limited to, acceleration of
the maturity of principal owed on this Debenture), no portion of the amounts
owed on this Debenture shall be paid by the Company until and unless such
payment shall be permitted under this Section 3 and any
commitment made in accordance with clause (a) of this Section
3.  Nothing in this Section 3 shall
prevent conversion at any time of all or any part of the principal balance of
this Debenture into Common Stock.

     

    4.           Remedies.

     

    a.           Events of
Default.  A “Default” shall be
deemed to exist for purposes of this Debenture so long as:

     

    (i)           any
interest owed shall be past due and shall have been past due for 30 days;
or

     

    (ii)           the
principal owed on this Debenture shall be past due; or

     

    (iii)         the
Company shall be in breach of any other covenant, agreement or warranty of the
Company in this Debenture, and such breach shall have continued for at least 30
days after there has been given to the Chief Financial Officer or Treasurer of
the Company, by the Debentureholder, a written notice specifying such breach and
requiring it to be remedied and stating that such notice is a “notice of
default” hereunder; or

     

    (iv)         a
decree or order by a court having jurisdiction in the premises shall have been
entered adjudicating the Company a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization of the Company under the
Federal Bankruptcy Code or any other similar applicable Federal or state law,
and such decree or order shall have been in effect for a period of 60 days; or a
decree or order of a court having jurisdiction in the premises for the
appointment of a receiver or liquidator or trustee or assignee in bankruptcy or
insolvency of the Company or of any property of the Company or for the winding
up or liquidation of its affairs shall be in effect and shall have been in
effect for a period of 60 days; or

     

    (v)          the
Company or any subsidiary shall have instituted proceedings to be adjudicated a
voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding
against it, or shall have filed a petition or answer or consent seeking
reorganization under the Federal Bankruptcy Code or any other applicable Federal
or state law, or shall have consented to the filing of any such petition, or
shall consent to the appointment of a receiver or liquidator or trustee or
assignee in bankruptcy or insolvency of it or of its property, or shall have
made an assignment for the benefit of creditors, or shall have admitted in
writing its inability to pay its debts generally as they become due, or
corporate action shall be taken by the Company or any subsidiary in furtherance
of any of the aforesaid purposes.


    
      
         


      

      
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    A default
shall be deemed to exist whenever prescribed by the terms of this Section 4(a)
regardless of whether such Default shall be voluntary or involuntary or shall
result from compliance with any legal requirement or any other circumstance of
any kind.

     

    b.           Acceleration of
Maturity.  Whenever a Default exists, the Debentureholder may
declare the principal of this Debenture to be due and payable immediately, by a
notice in writing to the Chief Financial Officer or Treasurer of the Company,
and upon any such declaration such principal (subject to the provisions of Section 3) shall
become immediately due and payable.

     

    c.           Collection of Indebtedness
and Suits for Enforcement.  The Company covenants that if the
principal or interest shall become past due, the Company shall pay interest upon
the overdue principal and, to the extent that payment of such interest shall be
legally enforceable, upon overdue installments of interest, at the rate borne by
this Debenture and such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Debentureholder. If the Company fails to pay
such amount forthwith upon such demand, the Debentureholder may institute a
judicial proceeding for the collection of the sums so due and unpaid, and may
prosecute such proceeding to judgment or final decree, and may enforce the same
against the Company or any other obligor upon the Debenture and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the property of the Company or any other obligor upon the Debenture, wherever
situated.

     

    d.           Unconditional Right of
Debentureholder to Received Principal and
Interest.  Notwithstanding any other provision in this
Debenture (with the exception of the subordination provisions contained in Section 3), the
Debentureholder shall have the right (except as otherwise provided in Section 3) which is
absolute and unconditional to receive payment of the principal of and, subject
to Section
1(c), interest on the stated maturity (or, in the case of redemption, on
the redemption date) and to institute suit for the enforcement of any such
payment, and such right shall not be impaired without the consent of the
Debentureholder.

     

    e.           Rights and Remedies
Cumulative.   No right or remedy herein conferred upon or
reserved to the Debentureholder is intended to be exclusive of any other right
or remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise.  The
assertion or employment of any right or remedy hereunder, or otherwise, shall
not prevent the concurrent assertion or employment or any other appropriate
right or remedy.

     

    f.     
      Governing Law; Dispute
Resolution.  This Debenture shall be governed by and construed
and enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Debenture shall be governed by,
the internal laws of the State of New York, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.

     

    
      
         


      

      
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    g.           Delay or Omission Not
Waiver.  No delay or omission of any Debentureholder to
exercise any right or remedy accruing upon any Default shall impair any such
right or remedy or constitute a waiver of any such Default or an acquiescence
therein.  Every right and remedy given by this Debenture or by law to
the Debentureholder may be exercised from time to time, and as often as may be
deemed expedient, by the Debentureholder.

     

    h.           Undertaking for
Costs. The parties to this Debenture agree that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Debenture, an undertaking of any party litigant to pay the costs of such
suit, and that such court may in its discretion assess reasonable costs,
including reasonable attorneys’ fees, against any party litigant in such suit,
having due regard to the merits and good faith of the claims or defenses made by
such party litigant.

     

    i.       
    Waiver of Stay or Extension
Laws.  The Company covenants (to the extent that it may
lawfully do so) that it will not at any time insist upon, or plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Debenture, and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and covenants that it will not hinder, delay or
impede the execution of any power herein granted, but will suffer and permit the
execution of every such power as though no such law had been
enacted.

     

    5.           Redemption.

     

    a.           Corporation’s Redemption
Option.  Upon or after the fourth anniversary of the initial
Issuance Date, the Corporation shall have the right, at the Corporation’s
option, to redeem all or a portion of the Debentures, at a price per share (the
“Debenture Redemption
Price”) equal to 100% of the Debenture Liquidation Value, plus accrued
interest thereon.

     

    b.           Early
Redemption.  Prior to redemption pursuant to Section 5(a) hereof,
the Corporation shall have the right, at the Corporation’s option, to redeem all
or a portion of the Debentures, at a price per share equal to: (i) 127% of the
Debenture Liquidation Value if redeemed on or after the first anniversary but
prior to the second anniversary of the initial Issuance Date, (ii) 118% of the
Debenture Liquidation Value if redeemed on or after the second anniversary but
prior to the third anniversary of the initial Issuance Date, and (iii) 109% of
the Debenture Liquidation Value if redeemed on or after the third anniversary
but prior to the fourth anniversary of the initial Issuance Date.

     

    c.           Mandatory
Redemption.  If the Corporation determines to liquidate,
dissolve or wind-up its business and affairs, or effect any Deemed Liquidation
Event, the Corporation shall redeem the Debentures at the Debenture Redemption
Price (plus the premium for early redemption pursuant to Section 5(b) hereof
if applicable).

     

    d.           Mechanics of
Redemption.  If the Corporation elects to redeem any of the
Debenture then outstanding, it shall do so by delivering written notice thereof
via facsimile and overnight courier (“Notice of Redemption at
Option of Corporation”) to each Holder, which Notice of Redemption at
Option of Corporation shall indicate (A) the number of Debenture that the
Corporation is electing to redeem and (B) the Corporation Redemption Price (plus
the premium for early redemption pursuant to Section 5(b) if
applicable).

     

    
      
         


      

      
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    e.           Payment of Redemption
Price.  Upon receipt by any Holder of a Notice of Redemption at
Option of Corporation, such Holder shall promptly submit to the Corporation such
Holder’s Debentures.  Upon receipt of such Holder’s Debentures, the
Corporation shall pay the Debenture Redemption Price (plus the premium for early
redemption pursuant to Section 5(b) if
applicable), to such Holder, at the Corporation’s option either (i) in cash, or
(ii) by offset against any outstanding note payable from Holder to the
Corporation that was issued by Holder in connection with the exercise of the
additional purchase right under the SPA or warrants issued in connection
therewith by such Holder.

     

    f.           Payment
Date.  For purposes of this Debenture, the “Payment Date” shall
be the later of the Redemption Date or the time this Debenture shall be
surrendered to the Company.  If this Debenture shall not be paid upon
the Payment Date, the principal shall, until paid, bear interest from the
Redemption Date at the rate borne by this Debenture.  In the event of
redemption by the Company, the Company hereby retains a right to offset against
the amount to be paid by the Company to the Debentureholder upon such redemption
any amounts owed to the Company by the Debentureholder as of the Payment Date
notwithstanding the manner in which such debt of the Debentureholder to the
Company may have been incurred.

     

    g.           Cancellation of Redeemed
Debenture.  When and if this Debenture is redeemed and paid
under the provisions of this Section 5, this
Debenture shall forthwith be cancelled by the Company.

     

    
      
         


      

      
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    IN
WITNESS WHEREOF, ZBB Energy Corporation has caused this Debenture to be signed
in its name by the signature of its President and attested by the signature of
its Secretary.

     

    ZBB
ENERGY CORPORATION

    


    
      
        
          
            
              	
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                      ATTEST:

                    
	 
      	 
      
	
                      By: