Document:

velatel_8k-ex1001.htm

EXHIBIT 10.1

   

BUSINESS COOPERATION AGREEMENT

Dated as of December 6, 2011

between

7L Capital Partners Emerging Europe LP

(7LCPEELP)

Karlo Vlah

Đurđa Vlah

Josip Vlah

and

VelaTel Global Communications, Inc.

(“Investor”)

With respect to the participation of the Investor in the Share Capital of

Herlong Investments Limited

(“Company”)

 

 

 

     

  

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BUSINESS COOPERATION AGREEMENT

    

THIS BUSINESS COOPERATION AGREEMENT, is entered into as of December 5, 2011 by and between

   

1.   VelaTel Global Communications, Inc., a United States (“US”) corporation, organized under the laws of the state of Nevada, with a principal place of business at 12526 High Bluff Drive, Suite 155, San Diego, California duly and legally represented by George Alvarez, its Chief Executive Officer (hereinafter “Investor or “VelaTel”), which terms shall also refer to VelaTel’s wholly owned subsidiary, Gulfstream Capital Partners, Ltd., a Seychelles corporation (“Gulfstream”) to the extent VelaTel elects to acquire the Investor’s Shares through Gulfstream, in which case all obligations, representations and warranties of Investor set forth in this Agreement and the Schedules thereof shall apply jointly and severally to both VelaTel and Gulfstream);

   

2.   7L Capital Partners Emerging Europe LP a limited partnership incorporated in Guernsey, having its registered office in Guernsey, Carinthia House, 9-12 The Grange, St. Peter Port, GY1 4BF, duly and legally represented by Mr. Salvator Levis (hereinafter “Founder” or “7LCPEELP”);

    

3.   Herlong Investments Limited, a company incorporated in Cyprus and having its registered office in Cyprus (Agapinoros 2, Iris Tower, 7th Floor Flat/Office 702 Nicosia) duly and legally represented by Mr. Salvator Levis (hereinafter “the Company” or “Herlong”)”);

    

4.   Karlo Vlah resident of Croatia, Merhatovec 5, HR-40314 Selnica, OIB: 5891406711 (Shareholder 1);

   

5.   Đurđa Vlah resident of Croatia Merhatovec 5, HR-40314 Selnica, OIB: 55417661185 (Shareholder 2); and

    

6.   Josip Vlah resident of Croatia Merhatovec 5, HR-40314 Selnica, OIB: 24162783756 (Shareholder 3);

 

(all of the parties mentioned under number 2, 4, 5 and 6 hereinafter referred to jointly as Shareholders).

   

(Each and all of the aforementioned referred to individually as a “Party” and collectively as the “Parties”).

   

RECITALS

   

A.   The Company is a limited liability company incorporated under the laws of Cyprus (registered under registration number no 261909). The authorized and issued share capital of the Company at the time of execution of this Agreement amounts to EUR 3,900 divided into 3,900 Common Shares of EUR 1 each. All Common Shares have been issued and are fully paid or credited as fully paid.

 

B.   7LCPEELP owns approximately 76.9% of Herlong’s Common Shares.

 

C.   Karlo Vlah owns approximately 11.5% of Herlong’s Common Shares.

 

D.   Each of Đurđa Vlah and Josip Vlah owns approximately 5.8% of Herlong’s Common Shares.

 

E.   The Company is the sole owner of Novi-Net, D.O.O. (“Novi-Net”) and Montenegro Connect D.O.O. (“Montenegro Connect”).

 

F.   Novi-Net d.o.o. is a company organized under the laws of the Republic of Croatia.  Novi-Net has been granted one or more  Wireless Broadband Access and related telecommunications services (“WBA”) Licenses by Governmental Entities in Croatia covering the bandwidth 3427.500 MHz  through 3548.500 MHz (in total 2x21 MHz), suitable for delivery of WBA to household, business enterprise and government subscribers in the following counties of Croatia: Medimurska zupanija, Varazdinska zupanija, Krapinsko-zagorska zupanija, Koprivnicko-krizevacka zupanija, and Viroviticko-podravska zupanija.  Novi-Net owns certain infrastructure equipment and is currently offering WBA to subscribers.  Novi-Net has been approved for issuance of nationwide WBA Licenses covering the same bandwidth as above, subject only to payment of the applicable license fees.

   

  

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G.   Montenegro Connect d.o.o. is a company organized under the laws of the Republic of Montenegro.  Montenegro Connect has been granted one National WBA License by Governmental Entities in Montenegro covering the bandwidth 3410.000 MHz through 3425.000 MHz and 3500.000 MHz through 3525.000 MHz (in total 15+25 MHz), suitable for delivery of WBA to household, business enterprise and government subscribers  nationwide .  Montenegro Connect owns certain infrastructure assets, but has no subscribers, or other revenue generating operations.

 

H.   Investor’s Share Capital is publicly traded on the US Over-The-Counter Service under the symbol OTCQB:VELA.  Investor is in the business of designing, building, deploying, expanding and operating WBA networks in key markets throughout the world.  Investor has access to investment capital and relationship with vendors advantageous to Investor’s business.

 

I.   The Company wishes to raise capital to implement the Investment (as described below), by including strategic partners in its shareholding base.

 

J.   The Investor intends to become a shareholder of the Company by contributing  EUR 2,800,000 and any additional amount that will be required for financing and implementing the Investment as equity in the latter’s Share Capital and undertakes to implement the Investment pursuant to the provisions of this Agreement.

 

K.   The Parties have valued their respective contributions towards the expansion and organic growth of the Company and its Subsidiaries as follows: Investor’s interest in the Share Capital of the Company will represent 75% of the Company’s Common Shares and the Shareholders interest will represent collectively 25% of the Company’s Common Shares (specifically 23.6% by 7LCPEELP, 0.7% by Shareholder 1, and 0.35% each by Shareholder 2 and 3).

 

L.   Investor shall be entitled to a preferred return on the entire amount actually invested by it in the Company, including the reasonable value of services provided directly by Investor’s personnel (which shall not exceed 10% of the value of equipment contributed), and including finance charges paid to others, but excluding any internal rate of return on Investor’s Commitment. In this respect Investor shall receive Redeemable Preference Shares, as per provisions of Section 7, at a par value of EUR 1.00 per Redeemable Preference Share for each EUR 1.00 that the Investor will actually invest from time to time.

 

M.   Forthwith after execution of this Agreement the Company, further to 7LCPEELP’s Investment, will issue to 7LCPEELP 12,381 new Common Shares at a nominal and issuance price of EUR 1 each, following which 7LCPEELP will own 15,381 Common Shares in the Company. 7LCPEELP shall be entitled to a preferred return on the entire amount of 7LCPEELP’s Investment. In this respect 7LCPEELP shall also receive at or before Closing 3,230,000 Redeemable Preference Shares. 7LCPEELP shall also receive Redeemable Preference Shares, as per the provisions of Section 7, at a par value of EUR 1.00 per Redeemable Preference Share for each EUR 1.00 that 7LCPEELP will actually invest from time to time.

 

N.   The Parties now wish to regulate their mutual prospective relationship as shareholders of the Company, by means of the present Agreement as aforesaid.

 

NOW, THEREFORE, in consideration of the foregoing premises and the respective representations and warranties, covenants and agreements contained herein and the sufficiency of which is hereby acknowledged by the parties, the Parties hereto agree as follows:

 

1.   DEFINITIONS

 

1.1   Definitions.  As used in this Agreement, in Schedule 1 to this Agreement containing representations and warranties of Seller, and/or in the Disclosure Schedule, the following terms shall have the meanings assigned to them in this Section.

 

Affiliate: means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such specified Person.

    

  

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Annual Operating Budget: means monthly projections of revenues, cost of service, operating expenses, working capital requirement, leases and any and all other cash or cash equivalents as prepared by the Company on an annual basis, as approved by the Board of Directors.

    

Agreement: means this Agreement and all schedules, exhibits and instruments and amendments or confirmation of them.

    

Articles of Association: means the articles of association of the Company to be adopted by the shareholders of the Company before  or at Closing, which will include certain important provisions hereof that pursuant to Cyprus legislation and common practice should be incorporated in the articles of association.

    

Business Day: means any day of the year, other than a Saturday, Sunday on which banks are normally open for general business in Cyprus, Croatia and Montenegro.

    

Company: means Herlong Investments Limited.

    

Companies: means Herlong Investments Limited, Novi-Net d.o.o and Montenegro Connect d.o.o.

   

Closing Date: means the date of Closing determined in accordance with Section 3.

    

Conditions: means the conditions pursuant to Section 2.

   

Common Shares: The Company’s ordinary shares.

   

Companies’ Intellectual Property: means all patents, patent applications, trademarks, trademark applications, service marks, tradenames, copyrights, trade secrets, licenses, domain names, mask works, information and proprietary rights and processes as are necessary to the conduct of the business of the Company or any Subsidiary as now conducted and as presently proposed to be conducted.

   

Contract: means any agreement, contract, lease, commitment, arrangement or understanding, written or oral, including any sales order or purchase order.

   

Damages: has the meaning given to it in Section 11.1.

   

Disclosure Schedule: Schedule 2 to this Agreement listing disclosures of matters required to qualify the Shareholders Warranties. The copies of documents that are referred in the Disclosure Schedule have been previously delivered by the Shareholders to Investor.

    

Encumbrance: means a mortgage, charge, pledge, lien, option, restriction, third party right or interest or other security interest of any kind.

   

Environmental Laws: means all applicable Laws and agreements or arrangement with Governmental Authorities and all other statutory requirements relating to public health or the protection of environment, prevention of pollution, remediation of contamination or restoration of environmental quality, protection of human health or the environment (including natural resources), or workplace health and safety, including all applicable Laws relating to the management, containment, manufacture, possession, presence, use, processing, generation, transportation, treatment, storage, disposal, release, abatement, removal, remediation or handling of or exposure to any hazardous materials, and all authorizations issued pursuant to such Laws, agreements, arrangements or statutory requirements.

 

EUR: means euro, the single currency of participating member states of the European Union.

 

Escrow Agent: means Inter Jura Cy (Trusts) Limited, a private limited liability company incorporated under the laws of Cyprus, with registration number 19433, having its registered office at 1 Lampousas street, 1095, Nicosia, Cyprus, a service company affiliated with Dr. K. Chrysostomides & Co LLC, a law firm in Cyprus.

 

FATCA: means the US law Foreign Account Tax Compliance Act.

 

Financial Statements: means the balance sheets, profit and loss statements, and statements of cash flows for the Companies prepared in accordance with accounting regulations and requirements of the applicable legislation for the relevant country as at the fiscal year ending 31 December 2010, and management accounts for the nine month period ending September 30, 2011.

   

  

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Governmental Authority: means any executive, judicial, legislative, political, regulatory, governmental, public or administrative entity, institution or organization, autonomous institution, central, regional, provincial, municipal or local government or authority, municipality, central bank, tax agency, court, commission, board, bureau, agency or instrumentality of the country, state, department, province or similar geographic or political circumscription having jurisdiction over any Person referred to in the context in which such word is used, including any: (i) subdivision or authority of any of the foregoing; (ii) quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the above; and (iii) other entities and agencies that perform administrative duties, which are authorized under any applicable Law, to issue or construe rules, decisions, general regulations or private administrative acts, with binding effect on the parties subject to the scope thereof.

 

IFRS: International Financial Reporting Standards applicable or appropriate to the competent jurisdiction;

 

Independent Accountant: KPMG or alternatively PWC or such other accountant as the parties may agree.

 

Investment: The finance of the growth and expansion of the Company’s Subsidiaries which will result to combine the WBA Licenses and other assets and resources of the Subsidiaries with equipment, services and other resources to be provided by Investor to the Company or its Subsidiaries in a manner that will allow the Company or its Subsidiaries to deploy and operate WBA networks to an expanded subscriber base in Croatia and Montenegro. More specifically:

    

(a)   The financing, designing, purchasing, installing, deploying and operating WBA network(s) in regions of Croatia and Montenegro covered by the WBA Licenses of the Subsidiaries, including CAPEX, OPEX, debt service, and other negative cash flow through the  date the overall operations of the Companies become cash flow positive, consisting of at least the following minimum components of equipment and service levels;

   

(b)   Seventy-five (75) fully installed base transceiver stations (BTS), including antennae, radios and back-up batteries, lease payments on sites, and all civil works and towers required to make the sites legally and structurally amendable to installation of the BTS equipment;

   

(c)   Core network equipment, switches and software necessary to provide Wi-MAX, LTE or dual band Wi-MAX/LTE triple play (voice, data, video) WBA service to at least 150,000 total subscribers based on no more than a 300% over-subscription level (i.e. as many as 50,000 subscribers online simultaneously);

   

(d)   Provision for national transport of internet connectivity between core network equipment and remote cities, plus point-to-point backhaul via fiber or microwave;

   

(e)   Administrative, sales, marketing and customer support staff, office space and office equipment required to operate the WBA network(s);

   

(f)   Consumer premises equipment (CPE), dongles, tablets, handsets, Mi-Fi cards and other devices offered for sale to subscribers to enable connection to the WBA network(s) and carried as inventory for sale;

   

(g)   Taxes, license fees and other amounts accruing to Governmental Authorities in connection with operations of the WBA network(s); and

   

(h)   Debt service on any amounts borrowed from banks to finance any of the foregoing items or other elements of CAPEX or OPEX, as well as debt service on pre-existing debt, to be retired in the ordinary course and according to their various terms.

   

Investor: has the meaning set forth in the preamble to this Agreement.

 

Investor’s Commitment: The amount of EUR 2,800,000 or such greater amount as is actually required to fulfill the Investment until the total operations of the Companies become cash flow positive as this will be determined by the Independent Accountant based on the audited consolidated financial statements of the Company.

   

  

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Investor’s Common Shares: means 48,843 Common Shares of the share capital of the Company, which shall represent 75% of the total Common Shares of the Company’s share Capital that shall have been issued and are outstanding as of the Closing of this Agreement.

 

Investor’s Shares: means (a) the Investor’s Common Shares (defined above) and (b) such number of Redeemable Preference Shares that will be issued to the Investor as per the provisions of this Agreement.

 

Investor’s Warranties: means the warranties of the Investor contained in this Agreement and "Investor's Warranty" means any one such warranty.

 

IPO: means an initial public floatation of equity shares of the relevant corporation under applicable securities legislation or the stock exchange requirements of any Major Stock Exchange.

 

Knowledge of Shareholders: or any similar phrase means, with respect to any fact or matter, the actual knowledge of 7LCPEELP and Shareholders and the directors and executive officers of 7LCPEELP, the Company and the Subsidiaries and any other employee of 7LCPEELP, the Company and the Subsidiaries with a title of Vice-President, General Manager or above, together with such knowledge that such directors, executive officers or other employees could be expected to discover after due investigation concerning the existence of the fact or matter in question.

 

Law or Laws: means any statute, law (including common law), constitution, treaty, ordinance, code, order, decree, case law, judgment, resolution, decision, rule, regulation, supreme decree, legislative decree, provision or principle of any kind that is a part a legal system in force, and any other binding requirement or determination of any Governmental Authority.

 

Major Stock Exchange: means with regard to the (i) Company: NASDAQ, AMEX, NYSE, the stock exchange of Toronto, Frankfurt, Amsterdam, Hong Kong or London and (ii) with regard to VelaTel: NASDAQ, AMEX or NYSE.

 

Material, Materially, Adversely, Material Adverse Change, or Material Adverse Effect means any action, omission or change with a significant impact or essential to any Person or to the business, operations, assets, financials, performance of the activities, or fulfillment of the purpose of any such Person.  Any such action, omission or change shall only be considered to produce a significant impact or to be essential to any such Person if its effects, consequences or results are likely to imply or involve more than EUR 100,000 (One Hundred Thousand and 00/100 Euros).  The effects, consequences or results derived from or arising out of: (i) any act or omission by such Person taken with the prior consent or at the direction of the other Parties hereto; or (ii) any Act of God or Force Majeure impacting any of the Parties, provided that the effects of the Act of God or Force Majeure event prevent performance of an obligation under this Agreement were not foreseeable and could not have been prevented or diminished by the Party affected by the Act of God or Force Majeure, shall not be considered within this definition.

 

Montenegro Connect d.o.o: a limited liability company incorporated under the laws of Montenegro, having its registered office at 65 Dzordza Vasingtona Street 81000 Podgorica, engaged in internet based services provision;

 

Novi-Net d.o.o: A limited liability company incorporated under the laws of Croatia having its registered office at Merhatovec 5, 40314 Selnica, engaged in internet based services provision and voice through internet transmission service provision;

 

Official: means: (i) any governmental official; (ii) any political party or official thereof; (iii) any candidate for political office; (iv) any member of the judiciary or an administrative tribunal; (v) any member of, or official of, any public international organization; or (vi) any employee of any of the foregoing;

 

Order: means any award, injunction, judgment, resolution, decision, decree, order, ruling, subpoena or verdict or other decision issued promulgated or entered by or with any Governmental Authority of competent jurisdiction.

 

Redeemable Preference Shares: 3,230,000 Redeemable Preference Shares issued and allotted to 7LCPEELP at or before Closing (at a nominal and issuance price of EUR 0.801 each) and 1,028,086 Redeemable Preference Shares issued and allotted to the Investor at Closing (at a nominal price of EUR 0.801 and an issuance price of 0.9525 each), and such number of Redeemable Preference Shares to be issued from time to time and allotted to the Investor or 7LCPEELP at an  issuance price of EUR 1.00 per share for each EUR 1.00 that the Investor or 7LCPEELP actually invests from time to time, the rights, preferences, privileges, and restrictions granted to and imposed on which are as set forth in Section 7 below.

 

  

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Shareholders’ Damages: has the meaning given to it in Section 14.1.

 

Share Capital: means (a) in the case of a corporation, (i) its issued shares of the common stock or other class of stock which confers voting power to elect the board of directors or others performing similar functions with respect to such corporation, and the right to receive the profits and losses, or distribution of assets, of the corporation, each in the proportion that the shares owned by any Person bear to the total shares issued and (ii) its issued shares of redeemable preference shares, (b) in the case of a partnership or limited liability company, its partnership or membership interests or units (whether general or limited), and (c) in the case of any other entity, the instruments that confer the same rights as applicable to a corporation as described above.

 

Subsidiaries: Novi-Net d.o.o and Montenegro Connect d.o.o.

 

Tax or Taxes: means all forms of tax, duties, imposts, contributions, withholdings, deductions, charges, levies and sums payable on account of the foregoing whatsoever imposed, charged or demanded by a Tax Authority in the nature of tax (including without limitation any amount payable as a result of counteraction, adjustment or set off by a Tax Authority in relation to any liability to tax, interest on unpaid tax, repayment of tax or interest or repayment supplement in respect of a repayment of tax), and all amounts recoverable by a Tax Authority as if they were tax and shall be deemed to include the cost of removing any charge over assets imposed by any Tax Authority and in each case all charges, interest, fines, penalties and surcharges arising from, incidental to, or relating to, the same.

 

Tax Authority: means any Governmental Authority competent to impose, administer or collect Tax.

 

VelaTel’s Series A Common Stock: Shares of Investor’s stock currently publicly traded via quotation through the Over The Counter Service, Inc. under the symbol “OTCQB:VELA.”

 

WBA: means wireless broadband access and related telecommunications services.

 

WBA License: means any combination of rights granted by one or more appropriate Governmental Authorities for private ownership or exclusive right to use specific radio frequency bandwidth within a defined geographic area and suitable for delivery of WBA, including and subject to all licenses, concessions and other Laws regulating the granted rights.

 

ZTE: means ZTE Corporation, a leading global provider of telecommunications equipment and network solutions headquartered in the Peoples Republic of China, with whom Investor has several contractual relationships including a global strategic memorandum of understanding whereby ZTE agrees to offer VelaTel a favorable vendor financing proposal for each project identified and use its best efforts to facilitate VelaTel’s applications for debt financing by banks with which ZTE has relationships.

 

7LCPEELP’s Common Shares: means 15,381 Common Shares which will be owned by 7LCPEELP after Closing and will represent 23.6% of the Company’s share capital.

 

7LCPEELP’s Investment: The amount of EUR (3,230,000) three million two hundred thirty euros already invested by 7LCPEELP in the Company.

 

Shareholders Warranties: means the warranties of the Shareholders contained in Schedule 1 and "Shareholders' Warranty" means any one such warranty.

   

1.2   Other Definitions.  Other terms defined in this Agreement and indicated as such by capitalized terms in quotation marks shall have the meaning ascribed thereto next to the definition, throughout the text of this Agreement.

 

1.3   Language.  This Agreement has been entered into in English language and, notwithstanding any translation thereof, the English language version shall control the construction and interpretation of this Agreement.  All material communications between the Parties with respect to this Agreement shall be in the English language.

   

  

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2.   CONDITIONS TO CLOSING

 

a.   Conditions to Obligations of Investor, and the Shareholders.  The obligations of Investor and of the Shareholders to consummate the Transaction are subject to the satisfaction on or prior to the Closing Date of the following conditions:

 

(a)   No temporary restraining order, preliminary or permanent injunction or other Order preventing the consummation of the Transaction shall be in effect.

 

(b)   No Law shall have been enacted or shall be deemed applicable to the Transaction which makes the consummation of the Transaction illegal.

 

(c)   Calendar year 2011 shall have ended.

 

b.   Conditions to Obligation of Investor.  The obligation of Investor to consummate the Transaction is subject to the satisfaction (or waiver by Investor in its sole discretion) of the following further conditions, which are for the exclusive benefit of Investor:

 

(a)   Shareholders Warranties set forth in Schedule 1 of this Agreement shall have been true and correct at and as of the date of this Agreement and shall be true and correct at and as of the Closing Date as if made at and as of the Closing Date, and the Shareholders shall have executed and delivered or cause to be delivered a certificate to Investor to that effect.  The receipt of such certificate at the Closing Date shall not constitute a waiver by Investor of any of the representation and warranties of the Shareholders which are contained in this Agreement.

 

(b)   Shareholders shall have performed or complied with all obligations and covenants required by this Agreement to be performed or complied with by the Shareholders with at or prior to the Closing Date, and the Shareholders shall have executed and delivered or cause to be delivered a certificate to Investor to that effect.  The receipt of such certificate at the Closing Date shall not constitute a waiver by Investor of any of the covenants of the Shareholders which are contained in this Agreement.

 

(c)   There shall have been no Material Adverse Change in the condition (financial or otherwise), operations, prospects or results of operations of the Company taken as a whole.

 

(d)   No Action shall be pending or threatened before any court, judge, arbitrator, arbitration panel or other Governmental Authority or other Person: (i) seeking to prevent consummation of any of the transactions contemplated by this Agreement; (ii) seeking to impose any Material limitation on the right of Investor to own the Investor’s Shares.

 

c.   Conditions to Obligation of the Shareholders.  The obligation of the Shareholders to consummate the Transaction is subject to the satisfaction (or waiver by 7LCPEELP in its sole discretion), of the following further conditions, which are for the Shareholders’ exclusive benefit:

 

(a)   The representations and warranties of Investor set forth in this Agreement shall have been true and correct at and as of the date of this Agreement and shall be true and correct at and as of the Closing Date as if made at and as of the Closing Date, and Investor shall have executed and delivered or cause to be delivered a certificate to the Shareholders to that effect.  The receipt of such certificate at the Closing Date shall not constitute a waiver by the Shareholders of any of the representation and warranties of Investor which are contained in this Agreement.

 

(b)   Investor shall have performed or complied in all Material respects with all obligations and covenants required by this Agreement to be performed or complied with by Investor at or prior to the Closing Date, and Investor shall have executed and delivered or cause to be delivered a certificate to the Shareholders to that effect.  The receipt of such certificate at the Closing Date shall not constitute a waiver by the Shareholders of any of the covenants of Investor which are contained in this Agreement.

 

(c)   No Action shall be pending or threatened before any court, judge, arbitrator or arbitration panel or other Governmental Authority or other Person wherein an unfavorable Order would: (i) prevent consummation of any of the transactions contemplated by this Agreement; or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation.  No such Order shall be in effect.

   

  

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3.   CLOSING

 

3.1    Closing shall take place at the offices of Dr. K. Chrysostomides & Co LLC, 1 Lampousas Str, Nicosia Cyprus as soon as possible after satisfaction of the Conditions and in any event on the date which is no later than five (5) days after the date on which the last of the Conditions to be satisfied or waived is satisfied or waived, or such other date as the parties may agree in writing. The date upon which the Closing occurs is herein referred to as the "Closing Date."

 

3.2    At Closing: The Shareholders shall deliver to the Investor or the Escrow Agent as appropriate the following:

 

3.2.1              Evidence satisfactory to the Investor (acting reasonably) of the fulfillment of the Conditions set forth in Section 2.b;

 

3.2.2              Evidence, to the Investor’s satisfaction, of the authority of any person or persons executing or attesting the execution of this Agreement and any other document on behalf of the Shareholders and the Company;

 

3.2.3              A certified copy of the duly executed resolutions of the board of directors of the Company and the Shareholders of the Company as may reasonably be required by the Investor in order to give effect to the valid issue and allotment to the Investor  of (i) 48,843 new Common Shares at a nominal  and issuance price of EUR 1 and (ii) 1,028,086 new Redeemable Preference Shares at a nominal value of EUR 0.801 and at an issuance price of ΕUR 0.9525 (“Investor’s Common Shares and Redeemable Preference Shares”), and the registration of the Investor as a shareholder of the Company in respect of Investor’s Common Shares and Redeemable Preference Shares;

 

3.2.4              A unanimous consent of the shareholders of the Company waiving any and all pre-emptive rights which they may have in relation to the issue and allotment of Investor’s Common Shares and Redeemable Preference Shares to the Investor;

 

3.2.5              Shares certificates in respect of Investor’s Common Shares and Redeemable Preference Shares;

 

3.2.6              Duly executed Share Pledge Agreement I, Share Pledge Agreement II, Escrow Agreement I and Escrow Agreement II;

 

3.2.7              Duly signed resignations of all members of the Board of Directors from their positions as directors of the Companies and of all officers from their positions as officers of the Companies, provided that 7LCPEELP shall have the right to appoint one of no less than five members and no more than nine members of the Board of Directors of the Company as per the provisions of Section 16;

 

3.2.8              A unanimous consent of the Shareholders confirming election of new directors and officers of the Companies and authorized signatories on each of the Companies’ bank accounts; and

 

3.2.9              All other documents, instruments or certificates required to be delivered by the Shareholders at or prior to the Closing pursuant to this Agreement.

 

3.3    At Closing: the Investor shall deliver to 7LCPEELP on behalf of the Shareholders the following:

 

3.3.1              Evidence, to 7LCPEELP’s satisfaction, of the authority of any person or persons executing or attesting the execution of this Agreement and any other document on behalf of the Investor;

 

3.3.2              Duly executed Share Pledge Agreement I, Share Pledge Agreement II, Escrow Agreement I and Escrow Agreement II;

 

3.3.3              Evidence to 7LCPEELP’s satisfaction that the Investor has ordered in the name and on behalf of the Company, from its supplier i.e. ZTE, the 75 base stations and the core equipment described under sub-paragraphs (b) and (c) of the Investment Definition;

   

  

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3.3.4    Evidence to 7LCPEELP’s satisfaction (i.e. a comfort letter signed by the authorized signatory of ZTE) that the Investor has paid to ZTE in the name and on behalf of the Company the 15% down payment, which amounts to EUR 528,086 on the equipment ordered to ZTE and described in par. 3.3.3 above;

 

3.3.5    Evidence to 7LCPEELP’s satisfaction that the Investor has paid by wire transfer to the Company’s bank account with Bank of Cyprus (account no CY81002001550000000114285600) the amount of EUR 500,000;

 

3.3.6    Evidence to 7LCPEELP’s satisfaction that employment contracts between the Company and or Companies and Key Employees (as defined in section 16 below) are executed on terms satisfactory to 7LCPEELP

   

4.   POST CLOSING SHAREHOLDING STRUCTURE OF THE COMPANY

 

4.1    Following the above, the Company’s Share Capital shall amount to EUR 3,475,851 and a reserve fund shall be formed due to the issuance of shares above par, amounting to 970,838. The shareholding structure of the Company will be formed as follows:

   

	
Shareholder

	
Common Shares

	
(%)

	
Redeemable Preference Shares

	
INVESTOR

	
48,843

	
75%

	
1,028,068

	
7LCPEELP

	
15,381

	
23.6%

	
3,230,000

	
Karlo Vlah

	
450

	
0.7%

	
---

	
Đurđa Vlah

	
225

	
0.35%

	
---

	
Josip Vlah

	
225

	
0.35%

	
---

	
TOTAL

	
65,124

	
100.0%

	
5,228,906

 

4.2    Any tax, stamp duties, fees, bank charges or other costs payable in relation to the issue of the new shares and to the execution of this Agreement shall be paid by the Company.

 

5.   INVESTMENT AND INVESTOR’S RIGHTS AND UNDERTAKINGS

 

5.1    Investor may, in its discretion (subject to sound business judgment in its capacity as majority shareholder of the Company), increase the amount of equipment and other CAPEX, OPEX and other investment beyond the minimum components and service levels described in the definition of Investment, either during the initial phase of deployment or as an expansion into future phase(s), either before the financial results of any initial phase(s) are generating free cash flow, or the result of which would be to exhaust all positive cash flow and return financial performance to a negative cash flow position, under the condition that 7LCPEELP’s and the Shareholders post-Closing 25% interest of Common Shares in the Share Capital of the Company shall not be subject to dilution.

 

5.2    All equipment and other fixed assets representing the Investment shall be contracted for purchase, titled and financed in the name of the Company or any of its Subsidiaries, with any down payments or other cash requirement that exceed the free cash flow of the Company or applicable Subsidiary paid by Investor and the full purchase price guaranteed by Investor to the extent required by any lender.  Investor shall be entitled to a security interest for the entire value of such equipment that is paid for or its financing is guaranteed by Investor.

   

  

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6.   SHAREHOLDERS ANTI DILUTION RIGHTS

 

The Shareholders' post-Closing shareholding which will jointly represent 25% of Common Shares in the Share Capital of the Company shall not be subject to dilution and these anti-dilution rights shall be incorporated in the Articles of Association of the Company. It is clarified that, subject to enforcement of any indemnity obligation pursuant to the Share Pledge Agreement I as described in Section 12, the Shareholders' ownership in the Company with respect to their Common Shares will not be diluted and will always represent 25% in the Share Capital of the Company’s Common Shares in case the Investor or any other strategic investor makes after Closing any contribution to the Company’s Share Capital. In this respect the Investor or any other strategic investor will be entitled to receive for any capital or in kind contribution to the Company’s share capital only Redeemable Preference Shares.

 

7.   REDEEMABLE PREFERENCE SHARES

 

7.1    In addition to the Redeemable Preference Shares issued at or before Closing to 7LCPEELP and the Investor, the Company will also issue from time to time and allot to the Investor or 7LCPEELP Redeemable Preference Shares at an issuance price of EUR1.00 per share for each EUR1.00 that Investor or 7LCPEELP actually invests from time to time.

 

7.2    Redeemable Preference Shares shall only be owned by the Investor and 7LCPEELP, whereas Shareholders 1, 2 and 3 shall at any time own only Common Shares

 

7.3    The rights, preferences, privileges, and restrictions granted to and imposed on the Redeemable Preference Shares are as set forth below:

 

7.4    Redeemable Preference Shares will only have redemption rights.

 

7.5    Redeemable Preference Shares will have no voting rights, no conversion rights and no dividend rights.

 

7.6   Redemption:

 

(i)    Subject to compliance by the Company with the Cyprus Companies Law Cap. 113 (as amended), at the end of each financial year, the Company shall commission the Independent Accountant to determine the amount of available positive cash flow (if any) after due allowance and reserves for taxes, working capital, and other contingent liabilities projected through the end of the Company’s fiscal year to which the issue of positive cash flow relates (“Legally Available Funds”).

 

(ii)    Within 60 calendar days of the end of each financial year, the Directors of the Company shall consider the relevant report from the Independent Accountant at a Board meeting and if pursuant to such determination there are Legally Available Funds, the Company shall inform in writing the holders of Redeemable Preference Shares (the "Redemption Dates").

 

(iii)    Within 10 Business days from each Redemption Date any of the holders of such shares may at its sole discretion deliver to the Company a request in writing (the “Redemption Request”) to proceed with the redemption in accordance with the terms of this Section 7.6, of such number of outstanding Redeemable Preference Shares as is given by dividing the Legally Available Funds by the redemption price of each outstanding Redeemable Preference Share, this redemption price being 1 EUR.

 

(iv)    The number of Redeemable Preference Shares held by each holder of such shares which shall be redeemed each year shall be pro rata to the total number of Redeemable Preference Shares outstanding at such time and held by each holder.

 

(v)    Following redemption of all outstanding Redeemable Preference Shares, all profits shall be distributed, after due allowance and reserves for taxes, working capital, and other contingent liabilities, pro rata as dividends to the holders of the Company’s Common Shares.

   

  

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8.   PRE-CLOSING UNDERTAKINGS

 

8.1    During the period between the date of this Agreement and the Closing Date, the Shareholders, so far as they are able, shall ensure that each of the Companies will:

 

8.1.1    Operate its business in the ordinary course in accordance with its business plans, budgets, all applicable legal and administrative requirements so as to maintain it as a going concern, and not do anything which is out of the ordinary course consistent with past practice without the prior written consent of the Investor; and

 

8.1.2    Take all reasonable steps to preserve and protect its business and assets, and not, without the prior written consent of the Investor, acquire or dispose of or transfer an asset, incur a liability, obligation or expense, other than in the ordinary course of business in accordance with past practice and on normal arm’s length terms.

 

8.2    To the extent permitted by applicable law, the Shareholders also agree to ensure that:

 

8.2.1    Each of the Companies cooperates with any reasonable requests by the Investor for information about the business, the assets and the ongoing affairs of such company; and

 

8.2.2    The Investor is given reasonable access during ordinary business hours to the legal and financial advisors and auditors, documents and premises of the Companies to the extent reasonably requested by the Investor or its advisors in preparation for Closing, provided, however, that such access shall not unreasonably interfere with the business and operations of the Companies.

 

9.   REPRESENTATIONS AND WARRANTIES

 

Each Party acknowledges that the other Party has been induced to enter into this Agreement on the basis of and in reliance upon the following representations, the accuracy of which each Party warrants to the other Party as of the date of this Agreement and as of the Closing.

 

(a)   Such Party is a corporation or limited partnership or limited liability company, as the case may be, duly organized, validly existing and in good standing under the laws of the country and state described as applicable to such Party in the Recitals, and has all requisite power to own, lease and operate its properties and to carry on its business as currently conducted and as proposed to be conducted in this Agreement.  No order has been made or petition presented (or is pending) or resolution passed for the winding up of Such Party.  Such Party is not insolvent or unable to pay its debts as they fall due.

 

(b)   Such Party has all requisite capacity, power and authority, and has taken all necessary corporate or other actions to enter into this Agreement.

 

(c)   Such Party has done or will promptly do all such further acts, including necessary filings with appropriate governmental authorizes, required in order to give full force and effect to this Agreement.

 

(d)   The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement will not result in any violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either: (a) a default under any provision, instrument, judgment, order, writ, decree, contract or agreement or (b) an event which results in the creation of any lien, charge or encumbrance upon any assets of such Party (except as expressly stated in this Agreement) or the suspension, revocation, forfeiture, or non-renewal of any material permit or license applicable to such Party.

 

(e)   No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of such Party.

    

  

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10.   SHAREHOLDERS' WARRANTIES

 

10.1    Shareholders represent and warrant to the Investor that each Shareholders' Warranty is true and accurate in all material respects as at the date of this Agreement and as at Closing.

 

10.2    The Shareholders shall procure that each Shareholders' Warranty is true and accurate at Closing, and for this purpose the Shareholders are deemed to repeat each Shareholders' Warranty at Closing.

 

10.3    The Shareholders undertake to immediately notify the Investor in writing of any circumstance arising after the date of this Agreement which could cause any Shareholders’ Warranty to become untrue or inaccurate.  Any such notification shall not have the effect of remedying any breach of Shareholders’ Warranty concerned.

 

10.4    Each of the Shareholders’ Warranties shall be construed as a separate and independent warranty and (except where this Agreement provides otherwise) shall not be limited or restricted in its scope by reference to or inference from any other term of another Shareholders’ Warranty or this Agreement.

 

11.   INDEMNIFICATION BY THE SHAREHOLDERS

 

11.1    The Shareholders, pro rata to their shareholding, with respect to Common Shares in the Company, shall indemnify, hold harmless and defend the Investor from and against any and all claims and/or liabilities, damages, penalties, judgments, assessments, losses, costs and expenses ("Damages") incurred by the Investor, the Company, Novi-Net d.o.o or Montenegro Connect d.o.o arising out of, relating to or based upon allegations of any breach of any Shareholders’ Warranty.

 

11.2    Subject to Sections 11.4 through 11.6, the Shareholders shall only be required to indemnify the Investor for any Damages arising under Section 11.1, up to the total value of the Shareholders’ Common Shares as such value is defined in Cause 11.7.

 

11.3   Subject to Section 11.6, the Investor's right to bring a claim for indemnification under Section 5.1 shall survive until the date falling 2 years after the Closing Date in the case of any Damages resulting from a breach of any Shareholders’ Warranty.

 

11.4   For the avoidance of doubt, the parties agree that the Shareholders shall not be liable in respect of any Damages to the extent that the matter or matters giving rise to such Damages have been fairly and accurately disclosed in the Disclosure Schedule.

 

11.5    The Shareholders shall not be liable for any Damages (i) unless and until the aggregate amount of all Damages incurred by the Investor, the Company, Novi-Net d.o.o or Montenegro Connect d.o.o exceeds One Hundred Thousand and 00/100 euros (EUR 100,000), in which event the Shareholders shall be jointly liable for all Damages from the first Euro; provided that nothing contained in this Section shall be deemed to limit or restrict in any manner any rights or remedies which the Investor has, or might have, at Law, in equity or otherwise, based on fraud or a willful misrepresentation.

 

11.6    The provisions of Sections 11.2 and 11.3 shall not apply in relation to any Damages resulting from a breach of the Shareholders’ Warranty set out in Paragraph 6 of Schedule 1 (Title and Assets) in respect of which:

 

11.6.1    The Shareholders’ liability shall be unlimited;

 

11.6.2    Such Damages shall not be included in the calculation of the aggregate amount referred to in Section 11.2; and

 

11.6.3    A claim for such Damages may be made at any time after the Closing Date.

 

11.7    Any Damages payable to the Investor pursuant to this Section 11 may be paid only out of the Shareholders Common Shares. For the purpose of determining the number of the Shareholders Common Shares to be comprised in such Damages, the total value of all the Shareholders Common Shares shall be deemed to be Euro 3,200,000 (i.e. 25% x the current valuation of the Company amounting to Euro 12,800,000).

   

  

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11.8    The Shareholders shall have no obligation to indemnify the Investor for any breach of any Shareholders’ Warranty unless they have received within the period specified in Section 11.3 or 11.6 above, as the case may be, a notice in good faith and in writing of a claim the amount of which will be determined from the Independent Accountant. Any matter as to which a claim has been asserted by written notice setting forth in reasonable detail the nature of such claim to the other party that is pending or the subject of an arbitration, litigation or other proceeding hereunder shall continue to be covered by the provisions of this Section until such matter is finally terminated by a court or tribunal of competent jurisdiction or otherwise and any amounts payable hereunder are finally determined and paid.

 

11.9   Procedure

 

11.9.1   Notice. The Investor (the “Indemnified Party”) shall give notice to the Shareholders with respect to any Damages.

 

11.9.2   Defense. The Indemnified Party shall have the right to control the defense of any claim, demand, lawsuit, allegation, proceeding or liability is asserted by any third party against such Indemnified Party in respect of matters embraced by the indemnity. Notwithstanding the foregoing, the Shareholders (or any of them) may, at its own expense, participate in such defense with counsel of its own choice. In addition, the Shareholders and the Indemnified Party shall, to the extent in such Party’s possession, make available to the other Party and its respective attorneys, accountants and other representatives all books, records and other information relating to such claim, demand, lawsuit, allegation, proceeding or liability and shall co-operate with such other party and shall render as much assistance as they may reasonably request to ensure a proper and adequate defense. Each of the Indemnified Party and the Shareholders shall, from time to time, and as reasonably requested by the other Party, advise such other Party of, and make available records and information relating to, the progress of such claim, demand, lawsuit, allegation, proceeding or liability. The Indemnified Party shall not consent or cause the Companies, as appropriate, to enter into any settlement of any claim, demand, lawsuit, allegation, proceeding or liability asserted by any third party against the Indemnified Party (either directly or through the Companies), except with the written consent of 7LCPEELP, which consent shall not be unreasonably withheld, delayed or conditioned.

 

12.   INVESTOR’S SECURITY

 

As a security for the fulfillment by the Shareholders of their obligations pursuant to Section 11 of this Agreement, the parties shall enter at Closing into a share pledge agreement and an escrow agreement substantially in the form of Schedules 3 and 4 attached hereto (the “Share Pledge Agreement I” and “Escrow Agreement I”) pursuant to the terms and conditions of which, the Shareholders shall pledge, mortgage and charge to the Investor the total of their Common Shares in the Company i.e. 16,281 Common Shares and related shares certificates. The Share Pledge Agreement I shall terminate and the Escrow Agent shall release and deliver the pledged shares to 7LCPEELP on behalf of the Shareholders, when either (i) the Investor, as the pledgee directs the Escrow Agent in writing, or (ii) two years from the date of execution of the Share Pledge Agreement I, whichever is earlier.  The Shareholders’ liability to indemnify the Investor for any Damages resulting from a breach of the Shareholders’ Warranty set out in Section 6 of Schedule 1 (Title and Assets) will survive the termination of the Share Pledge Agreement I.

 

13.   INVESTOR’S WARRANTIES

 

13.1    The Investor represents and warrants to the Shareholders that it has the requisite knowledge and means for the due and proper implementation of the Investment.

 

13.2    Investor undertakes to the Shareholders that it will pay to the Company or on its behalf all amounts associated with the financing and implementation of the Investment. For avoidance of doubt, the Investor undertakes to the Shareholders the following:

 

I.    On or before Closing to provide the evidence described in Subsection 3.3.4 of payment (i) on behalf and in the name of the Company the amount of EUR 528,086, which represents the credit with respect to the 15% down payment for the purchase of the equipment described under sub-paragraphs (b) and (c) of the Investment Definition and (ii) to the Company at least EUR 500,000;

   

  

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II.    Within 90 days following Closing (i) to pay to the Company at least another EUR 500,000, bringing the total to at least EUR 1,000,000;

 

III.    Within 180 days following Closing to deliver to the Company the 75 base stations and the core equipment (which will be purchased in the name and on behalf of the Company) described under sub-paragraphs (b) and (c) of the Investment Definition;

 

IV.    Within 180 days following Closing to pay to the Company at least another EUR 500,000, bringing the total to at least EUR 1,500,000;

 

V.    Within 270 days following Closing to pay to the Company at least another EUR 500,000, bringing the total to at least EUR 2,000,000;

 

VI.    Within 360 days following Closing (i) to pay to the Company EUR 271,914 and (ii) at least 50 of the initial 75 base stations and the core equipment included in the Investment Definition will have been fully installed and will be operational for delivery of broadband service to subscribers, including certification by ZTE and the Company that such equipment has satisfied preliminary acceptance testing;

 

VII.    To proceed to all other actions required for the due finance and implementation of the Investment until the total operations of the Companies become cash flow positive as this will be confirmed by the Independent Accountant based on the audited consolidated financial statements of the Company.

 

13.3    The Investor shall cause the Company to utilize in full the amount paid by the Investor for the implementation of the Investment.

 

13.4    The Investor represents and warrants to the Shareholders that each Investor’s Warranty is true and accurate in all material respects as at the date of this Agreement and as at Closing.

 

13.5    The Investor shall procure that each Investor's Warranty is true and accurate at Closing, and for this purpose the Investor is deemed to repeat each Investor’s Warranty at Closing.

 

13.6    The Investor undertakes to immediately notify the Shareholders in writing of any circumstance arising after the date of this Agreement which could cause any Investor's Warranty to become untrue or inaccurate.  Any such notification shall not have the effect of remedying any breach of the Ιnvestor's Warranty concerned.

 

13.7    Each of the Investor's Warranties shall be construed as a separate and independent warranty and (except where this Agreement provides otherwise) shall not be limited or restricted in its scope by reference to or inference from any other term of another Investor's Warranty or this Agreement.

 

14.   INDEMNIFICATION BY INVESTOR

 

14.1    The Investor shall indemnify, hold harmless and defend the Shareholders from and against any and all claims and/or liabilities, damages, penalties, judgments, assessments, losses, costs and expenses ("Shareholders’ Damages") incurred by the Shareholders, the Company, Novi-Net d.o.o or Montenegro Connect d.o.o arising out of, relating to or based upon allegations of the failure of or any breach of any Investor’s Warranty.

 

14.2    The Investor shall only be required to indemnify the Shareholders for any 7LCPEELP’s and the Shareholders’ Damages arising under Section 14.1, up to the total value of the Investor’s Common Shares as such value is defined in Cause 14.5.

 

14.3    7LCPEELP’s and the Shareholders right to bring a claim for indemnification under Section 14.1 shall survive until the date both conditions under (i) and (ii) herein are fulfilled: (i) the Shareholders have received satisfactory evidence that the Investor has paid to the Company the Investor’s Commitment and has fulfilled its obligations as such are detailed in Section 13.2 I-VI and (ii) the Independent Accountant will have confirmed that the Company and its Subsidiaries have achieved positive cash flow, after due allowance for reserves for taxes, working capital and other contingent liabilities.

    

  

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14.4    The Investor shall not be liable for any Shareholders Damages (i) unless and until the aggregate amount of all Damages incurred by the Shareholders, the Company, Novi-Net d.o.o or Montenegro Connect d.o.o exceeds One Hundred Thousand and 00/100 Euros (EUR 100,000), in which event the Investor shall be liable for all Shareholders Damages from the first Euro; provided that nothing contained in this Section shall be deemed to limit or restrict in any manner any rights or remedies which the Shareholders have, or might have, at Law, in equity or otherwise, based on fraud or a willful misrepresentation.

 

14.5    Any Shareholders’ Damages payable to the Shareholders pursuant to this Section may be paid only out of the Investor’s Common Shares. For the purpose of determining the number of the Investor’s Common Shares to be comprised in such Damages, the total value of all the Investor’s Common Shares shall be deemed to be EUR 9,600,000 (i.e. 75% x the current valuation of the Company amounting to EUR 12,800,000).

 

14.6    The Investor shall have no obligation to indemnify the Shareholders for any breach of any Investor’s Warranty unless they have received a notice in good faith and in writing of a claim. Any matter as to which a claim has been asserted by written notice setting forth in reasonable detail the nature of such claim to the other Party that is pending or the subject of an arbitration, litigation or other proceeding hereunder shall continue to be covered by the provisions of this Section until such matter is finally terminated by a court or tribunal of competent jurisdiction or otherwise and any amounts payable hereunder are finally determined and paid.

 

15.   7LCPEELP’s SECURITY

 

As a security for the fulfillment by the Investor of its obligations pursuant to Sections 13 and 14 of this Agreement and especially its undertakings  for the proper financing and implementation of the Investment the Parties shall enter at Closing into a share pledge agreement and an escrow agreement substantially in the form of Schedule 5 and 6 attached hereto (the “Share Pledge Agreement II” and the “Escrow Agreement II”) pursuant to the terms and conditions of which, the Investor shall pledge, mortgage and charge to 7LCPEELP the total of  the Investor’s Common Shares in the Company i.e. 48,843 Common Shares and related shares certificates. The Share Pledge Agreement II shall terminate and Escrow Agent shall release and deliver to Investor all of the Investor’s Common Shares, which amount shall equal 75% of the total Common Shares issued and outstanding as of Closing, when 7LCPEELP (acting reasonably) directs the Escrow Agent in writing that it has obtained satisfactory proof that the Investor has fulfilled its obligations and has paid to the Company the amounts described in Section 13.2 I-VI.  It is explicitly acknowledged that should the Investor fail to comply with any of its above mentioned undertakings pursuant to Section 13.2 I-VI, then the Share Pledge Agreement II shall become immediately enforceable for the total pledged shares of the Investor. The Investor’s liability to indemnify the Shareholders for any Damages resulting from a breach of the Investor’s Warranty set out in Section 13.2 VII will survive the termination of the Share Pledge Agreement II.

 

16.   MANAGEMENT OF THE COMPANY POST CLOSING

 

16.1   Board of Directors.  The senior management and administration of the Company shall be carried out by its Board of Directors, which shall be comprised of no fewer than five and no more than nine directors, of which 7LCPEELP shall have the right to elect or appoint one director. It is also hereby agreed that only at the initiative of 7LCPEELP may a director appointed by it be removed or replaced by a new director appointed by it. In the event of vacancy, for any reason whatsoever, in the position of a director appointed by 7LCPEELP, such vacancy shall be filled by a new director appointed by 7LCPEELP.

    

  

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16.2   Decision Making: The Investor, the Company and each of the Shareholders hereby covenant with and undertake to 7LCPEELP that for so long as 7LCPEELP is a shareholder of the Company, the Company shall not without the prior consent in writing of 7LCPEELP (which consent shall not be unreasonably withheld and may be furnished in writing by the director of 7LCPEELP at meetings of the Board of Directors or otherwise) proceed with or approve any of the following matters:

	
·  

	
Changes in Company’s objectives, or Memorandum or Articles of Association or legal status;

 

	
·  

	
Increasing and or changing the authorized or issued Share Capital of the Company; authorization and/or issuance of shares of any class or any class of securities convertible into shares;

 

	
·  

	
Approving any management or employee stock option award, grant or plan;

 

	
·  

	
Declaring and distributing dividends;

 

	
·  

	
Approving any proposal to list the Company and or the Subsidiaries on a stock exchange;

 

	
·  

	
Purchasing shares or acquiring an entity, business or an ownership interest in any other company;

 

	
·  

	
Establishing any subsidiary, entering any new business areas or changing substantially the nature of the Company’s business and its subsidiaries;

 

	
·  

	
Establishing any joint venture or partnership;

 

	
·  

	
Merging, dissolving, liquidating or selling the subsidiaries of the Company or any major part thereof;

 

	
·  

	
Amending the Business Plan (including the R&D program and the Annual Operating Budget);

 

	
·  

	
 Replacing any of the Companies’ Key Employees as set forth in Schedule 7 of this Agreement, who will continue to render their services to the Companies pursuant to  Section 16.3;

 

	
·  

	
Approving the Company’s accounts, financial statements and Annual Report;

 

	
·  

	
Appointing and removing the Company’s auditors;

 

	
·  

	
Entering into, guaranteeing or amending any credit, loan, debt facility or lease agreement, in excess of EUR 100,000 or combined facilities exceeding more than EUR 300,000 in any given year, unless included in the current Annual Operating Budget;

 

	
·  

	
The sale, disposition, lease or encumbrance of any of substantially all the Company’s and the Subsidiaries’ assets, including the licenses that the Subsidiaries’ own;

 

	
·  

	
Commencement of a voluntary bankruptcy or insolvency proceedings;

 

	
·  

	
Any contract between the Company or any of the Subsidiaries and the Investor or companies controlled by the Investor which exceeds in isolation or in the aggregate EUR 200,000 per year in payment value to the Investor or company controlled by the Investor (“Related Party Transactions”);

 

	
·  

	
All the above issues in connection with any subsidiaries or affiliates of the Company.

   

16.3   Officers and Other Management.  The officers and other managerial personnel of the Company and its Subsidiaries as reflected on Schedule 7 (“Key Employees”) shall continue in their current job descriptions, duties and compensation levels, and shall also be offered participation in VelaTel’s stock option plan and future awards pursuant to such plan on the same basis as employees of similar tenure and responsibility employed by VelaTel and its other Affiliates from time to time.  Key Employees identified as such on Schedule 7 shall have executed on Closing employment contracts substantially in the form attached as Schedule 8, to enhance the ability of the Company and its Subsidiaries to retain the services of such employees. Any such employment contract, subject to applicable laws shall authorize the Company or Subsidiary to terminate an employee for good cause, including willful dishonesty causing financial harm to any of the Companies, conviction of a serious criminal offense, or willful refusal to perform job duties which remains uncorrected following reasonable written notice from the Company’s Board of Directors.

    

  

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17.   PREEMPTIVE RIGHTS AND TRANSFER OF SHARES – TAG ALONG AND DRAG ALONG RIGHTS -EXIT

 

17.1   No Dilution of Shareholders’ Equity. Subject to the provisions of (i) Section 6 according to which the Shareholders' shareholding of 25% of Common Shares shall not be subject to dilution and (ii) Section 7, according to which only the Investor and 7LCPEELP have the right to acquire Redeemable Preference Shares, all the shareholders of the Company shall have the right to participate pro rata in the Company’s subsequent capital increases for the issuance of any class of stock, option, warrant, or any kind of security whatsoever, other than Redeemable Preference Shares and Common Shares, provided that such right shall not apply for any issuance pursuant to an employee stock option plan, any issuance pursuant to an IPO or following an IPO and any issuance in consideration for the acquisition by the Company of another entity or business, by way of contributions in kind from the shareholders of the entity or business to be acquired.

 

17.2   Restrictions on Transfer of Investor’s Common Shares

 

17.2.1    The Investor is forbidden to transfer, pledge or in any other way encumber (except pursuant to the Pledge Agreement II) its Common Shares in the Company, without the prior written consent of 7LCPEELP, save for the following exception:  The Investor will be entitled to sell part of its Common Shares  without 7LCPEELP’s consent, in which case paragraph 17.3 will not apply, provided that (i) the Investor’s shareholding percentage in the Company following transfer of the above part will not fall below 50.9% of the Company’s Common Shares and (ii) should the transfer of the said Investor’s Common Shares occur before termination of the Share Pledge Agreement II, the transferred shares will continue to be pledged in favor of 7LCPEELP and the Investor shall procure that the transferee executes in favor of 7LCPEELP a pledge agreement in form and substance similar to Share Pledge Agreement II, over the Investor’s Common Shares which the Transferee is willing to acquire.

 

17.2.2    Transfer or encumbering of shares, in breach of the provisions of this Section, is to be considered as null and void; the registration in the shareholders’ registry of the Company, as well as the issuance of new shares in the name of the party to which the transfer has been effected are prohibited and if realized shall be considered as null and void.

 

17.3   Right of First Refusal. Subject to paragraph 17.2.1 above and paragraph 17.4.1 below, in case that any of the shareholders of the Company (for the purpose of this paragraph “Transferring Shareholder(s)”), intends to sell its shares or part of them, to a third party, the following procedure shall be observed:

 

17.3.1    The Transferring Shareholder who intends to transfer his shares, (the Transferor) shall give written notice (Statement of Transfer) to the other shareholders, specifying the number of shares to be transferred (the Transferred Shares), the identity of the candidate Transferee, the purchase price and all material terms regarding the purchase price (e.g. taxes) ("Transfer Price") and shall invite the other shareholders to exercise, if they so wish, their first refusal rights.

 

17.3.2    If, upon the expiry of thirty (30) days from the date of receipt of the Statement of Transfer, the other shareholders have not accepted in writing to purchase the Transferred Shares on the terms stated in the Statement of Transfer, then the Transferor may within 30 days, transfer the Transferred Shares to the candidate Transferee upon the same or more favorable to the Transferor, terms and conditions and at the Transfer Price or at a higher price. It is agreed that the Transferor is not obliged to transfer his shares to the other shareholders if the latter do not intend to acquire the total number of the Transferred Shares.

 

17.3.3    Insofar as more than one of the other shareholders exercises their first refusal rights prescribed above, these shareholders shall acquire the Transferred Shares, pro-rata to their shareholding of Common Shares in the Company. The transfer of the Transferred Shares to the other shareholders and the depositing of the Transfer Price must take place within ten (10) days from the date of receipt of the last notification from the other shareholders of their intention to exercise their first refusal rights.

   

  

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17.4   Obligations of New Shareholders

 

17.4.1    The Shareholders will be entitled to transfer all the Common Shares they hold in the Company to a new holding company (“NewCo”) they will establish, in which case (i) paragraph 17.3 will not apply, (ii) all obligations, representations and warranties of the Shareholders set forth in this Agreement and the Schedules thereof shall apply jointly and severally to both the Shareholders and NewCo; and (iii) NewCo shall enjoy the rights and bear the obligations of the Shareholders, pursuant to this Agreement, the Schedules thereof, the Share Pledge Agreements and Escrow Agreements, as if NewCo were an original contracting party hereto. The Shareholders shall procure that NewCo will execute in favor of the Investor such an amending pledge agreement in form and substance similar to Share Pledge Agreement I.

 

17.4.2    In the event of capital increase of the Company, through which a new shareholder acquires shares, and in each case of a transfer of shares to a third party who is not a shareholder of the Company, the existing shareholders (in the event of increase) and the transferring shareholder (in the event of transfer) undertake the obligation to ensure the unconditional and written adherence to this Agreement by the party acquiring the shares of the Company. The adherence document shall obligatorily be submitted to the Company during the registration of the new shareholder in the shareholders’ registry.

 

17.5   Tag along right

 

17.5.1    Subject to the provisions of Sections 17.2.1 and 17.3 above, in the event that the Investor wishes to sell any of its Common Shares in the Company to a third party (Prospective Transferee), then the Investor shall cause the Prospective Transferee to execute and deliver to the Shareholders (the “Tag Along Shareholders”) an offer (the “Tag–along Offer”) by registered post, registered email or courier  (the "Tag Along Notice") specifying in reasonable detail the identity of the Prospective Transferee, the number of the Investor’s Common Shares to be transferred, the price, the proposed date of Transfer and the other terms and conditions of the Transfer.

 

17.5.2   Election to Participate A Tag Along Shareholder may elect to participate in the contemplated Transfer by delivering written notice by fax and courier (the "Election Notice") to the Investor within 20 days after delivery of the Tag Along Notice in accordance with Subsection 17.5.1 in which event such Shareholder shall be entitled, in accordance with the following provisions of this Section 17, to transfer the same proportion of its Common Shares as is equal, as near as possible, to the proportion which the Investor’s Common Shares which are the subject of the Tag Along Notice bears to the total Investor’s Common Shares at that time. A Tag Along Shareholder that has delivered an Election Notice may withdraw such Election Notice by delivery of written notice to the Investor by fax and courier no later than 3 Business Days prior to the proposed date of Transfer if there is any material change in the terms and conditions of the Transfer set out in the Tag Along Notice or notified to it pursuant to Subsection 17.5.1.

 

17.5.3   Consideration Any Transfer pursuant to this Section 17.5 shall be on the same terms and conditions as those terms and conditions applicable to the Investor.

 

17.5.4   Prospective Transferees. The Investor shall not Transfer all or any part of its Common Shares to any Prospective Transferee pursuant to this Section 17.5 unless:

 

(i)    Simultaneously with the Transfer, such Prospective Transferee purchases from the Tag Along Shareholders which have delivered an Election Notice in accordance with Subsection 17.5.2 which has not been withdrawn, all of the Common Shares which those Tag Along Shareholders are entitled to sell to the Prospective Transferee pursuant to this Section 17.5 on the same terms and conditions; or

 

(ii)    If such Prospective Transferee declines to allow the participation of such Tag Along Shareholders, simultaneously with such Transfer, the Investor purchases (on the same terms and conditions, subject to Subsection 17.5.5, on which its own Common Shares are being sold to such Prospective Transferee) the equivalent number of Common Shares from such Tag Along Shareholders which those Tag Along Shareholders would have been entitled to sell pursuant to this Section 17.5.

   

  

19

  

   

17.5.5   Indemnities and Representations. In respect of any Transfer of Common Shares pursuant to this Section 17.5, the Tag Along Shareholders shall not be required to give any representations, indemnities or similar assurances, other than with respect to title to, and ownership of, their respective Common Shares (on terms consistent with those provided by the Investor in respect of its Common Shares).

 

17.6   Drag Along Right

 

Subject to the provisions of Sections 17.2.1 and 17.3 above the Investor will have the right to drag along the Shareholders from the third anniversary from Closing and onwards.

 

17.6.1   Delivery of Drag Along Notice At least 60 days prior to the date of any Transfer of all but not less than all of the Investor’s Common Shares by the Investor to a third party purchaser the Investor may deliver a written notice by fax and courier (the "Drag Along Notice") to the Shareholders (in this Section the "Drag Along Shareholders"), specifying in reasonable detail the identity of the Prospective Transferee, the price, the proposed date of Transfer and the other terms and conditions of the Transfer.

 

17.6.2   Requirement to Participate. Upon receipt of the Drag Along Notice, the Drag Along Shareholders shall subject to the provisions of Subsection 17.6.3 as to the consideration, be obliged to participate in the contemplated Transfer by selling all of their respective Common Shares in accordance with the following provisions of this Section 17.6.

 

17.6.2   Consideration. Any Transfer pursuant to this Subsection 17.6 shall be on the same terms and conditions as those terms and conditions applicable to the Investor provided however that the Drag Along Shareholders will not be obliged to participate in the contemplated Transfer if the price agreed to be received by them for their Common Shares is less than the higher of the following:

 

(i)   the amount which arises from the product of the number “8” (eight) multiplied by the consolidated and combined EBITDA of the Companies, for the year prior to the exercise by the Investor of its Drag Along Right, and further multiplied by the percentage which the Drag Along Shareholders hold in the Share Capital of the Company with respect to Common Shares, or

 

(ii)   the amount which arises from the product of the number “1.5” (one point five) multiplied by the consolidated and combined revenues of the Companies, for the year prior to the exercise by the Investor of its Drag Along Right, and further multiplied by the percentage which the Drag Along Shareholders hold in the Share Capital of the Company with respect to Common Shares.

 

17.6.3   Time of Transfer. The Drag Along Shareholders shall Transfer all of their respective Common Shares to the Prospective Transferee on the same terms and conditions on which the Investor’s Common Shares are being sold to the Prospective Transferee and simultaneously with the Transfer of all of the Investor’s Common Shares to such Prospective Transferee.

 

17.6.4   Indemnities and Representations. In respect of any Transfer of Common Shares pursuant to this Section 17.6, the Drag Along Shareholders shall not be required to give any representations, indemnities or similar assurances, other than with respect to title to, and ownership of, their respective Common Shares (on terms consistent with those provided by the Investor in respect of its Common Shares).

 

17.7   Exit

 

17.7.1    Common goal of the contracting parties is either

 

(i)    The listing of the Company’s Common Shares on a Major Stock Exchange; or

 

(ii)    A share swap of the Shareholders’ Common Shares in the Company into VelaTel’s Series A Common Stock followed by the listing of VelaTel’s Series A common shares on a Major Stock Exchange. Such exchange of the Shareholders’ Common Shares in the Company with VelaTel’s Series A Common Stock shall be based on the following valuation with respect to the Company and VelaTel:

   

  

20

  

   

(a)    The Shareholders Common Shares will be valued at the higher of the following:

 

	
·  

	
The amount which arises from the product of the number “8” (eight) multiplied by the consolidated and combined EBITDA of the Companies, for the year prior to the roll up and further multiplied by the percentage which the Shareholders hold in the Share Capital of the Company with respect to Common Shares, or

 

	
·  

	
The amount which arises from the product of the number “1.5” (one point five) multiplied by the consolidated and combined revenues of the Companies, for the year prior to the roll up, and further multiplied by the percentage which the Shareholders hold in the Share Capital of the Company with respect to Common Shares.

 

(b)    Each share of VelaTel’s Series A Common Stock will be valued as following:

 

	
·  

	
The amount which equals to the volume-weighted average of the closing price of shares being traded on any Major Exchange upon which VelaTel’s Series A Common Stock is listed from time to time, for the ten-day trading period immediately preceding the date of the roll up as detailed in Subsection 17.7.1 (ii) above.

 

VelaTel shall procure that the Shareholders will be entitled to demand and piggyback registration rights, with respect to VelaTel’s Series A Common Stock that the Shareholders will own on terms at least equal to those granted Isaac Organization, provided that the Shareholders’ right to exercise their piggyback registration rights shall be contingent upon Isaac Organization also exercising its piggyback registration rights.

 

17.7.2    If Investor has not provided 7LCPEELP an exit based on either 17.7.1 (i) or (ii) above by December 31, 2016, then 7LCPEELP will have the right to drag along the Investor pursuant to the provisions of this Subsection 17.7.2.  If Investor has provided 7LCPEELP an exit based on either (i) or (ii) above by December 31, 2016 but 7LCPEELP declines to exercise its option to exit, then 7LCPEELP’s drag along rights shall expire.

 

(i)   Delivery of Drag Along Notice At least 60 days prior to the date of any Transfer of all but not less than all of the Shareholders’ Common Shares by the Shareholders to a third party purchaser, 7LCPEELP may deliver a written notice by fax and/or courier (the "Drag Along Notice") to the Investor specifying in reasonable detail the identity of the Prospective Transferee, the price, the proposed date of Transfer and the other terms and conditions of the Transfer.

 

(ii)   Requirement to Participate. Upon receipt of the Drag Along Notice, the Investor shall be obliged to participate in the contemplated Transfer by selling all of its respective Common Shares in accordance with the following provisions of this Section 17.7.

 

(iii)   Consideration. Any Transfer pursuant to this Section 17.7 shall be on the same terms and conditions as those terms and conditions applicable to the Shareholders provided however that the Investor will not be obliged to participate in the contemplated Transfer if the price agreed to be received by it for its Common Shares is less than the higher of the following:

 

	
·  

	
the amount which arises from the product of the number ”6” (six) multiplied by the consolidated and combined EBITDA of the Companies, for the year prior to the exercise by 7LCPEELP of its Drag Along Right, and further multiplied by the percentage which the Investor holds in the Share Capital of the Company with respect to Common Shares, or

 

	
·  

	
the amount which arises from the product of the number “1.2” (one point 2) multiplied by the consolidated and combined revenues of the Companies, for the year prior to the exercise by 7LCPEELP of its Drag Along Right, and further multiplied by the percentage which the Investor holds in the Share Capital of the Company with respect to Common Shares.

 

(iv)   Time of Transfer. The Investor shall transfer all of its respective Common Shares to the Prospective Transferee on the same terms and conditions on which the Shareholders’ Common Shares are being sold to the transferee and simultaneously with the transfer of all of the Shareholders’ Common Shares to such Prospective Transferee.

     

  

21

  

   

(v)   Indemnities and Representations. In respect of any Transfer of Common Shares pursuant to this Section 17.7, the Investor shall be obligated to join on a several and pro rata basis (based on the gross proceeds to be received) in any indemnification that 7LCPEELP agrees to provide or other obligations to which 7LCPEELP is subject in connection with such Transfer (other than any obligations which relate specifically to warranties given by 7LCPEELP regarding its title to, and ownership of, the 7LCPEELP’s Common Shares), provided that 7LCPEELP shall have first consulted with the Investor as to the terms of such indemnification or other obligations and the Investor has provided its prior written consent (not to be unreasonably withheld or delayed) to joining on a pro rata basis in any such indemnification or other obligations and, provided further, that the Investor shall be entitled on a pro rata basis to the benefit of any exceptions.

 

17.8   Effect of FATCA

 

If the effect of any consideration payable under Sections 17.6.2 or 17.7.1 would subject the Shareholders to withholding tax under FATCA, Shareholders shall have the right to elect payment of the consideration in the form of cash based on the same formula as set forth in the respective Sections (i.e.17.6.2 and 17.7.1) for determining the price to be received by the Shareholders for their Common Shares.

 

18.   7LCPEELP'S RIGHT TO INFORMATION

 

18.1    The Investor, as carrying out the Company’s management post-Closing, undertakes the obligation, for so long as 7LCPEELP owns shares of the Company, to cause the Company to deliver to 7LCPEELP the following documents, concerning the Companies:

 

(a)   monthly management accounts (including income statement and cash flow) and report on the progress of the Investment comparing actual monthly results and progress with the respective results as per business plan or the quarterly budget as approved by the Board of Directors, provided such accounts and reports shall be no more detailed than the Company has generated up to Closing or 7LCPEELP shall incur the full cost of preparing such reports based upon raw data to which they are entitled as a Shareholder,

 

(b)   quarterly and annual year-to-date unaudited financial statements (including balance sheet, income statement and cash flow),

 

(c)   the annual audited financial statements approved by the competent bodies,

 

(d)   the budget for the upcoming fiscal year and succeeding two years drawn up by the Investor, being the management of the Company, describing in detail, at a minimum, assumptions with respect to (a) revenues (b) customers (c) operating costs and (d) capital expenditures,

 

(e)   the quarterly budget for the upcoming 3 months drawn up by the Investor, being the management of the Company, describing in detail, at a minimum, assumptions with respect to (a) revenues (b) customers (c) operating costs and (d) capital expenditures, provided such budgets shall be no more detailed than the Company has generated up to Closing, or 7LCPEELP shall incur the full cost of preparing such reports based upon raw data to which they are entitled as a Shareholder,

 

(f)   a management letter in a form reasonably acceptable to 7LCPEELP discussing new developments, significant variances from the business plan in force and

 

(g)   such other financial or operating information as may be reasonably required by 7LCPEELP from time to time.

 

18.2    The above documents shall be submitted as follows:

 

(a)   the monthly management accounts and reports within fifteen (15) calendar days after the end of the respective month,

 

(b)   the quarterly and annual year-to-date unaudited financial statements, within forty-five (45) calendar days from the end of the respective period,

   

  

22

  

   

(c)   the annual audited financial statements within sixty (60) calendar days following each fiscal year, unless the period is extended by a unanimous vote of the Board of Directors of the Company,

 

(d)   the annual budget, at least 45 days prior to the beginning of each fiscal year,

 

(e)   the quarterly budget, at  least 20 days prior to the beginning of each quarter and

 

(f)   the management letter at intervals to be advised by 7LCPEELP.

    

19.   TERMINATION

 

This Agreement may be terminated and the Transaction abandoned at any time prior to the Closing:

 

(a)   by mutual written consent of the Investor and 7LCPEELP;

      

(b)   by any Party if:

 

i.   the Closing does not occur on or before January 31, 2012, provided that the right to terminate this Agreement under this Section (ii) (A) shall not be available to any Party whose breach of a representation, warranty, covenant or agreement under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or before such date; or

 

ii.   a Governmental Authority shall have issued an Order or taken any other action, in any case having the effect of restraining, enjoining or otherwise prohibiting the Transaction, which Order or other action is final and non-appealable;

 

(c)   by Investor if:

 

i.   any condition to the obligations of Investor hereunder becomes incapable of fulfillment, other than as a result of a breach by Investor of any covenant or agreement contained in this Agreement and such condition is not waived by Investor; or

 

ii.   there has been a breach by the Shareholders of any representation, warranty, covenant or agreement contained in this Agreement or Schedules, or if any representation or warranty of the Shareholders shall have become untrue, in either case such that the conditions set forth in Section 2 of this Agreement would not be satisfied.

 

(d)   by 7LCPEE / Shareholders if:

    

i.   any condition to the obligations of 7LCPEE / Shareholders hereunder becomes incapable of fulfillment, other than as a result of a breach by 7LCPEE / Shareholders of any covenant or agreement contained in this Agreement and such condition is not waived by7LCPEE / Shareholders; or

     

ii.   there has been a breach by the Investor of any representation, warranty, covenant or agreement contained in this Agreement or Schedules, or if any representation or warranty of the Investor shall have become untrue, in either case such that the conditions set forth in Section 2 of this Agreement would not be satisfied.

Effect of Termination.  In the event of termination of this Agreement, written notice of the termination shall immediately be given to the other Parties, this Agreement shall immediately become null and void and there shall be no liability or obligation on any of the Parties; provided that the provisions of except that the provisions of this Section 19 and Sections 22 (Expenses), 20.1 (Notices), 24 (Governing Law) and 25(Jurisdiction) shall remain in full force and effect and survive any termination of this Agreement. Termination of this Agreement does not affect a Party's accrued rights and obligations under this Agreement as at the date of termination.

   

  

23

  

 

20.   NOTICES

 

Any notice, request, demand, waiver, consent, approval or other communication which is required or permitted hereunder shall be in writing and shall be deemed given: (i) on the date established by the sender as having been delivered personally; (ii) on the date delivered by a private courier as established by the sender by evidence obtained from the courier; (iii) on the date sent by facsimile, with confirmation of transmission, if sent during normal business hours of the recipient, if not, then on the next Business Day; or (iv) on the fifth day after the date mailed, by certified or registered mail, return receipt requested, postage prepaid.  Such communications, to be valid, must be addressed as follows:

 

If to Investor, to:

 

VelaTel Global Communications, Inc.

12526 High Bluff Drive, Suite 155

San Diego, California 92130 USA

Attn: Kenneth L. Waggoner, Esq.

Tel.:  +1 760 230 8986

Fax:  +1 760 359 7042

Email: kwaggoner@velatel.com

 

If to 7LCPEELP, to:

 

7L Equity Partners (Emerging Europe) Limited

Carinthia House

9-12 The Grange

St Peter Port

Guernsey, GY1 4BF

Great Britain

Attn. Mr. Jacques Vermeulen

Tel.:  +44 1481 743 758

Fax:  +44 1481 734 301

Email: jacques.vermeulen@augentius.com

 

If to the Shareholders 1, 2 and 3, to:

 

IRIS Management Services Ltd

Agapinoros 2, Iris Tower 13

7th Floor, Flat/Office 702

P.C. 1076, Nicosia, Cyprus

Facsimile: +357-22-717-745

Attention: Stella Constantinou

 

or to such other address or to the attention of such Person or Persons as the recipient Party has specified by prior written notice to the sending Party (or in the case of counsel, to such other readily ascertainable business address as such counsel may hereafter maintain).  If more than one method for sending notice as set forth above is used, the earliest notice date established as set forth above shall control.

 

21.   AMENDMENTS AND WAIVERS

 

(a)   Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each Party to this Agreement, or in the case of a waiver, by the Party against whom the waiver is to be effective.

 

(b)   No failure or delay by any Party in exercising any right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

 

(c)   To the maximum extent permitted by Law: (i) no waiver that may be given by a Party shall be applicable except in the specific instance for which it was given; and (ii) no notice to or demand on one party shall be deemed to be a waiver of any obligation of such Party or the right of the Party giving such notice or demand to take further action without notice or demand.

    

  

24

  

 

22.   EXPENSES

 

Each Party shall bear its own costs and expenses in connection with this Agreement and the transactions contemplated by this Agreement, including all legal, accounting, financial advisory, consulting and all other fees and expenses of third parties, whether or not the Transaction is consummated.

 

23.   ASSIGNMENT

 

No party shall be entitled to assign or transfer all or any of its rights, benefits or obligations under this Agreement without the prior written consent of all the other parties to this Agreement. This Agreement may not be assigned by either Party hereto without the prior written consent of the other Parties.

 

24.   GOVERNING LAW

 

This Agreement shall be governed by and construed in accordance with the laws of the Republic of Cyprus.

 

25.   JURISDICTION

 

All disputes arising in connection with the creation, validity, effect, interpretation or performance of, or the legal relationships established by, this Agreement or otherwise arising in connection with this Agreement, shall be finally settled by arbitration. The arbitration shall be held in Cyprus and conducted in the English language in accordance with the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules as at present in force. There shall be 3 arbitrators, one to be appointed by the claimant and/or claimants and one to be appointed by the respondent and/or respondents and the third to be appointed by the common agreement of the two arbitrators selected by the parties. In the event of a failure to agree on the appointment of arbitrators, the appointing authority shall be the London Court of International Arbitration. If the parties so agree, there shall be a sole arbitrator appointed by the London Court of International Arbitration Upon the award rendered an application may be made to the competent court for a judicial acceptance of the award and an order for enforcement.

 

26.   COUNTERPARTS

 

This Agreement may be executed in counterparts, and either Party hereto may execute any such counterpart, each of which when executed and delivered shall be deemed to be an original and both of which counterparts taken together shall constitute but one and the same instrument.  This Agreement shall become effective when each Party hereto shall have received a counterpart hereof signed by the other Party hereto.  The Parties agree that the delivery of this Agreement may be effected by means of an exchange of facsimile signatures with original copies to follow by mail or courier service.

 

27.   THIRD PARTY BENEFICIARIES

 

A person who is not a party to this Agreement has no rights to enforce any term of this Agreement but this does not affect any right or remedy of a third party which exists or is available.

 

28.   ENTIRE AGREEMENT

 

This Agreement, the Schedules and the documents, instruments and other agreements specifically referred to in this Agreement or delivered pursuant to this Agreement set forth the entire understanding of the Parties hereto with respect to the Transaction.  All Schedules referred to in this Agreement are intended to be and hereby are specifically made a part of this Agreement.  Any and all previous agreements and understandings between or among the Parties regarding the subject matter of this Agreement, whether written or oral, are superseded by this Agreement.

    

  

25

  

    

29.   CAPTIONS

 

All captions contained in this Agreement and on the Schedules are for convenience of reference only, do not form a part of this Agreement and shall not affect in any way the meaning or interpretation of this Agreement and of the Schedules.

 

30.   SEVERABILITY

 

Any provision of this Agreement which is invalid or unenforceable in any jurisdiction shall be ineffective to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining provisions hereof, and any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

 

31.   SPECIFIC PERFORMANCE

 

Investor and the Shareholders each agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by them in accordance with the terms hereof and that each Party shall be entitled to specific performance of the terms hereof, in addition to any other remedy at Law or equity.

 

32.   INTERPRETATION

 

(a)   The meaning assigned to each term defined herein shall be equally applicable to both the singular and the plural forms of such term and vice versa, and words denoting either gender shall include both genders as the context requires.  Where a word or phrase is defined in this Agreement, each of its other grammatical forms shall have a corresponding meaning.

 

(b)   The terms "hereof", "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement.

 

(c)   When a reference is made in this Agreement to an Article, Section, paragraph, Exhibit or Schedule, such reference is to an Article, Section, paragraph, Exhibit or Schedule to this Agreement unless otherwise specified.

 

(d)   The word "include", "includes", and "including" when used in this Agreement shall be deemed to be followed by the words "without limitation", unless otherwise specified.

 

(e)   The phrase “the aggregate of”, “the total of”, “the sum of”, or a phrase of similar meaning means “the aggregate (or total or sum), without duplication thereof.

 

(f)   In the computation of periods of time from a specified date to a later specified date , unless otherwise expressly stated, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding.”

 

(g)   A reference to any Party to this Agreement or any other agreement or document shall include such Party's predecessors, successors and permitted assigns.

 

(h)   Reference to any Law means such Law as amended, modified, codified, replaced or reenacted, and all rules and regulations promulgated thereunder.

(i)   The Parties have participated jointly in the negotiation and drafting of this Agreement.  Any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any Party by virtue of the authorship of this Agreement shall not apply to the construction and interpretation hereof.

   

  

26

  

    

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date first above written.

 

	

7LCPEELP

 

7L CAPITAL PARTNERS EMERGING EUROPE LIMITED

	 	 	

INVESTOR

VELATEL GLOBAL COMMUNICATIONS, INC.

	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	By: 	
/s/ Salvator I. Levis  

	 	By: 	
/s/ George Alvarez 

	 
	

Salvator I. Levis, Authorized Signatory for 7L Capital Partners Emerging Europe L.P.

	 	

George Alvarez, its Chief Executive Officer

	 
	
 

	 	 	
 

	 

 

	

Company

 

HERLONG INVESTMENTS LIMITED

	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	By: 	
/s/ Aristides C. Fronistas 

	 	 	
 

	 
	

Aristides C. Fronistas

Authorized Signatory for 7L Capital Partners Emerging Europe L.P.

	 	 	 
	
 

	 	 	
 

	 

 

	

KARLO VLAH

	 	

DURDA VLAH

	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	By: 	
/s/ Salvator I. Levis  

	 	By: 	
/s/ Salvator I. Levis  

	 
	

Salvator I. Levis, as attorney in fact per POA

	 	

Salvator I. Levis, as attorney in fact per POA

	 
	
 

	 	 	
 

	 

 

	

JOSIP VLAH

	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	By: 	
/s/ Salvator I. Levis  

	 	 	
 

	 
	

Salvator I. Levis, as attorney in fact per POA

	 	

 

	 
	
 

	 	 	
 

	 

 

 

  

27

  

 

7LCP'S AND THE SHAREHOLDERS WARRANTIES

 

 

	
1.

	
Disclosure Schedule

 

The information disclosed in the Disclosure Schedule is in all material respects true, correct and complete, and such information fairly and accurately presents the legal and financial situation of the Company, Novi-net d.o.o. and Montenegro Connect d.o.o.  All material facts about, or circumstances relating to, the assets, business or financial condition of the Companies have been fairly and accurately disclosed in the Disclosure Schedule.

 

	
2.

	
Organisation, Operations and Status

 

	
(a)

	
Each of the Companies is a company duly organised, validly existing and in good standing under the laws of its respective jurisdiction of incorporation and operation, and is not in breach of any legal, statutory or administrative requirements or commercial arrangements applicable to it.  No steps have been taken which may make any of the foregoing untrue.

 

	
(b)

	
Each of the Companies has all necessary power, authority, consents, licenses and permits required to own, operate or lease the properties and assets now owned, operated or leased by it as well as to provide all the services provided by it.

 

	
(c)

	
True and complete copies of the memorandum of association, by-laws or other organisational documents of the Companies have been disclosed to the Investor in the Disclosure Schedule and such copies shall be true, complete, accurate and up-to-date on the date of this Agreement and on the Closing Date.  No action has been taken to introduce any amendments to any Company's memorandum of association, by-laws or other organisational documents and, except as contemplated by this Agreement, no proceedings are pending for any change to the details contained in respect of the Companies at the relevant Commercial Registries or with any other Governmental Authority.

 

	
(d)

	
All resolutions, financial statements and other documents that each of the Companies is required by law to file with any Governmental Authority have been duly filed.

 

	
(e)

	
No resolution on the liquidation of any of the Companies has been adopted or is pending and no court has issued any decision on dissolution of any of the Companies.

 

	
(f)

	
None of the Companies has been declared bankrupt, composition proceedings with creditors have not been opened in relation to any of the Companies, and no circumstances have arisen for declaration of bankruptcy or opening of composition proceedings in respect of any of the Companies.

 

	
3.

	
Authority, Enforceability and No Conflict

 

	
(a)

	
The Shareholders have full power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby and no further authorisations are required under applicable law, any of the Companies’ organisational documentation or otherwise.

 

	
(b)

	
This Agreement has been duly and validly executed and delivered by the Shareholders and constitutes a valid and binding obligation of the Shareholders, enforceable against the Shareholders in accordance with its terms.

    

  

Schedule 1 - 1

  

    

	
(c)

	
The execution and delivery of this Agreement by the Shareholders, the performance by the Shareholders of their obligations hereunder and the consummation by the Shareholders of the transactions contemplated hereby will not (i) violate, conflict with or result in any breach of any provision of the organisational documents of 7LCPEELP or the Companies or any agreement or judicial requirement; (ii) result in the creation of any Encumbrance over the business or assets of any of the Companies; or (iii) result in the suspension, revocation, forfeiture or non-renewal of any permit.

 

	
4.

	
Consents

     

Except as contemplated by this Agreement, no consent is necessary for the consummation by the Shareholders of the transactions under this Agreement.

    

	
5.

	
Details of Companies

 

	
(a) 

	
As at the date hereof the issued share capital of the Company amounts to Euro 3,900 divided into 3,900 Common Shares at a nominal value (par value) of Euro 1 each, as per the following chart :

 

	
(b) 

	
As at the date hereof the issued share capital of Novi-Net d.o.o amounts 10,158.000.00 HRK divided into 1 part of 100% at a nominal value (par value) of HRK 10,158,000.00 each.

 

	
(c) 

	
As at the date hereof the issued share capital of Montenegro Connect d.o.o amounts Euro 637,001.00 divided into 1 part of 100% at a nominal value (par value) of Euro 637,001.00 each.

 

	
(d) 

	
The Company has no subsidiaries other than Novi-net d.o.o and Montenegro Connect d.o.o and neither of them has any subsidiary.

 

	
6.

	
Title and Assets

    

	
(a)

	
From the date hereof until Closing Date when Investor shall become a shareholder of the Company, the Company shall not proceed to any capitalisation of its reserve funds nor shall it take any action in order to increase or decrease in any way its authorised or issued share capital, except as required by Law.

    

	
(b)

	
No shares of the Company have been issued, pledged or otherwise encumbered, and no transfer of shares has occurred, in any manner, except in accordance with Law and the Company’s constituent documents. All issued shares were validly issued, are fully paid and non assessable and have been issued in accordance with all applicable legislation. All shares of the Company are legally and beneficially owned directly by the Shareholders.

 

	
(c)

	
The Novi-net doo shares constitute 100% of the issued shares in the share capital of Novi-net doo.  All of the Novi-net doo Shares are duly authorised, validly issued and fully paid and all of the Novi-net doo Shares are legally and beneficially owned directly by the Company, free and clear of any Encumbrances or rights of third parties of any kind.  There is no requirement to make any additional payment in respect of the Novi-net doo Shares.

 

	
(d)

	
The Montenegro Connect doo shares constitute 100% of the issued shares in the share capital of Montenegro Connect doo.  All of the Montenegro Connect doo Shares are duly authorised, validly issued and fully paid and all of the Montenegro Connect doo Shares are legally and beneficially owned directly by the Company, free and clear of any Encumbrances or rights of third parties of any kind.  There is no requirement to make any additional payment in respect of the Montenegro Connect doo Shares.

    

  

Schedule 1 - 2

  

    

	
(e)

	
Each of the Companies owns, leases or has other contractual rights to use all tangible personal property necessary for the conduct of the business as now conducted and as currently proposed to be conducted by it, free and clear of all Encumbrances.

 

	
7.

	
Options and Warrants

      

Save as disclosed in the Disclosure Schedule there are no authorised or outstanding subscriptions, options, conversion rights, warrants or other agreements, securities or commitments of any nature whatsoever (whether oral or written and whether current or conditional) obligating the Companies to issue, deliver or sell, or cause to be issued, delivered or sold, any authorised or issued shares in the capital, or any securities convertible into or exchangeable for shares in the capital, of any the Companies or obligating any person to grant, extend or enter into any such agreement or commitment.

    

	
8.

	
Financial Statements

 

	
(a)

	
The Financial Statements have been prepared in all material respects in accordance with applicable accounting regulations and requirements and present fairly the financial position and results of operations of the Companies as at such dates and for the periods for which they were prepared.

 

	
(b)

	
Since the date of the Financial Statements, no dividend or other distribution of profits has been declared, made or paid by or in relation to any of the Companies.

 

	
(c)

	
None of the Companies has any indebtedness, obligations or liabilities of any kind (whether accrued, absolute, contingent, off-balance-sheet or otherwise, and whether due or to become due) that would have been required by applicable accounting regulations and requirements to be reflected or reserved against on the balance sheet and were not fully reflected or reserved against in the Financial Statements of the Companies.

 

	
(d)

	
Since the date of the Financial Statements, there has been no event that would be reasonably likely to adversely affect the accuracy of the information presented in the Financial Statements, or to impair any of the Companies ability to continue operating on the same basis as it has during the period covered by the Financial Statements.

 

	
(e)

	
None of the Companies has any off-balance-sheet liabilities.  In particular, none of the Companies (i) has granted any guarantees, issued any bills of exchange or created any Encumbrances over any of its assets or (ii) is liable for any debts of any third parties

    

	
9. 

	
Absence of Undisclosed Liabilities

      

Except for matters relating to the transactions contemplated by this Agreement, or provided for or reserved against in the Financial Statements, there are no liabilities or financial obligations of any of the Companies in the aggregate (including any and all contingent liabilities) that are required to be reflected on a balance sheet prepared in accordance with applicable accounting regulations and requirements.

    

	
10.

	
Employee Matters

   

	
(a)

	
There are no pending claims (including claims for workplace injury) by any past or current employees of any of the Companies against such Company, and, to the best knowledge of the Shareholders, no circumstances have occurred that give rise to any claims by any employee of any of the Companies against such Company.

    

  

Schedule 1 - 3

  

     

	
(b)

	
Except as disclosed in the Key Employee Schedule, there are no (i) directors, employees, contractors and consultants in any of the Companies (including title and position) as of the Closing Date, (ii) the base compensation and benefits of each such director, employee, contractor and consultant whose base compensation and target bonus on an annual basis exceeds 70,000 Euro, and (iii)  former directors, employees, contractors and consultants in any of the Companies who are receiving benefits or scheduled to receive benefits in the future, and the nature and amount of such benefit.

 

	
(c)

	
All employment contracts in force in Novi-net d.o.o. and Montenegro Connect d.o.o. as per applicable employment legislation in Croatia and Montenegro may not be terminated by such Company without cause and without any severance or other liability to such Company.

 

	
(d)

	
Except as disclosed in the Key Employee Schedule, all directors, contractors and consultants of each of the Companies may be terminated by such Company at any time with or without cause and without any severance or other liability to such Company. The individuals listed in the Disclosure Schedule as independent contractors (as distinguished from employees) have been properly characterized as such using the applicable rules and regulations of the Taxing Authority of any applicable Governmental Entity.

 

	
(e)

	
Each of the Companies has paid or properly accrued in the ordinary course of business all wages and compensation due to all current and past employees, including all vacations or vacation pay, holidays or holiday pay, sick days or sick pay, and bonuses, severance payments, profit sharing, withholdings and/or payment of taxes, final payment and indemnification for dismissal, and penalties and compensation for termination of contract, and interest, as applicable.  Each of the Companies has filed and/or posted all reports, information and notices required under any law respecting the hiring, hours, wages, occupational safety and health, employment, promotion, termination or benefits of any employee.

    

	
11.

	
Fees and Commissions

    

	
(a)

	
Neither the Shareholders, nor any of their Affiliates, directors, officers, partners, employees or agents have employed any investment banker, broker or finder in connection with the Transaction.

 

	
(b)

	
Except for payments, if any, to be made by the Shareholders at their own expense, neither the execution and delivery of this Agreement by the Shareholders, the performance by the Shareholders of their obligations hereunder nor the consummation by the Shareholders of the transactions contemplated hereby will result in any payment being made by any of the Companies to any directors, officers, partners, employees, agents or other persons.

 

	
(c)

	
Any third party consulting and advising fees incurred by the Shareholders in connection with this Agreement and the transactions contemplated herein are the sole obligation of the Shareholders, and none of the Companies shall be held responsible for any such fees.

    

	
12.

	
Contracts

   

	
(a)

	
The Disclosure Schedule contains details of all agreements to which each of the Companies is a party or by which it is bound, except:

 

	
  

	
(i)

	
agreements requiring payment or provision of services of less than Euro 25,000 in the case of any individual agreement or Euro 50,000 in aggregate; and

 

	
  

	
(ii)

	
any agreement that is terminable by any of the Companies upon 30 days notice or less without the payment of any material penalty or material termination fee.

     

  

Schedule 1 - 4

  

    

	
(b)

	
Save as disclosed in the Disclosure Schedule there are no contracts or other agreements to which any of the Companies is a party which are for a value in excess of Euro 50,000 and which cannot be cancelled or terminated by such Company within a notice period of three months.

   

	
(c)

	
None of the Companies have entered into any contracts or agreements that are not on an arm's length basis.

 

	
(d)

	
Save as disclosed in the Disclosure Schedule and any employment contract disclosed in the Schedule of Key Employees, none of the Companies have entered into any contract or agreement with any related party.

 

	
(e)

	
The Company has no indebtedness, obligations or liabilities of any kind whatsoever (whether accrued, absolute, contingent, off-balance-sheet or otherwise, and whether due or to become due) and the only asset of the Company is its 100% shareholding in each of Novi-net d.o.o. and Montenegro Connect d.o.o.

 

	
13.

	
Taxes

 

	
(a)

	
Each of the Companies has filed on a timely basis all returns and reports in respect of Taxes for which it may be liable.  All Taxes incurred by any of the Companies that were due and payable have been paid.  There are no pending or, to the best knowledge of the Shareholders after due inquiry, threatened, audits or investigations relating to Taxes for which any of the Companies may become liable.  No deficiencies for any Taxes have been assessed against any of the Companies, other than deficiencies, if any, that are reflected in the Financial Statements of such Company.

 

	
(b)

	
All Taxes that any of the Companies has been required by law to withhold or collect have been duly withheld or collected and have been timely paid to the proper Governmental Authorities or properly held by such Company for such payment.

 

	
14. 

	
Litigation

      

There are no lawsuits, arbitrations, claims, proceedings or investigations pending or, to the best knowledge of the Shareholders, threatened by or against any of the Companies or administrative proceedings to which any of the Companies is a party, that could reasonably be expected to result in a claim or judgment against any of the Companies in excess of Euro 25,000 or that would prevent the consummation of any transaction contemplated by this Agreement.

      

	
15. 

	
Environmental Matters

     

The Companies and their businesses, operations, assets, equipment, property, leaseholds and other facilities are, in all material respects, in compliance with the provisions of EBRD's "Environmental Procedures for Private Equity Funds".

   

	
16. 

	
Intellectual Property

     

Each of the Companies owns or has the right to use all intellectual property rights used by it in the course of its business and, to the best knowledge of the Shareholders, there is no infringement by any of the Companies of any third-party intellectual property rights.

        

  

Schedule 1 - 5

  

    

	
17. 

	
Competition

     

None of the Companies is a party to any agreements with any third party regarding competition, price fixing or division of markets.

    

	
18. 

	
Real Property

     

The Companies do not own, possess ownership title to, nor hold any rights of perpetual usufruct to any real estate located in Cyprus, Croatia, Montenegro or elsewhere.  All of the real property leased by the Companies (“Leased Real Property”) is identified on the Disclosure Schedule.  Each of the leases for the Leased Real Property identified the Disclosure Schedule is in full force and effect and has not been modified, amended, or altered, in writing or otherwise.  Except as set forth in the Disclosure Schedule, neither the Company nor any other party to any lease to which the Company is also party is in default under any of said leases, nor has any event occurred which, with the giving of notice or the passage of time, or both, would give rise to a default.

    

	
19.

	
Commercial Policy

     

None of the Companies has and nor, to the Shareholders’ best knowledge, have any of their respective officers, directors, authorised employees, agents or representatives:

   

	
(a)

	
paid, offered, promised to pay or offered to pay, or authorized the payment of, any commission, gift, loan, bribe, pay-off or kickback related to any activities of the Companies that violates any applicable law, or entered into any agreement pursuant to which any such commission, gift, loan, bribe, pay-off or kickback may or will at any time be paid;

 

	
(b)

	
offered or given any thing of value to an Official (or any other person, while knowing or having reason to know that all or a portion of such thing of value will be offered, promised or given, directly or indirectly, to an Official) for the purpose of influencing any action, omission or decision by the recipient in order to either obtain or retain a business or other advantage for the Companies in the conduct of their business or to direct business to another person; or

 

	
(c)

	
threatened injury to person, property or reputation in connection with the activities of the Companies in order to influence the decision, action or inaction of any Official or to obtain or retain business or other advantages in the conduct of business.

 

	
20.

	
Authorizations

     

To the best of the Shareholders knowledge each of the Companies owns, holds or lawfully uses in the operation of their respective businesses all necessary licences, concessions, consents, registrations, permits and authorities (public and private) (“Authorizations”) which are necessary for the conduct of its business as currently conducted or as proposed to be conducted, the lack of which could reasonably be expected to have a Material Adverse Effect.  Such Authorizations are valid and in full force and effect, free and clear of all Liens, and none of such Authorizations will be terminated or impaired or become terminable as a result of the transactions contemplated by this Agreement.  To the best knowledge of the Shareholders, no event has occurred and no circumstances exist that (with or without the passage of time or the giving of notice) may result in a violation of or the revocation, withdrawal, termination, cancellation, suspension or modification of any Authorization.  The Shareholders know of no reason why any Authorization should be suspended, cancelled or revoked or should not be renewed or reissued upon or prior to its expiry.

   

  

Schedule 1 - 6

  

   

	
21. 

	
Bank Accounts

    

The Disclosure Schedule includes a list containing the name and address of each bank, safe deposit company or other financial institution in which the Company has an account, lock box or safe deposit box, the account number or other identifying information, and names of all persons authorized to draw thereon or have access thereto.

    

	
22. 

	
Foreign Corrupt Practices Act

     

To Shareholders’ best knowledge, none of the Companies, nor any of their respective directors, officers or employees have made, directly or indirectly, any payment or promise to pay, or gift or promise to give or authorized such a promise or gift, of any money or anything of value, directly or indirectly, to: (i) any foreign official (as such term is defined in the US Foreign Corrupt Practices Act (“FCPA”) for the purpose of influencing any official act or decision of such official or inducing him or her to use his or her influence to affect any act or decision of a governmental authority; or (ii) any foreign political party or official thereof or candidate for foreign political office for the purpose of influencing any official act or decision of such party, official or candidate or inducing such party, official or candidate to use his, her or its influence to affect any act or decision of a foreign Governmental Entity, in the case of both (i) and (ii) above, in order to assist any of the Companies or their respective affiliates to obtain or retain business for, or direct business to, such Company.  To Shareholders’ best knowledge none of the Companies, nor any of their respective directors, officers or employees has made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of funds or received or retained any funds in violation of any law, rule or regulation.

    

	
23. 

	
Compliance with Office of Foreign Assets Control

     

To Shareholders’ best knowledge, none of the Companies, nor any of their respective directors, officers or employees are an OFAC Sanctioned Person (as defined below).  The Companies and their respective directors, officers or employees are in compliance with, and have not previously violated, the US Patriot Act of 2001, as amended through the date of Closing, to the extent applicable to the Companies, and all other applicable anti-money laundering Laws.

    

For the purposes of Section 23 of this Schedule:

    

	
(a) 

	
“OFAC Sanctions” means any sanctions program administered by the Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”).  For ease of reference, and not by way of limitation, OFAC Sanctions programs are described on OFAC's website atwww.treas.gov/ofac;

 

	
(b) 

	
“OFAC Sanctioned Person” means any government, country, corporation or other entity, group or individual with whom or which the OFAC Sanctions prohibit a US Person from engaging in transactions and includes, without limitation, any individual or corporation or other entity that appears on the current OFAC list of Specially Designated Nationals and Blocked Persons (“SDN List”).  For ease of reference, and not by way of limitation, OFAC Sanctioned Persons other than governments and countries can be found on the SDN List on OFAC's website at www.treas.gov/offices/enforcement/ofac/sdn; and

 

	
(c) 

	
“US Person” means any US citizen, permanent resident alien, entity organized under the laws of the US (including foreign branches), or any person (individual or entity) in the US and, with respect to the Cuban Assets Control Regulations, also includes any corporation or other entity that is owned or controlled by one of the foregoing, without regard to where it is organized or doing business.

   

  

Schedule 1 - 7

  

 

 

  

Schedule 2 - page 1

  

 

 

  

Schedule 2 - page 2

  

 

 

  

Schedule 2 - page 3

  

 

 

  

Schedule 2 - page 4

  

 

 

  

Schedule 2 - page 5

  

 

 

 

  

Schedule 2 - page 6

  

 

SHARE PLEDGE AGREEMENT I

 

 

THIS SHARE PLEDGE AGREEMENT (the "Share Pledge") dated the ___ day of December, 2011 is made between:

 

1.   7L Capital Partners Emerging Europe LP a limited partnership incorporated in Guernsey, having its registered office in Guernsey, Carinthia House, 9-12 The Grange, St. Peter Port, GY1 4BF, duly and legally represented by Mr. Salvator Levis (hereinafter “7LCPEELP” or the “Pledgor 1")

 

2.   Karlo Vlah resident of Croatia, Merhatovec 5, HR-40314 Selnica, OIB: 5891406711 (“Pledgor 2”)

 

3.   Đurđa Vlah resident of Croatia Merhatovec 5, HR-40314 Selnica, OIB: 55417661185 (“Pledgor 3”)

 

4.   Josip Vlah resident of Croatia Merhatovec 5, HR-40314 Selnica, OIB: 24162783756 (“Pledgor 4”).

 

(the aforementioned numbers 1, 2, 3 and 4 hereinafter referred to jointly as “Pledgors”)

 

AND

 

5.   VelaTel Global Communications, Inc., a United States (“US”) corporation, organized under the laws of the state of Nevada, with a principal place of business at 12526 High Bluff Drive, Suite 155, San Diego, California duly and legally represented by [●] (hereinafter “VelaTel" or the "Pledgee").

 

(Jointly hereinafter referred to as the “Parties”)

     

WHEREAS:

 

	
A.

	
At the date of this Share Pledge the Pledgors are the registered owners of [●] Common Shares of par value 1 each in “HERLONG ΙNVESTMENTS LIMITED” (referred to as the “Company”) bearing issuance no [●], which are embodied in share certificates no [●] and represent jointly 25% of the issued Common Shares in the share capital of the Company. Pledgor 1 holds 15,381 Common Shares in the Company (“Shares 1”). Pledgor 2 holds 450 Common Shares in the Company (“Shares 2”). Pledgor 3 holds 225 Common Shares in the Company (“Shares 3”). Pledgor 4 holds 225 Common Shares in the Company (“Shares 4”). Shares 1, Shares 2, Shares 3 and Shares 4 shall hereinafter jointly be referred to as “Shares”).

 

	
B.

	
Pledgors have made certain representations, warranties, statements and covenants under the Business Cooperation Agreement between the Pledgors the Pledgee and the Company dated [●] (hereinafter referred to as the “Agreement”), for which each of the Pledgors will be liable pro rata to its shareholding in the Common Shares of the Company (the “Potential Liabilities”);

 

	
C.

	
In order to secure the payment and performance of the obligations of Pledgors in favor of Pledgee relating to the Potential Liabilities, Pledgors have agreed to give a pledge in favour of the Pledgee over the Shares, which are legally held by the Pledgors.

     

  

Schedule 3 - 1

  

NOW, THEREFORE, in consideration of the premises and of the mutual covenants set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

   

1.    CHARGE AND PLEDGE

 

	
1.01

	
As security for the payment and performance by the Pledgors of each and every Potential Liability of Pledgors under Section 11 of the Agreement (the “Obligations”), the Pledgors hereby pledge, charge and assign to the Pledgee the Shares, any further ordinary shares in the Company at any time issued to the Pledgors during the Security Period (as defined in clause 7 below), whether in addition to or in exchange of or in substitution of or in replacement of the Shares (the “Further Shares”) and pledge the aforementioned share certificate numbered [●] (the “Share Certificate 1”), [●] (the “Share Certificate 2”), [●] (the “Share Certificate 3”) and [●] (the “Share Certificate 4”)  representing the Shares, as well as any substitute/additional share certificate issued in replacement of the above (together Share Certificate 1,  Share Certificate 2, Share Certificate 3 and Share Certificate 4, the “Share Certificates”).

 

	
1.02

	
The Pledgors will take any and all further legal steps required by the Pledgee to obtain legal protection for the Pledgee’s rights under this Share Pledge. Any required step shall be reasonable, without prejudice to the rights and obligations of the Pledgors and should be expressed in writing by the Pledgee.

 

	
1.03

	
The Pledgors undertake the obligation to deliver the Escrow Documents as the term is defined in Section 4 to [●] (“Escrow Agent”), in order to be held in escrow according to the terms and conditions of an escrow agreement (the “Escrow Agreement I”) which is being signed at the same time with the Share Pledge.

 

	
1.04

	
Except as otherwise defined herein, all terms used herein and defined in the Agreement shall be interpreted herein as so defined.

    

2.   REPRESENTATIONS AND WARRANTIES

 

2.01           The Pledgors hereby represent and warrant to the Pledgee that:

 

	 	
(a) 

	
the Pledgors are the registered owners of all of the Shares charged pursuant to this Share Pledge, and has full right in and title to the said Shares and the said Shares are free from any charge, lien or encumbrance of any kind save as created pursuant to (or referred to) in this Share Pledge;

 

	 	
(b) 

	
the Pledgors have full power and authority: (i) to execute and deliver this Share Pledge and all notices, certificates and other documents related to this transaction and (ii) to comply with the provisions of, and perform all its obligations under this Share Pledge;

 

	 	
(c) 

	
the Pledgors have taken all necessary corporate and other action to authorize the execution and delivery of this Share Pledge;

 

	 	
(d) 

	
this Share Pledge constitutes the Pledgors’ legal, valid and binding obligations enforceable against the Pledgors in accordance with its terms;

 

	 	
(e) 

	
the entry into and performance by the Pledgors of this Share Pledge does not and will not violate in any respect: (i) any law or regulation of any governmental or official authority or body, or (ii) the constitutional documents of Pledgor 1, or (iii) any agreement, contract or other undertaking to which the Pledgors are a party or which is binding upon the Pledgors or any of their property or assets;

 

	 	
(f) 

	
all consents, licenses, approvals and authorisations which are required in connection with the execution, validity, performance or enforceability of this Share Pledge have been obtained and are valid and subsisting at the date hereof.

    

  

Schedule 3 - 2

  

	
3.  

	
PRESERVATION OF SHARES AND SECURITY

 

During the Security Period (as defined in clause 7 below) and until the Obligations have been discharged in full, the Parties covenant to each other as follows:

 

	
3.01  

	
Each of the Pledgors shall defend at their own cost the Shares each of them owns and all the Pledgee’s rights, title and interest in and to the Shares and to any Further Shares against the claims of any third parties; in the event of failure by the Pledgors to diligently defend against or discharge any claim that contests or is otherwise inconsistent with any such rights, title, or interest of the Pledgee, the Pledgee shall inform in writing the Pledgors requesting the latter to forthwith proceed to any action required so that the Pledgors’ obligations under this section are fulfilled. In case the Pledgors do not proceed to the actions required within 10 Business Days, the Pledgee in its sole discretion, may contest, settle or discharge any such claim, and Pledgors shall pay to the Pledgee, upon written demand, the costs and expenses, including attorney’s fees, thereof.

 

	
3.02  

	
Each of the Pledgors shall promptly notify the Pledgee of any attachment or other legal process levied or attempted to be levied against any of the Shares and/or Further Shares, of any loss or damage to the Shares and/or Further Shares and of any other event affecting any of the Shares and/or Further Shares that might in any way have an adverse effect on the validity or enforceability of the Share Pledge created hereby or on the rights or remedies of the Pledgee hereunder.

 

	
3.03  

	
The Parties agree that the pledge shall not be extended to voting rights, dividends, interest and other monies paid or payable or rights or property accruing as at or after the date hereof on or in respect of all or any of the Shares and/or Further Shares, unless there is an Event of Default (as described below), in which case the total of the rights attached to the Shares and/or Further Shares shall be exercised by the Pledgee, upon the latter’s written notice towards the Pledgors and the Company.

 

	
3.04  

	
Each of the Pledgors shall from time to time furnish notices and obtain consents from all other persons, and properly ensure all other recordations and registrations, as the Pledgee may determine to be necessary in its sole discretion for the realisation of the Pledgee’s rights hereunder.

 

	
3.05  

	
The Pledgors shall not create or permit to exist by any means any pledge, charge, lien, transfer of rights, assignment, agreement or arrangement for security of any kind on or in connection with any part of the Shares and/or Further Shares other than this Share Pledge.

 

	
3.06  

	
The Pledgors subject to the provisions of clause 3.07 below shall not sell, assign, transfer, lease or otherwise dispose or attempt to dispose in any manner all or any part of the Shares and/or the Further Shares

 

	
3.07  

	
The Pledgors pursuant to the provisions of clause 17.4.1 of the Agreement will be entitled to transfer the Shares they hold in the Company to a new holding company (“NewCo”) they will establish (“Permitted Transfer”). It is explicitly acknowledged and agreed between the Parties that should a Permitted Transfer take place before the end of the Security Period (as this is defined in clause 7 below), the Pledgee will consent to the release and delivery of the Escrow Documents (as defined in Clause 4 below) back the Pledgors in accordance with the terms of Clause 7 below, on the following conditions being met:

 

	 	
(i) 

	
that the Shares and/or Further Shares will continue to be pledged in favour of the Pledgee and NewCo will pledge and charge the Shares and/or Further Shares it holds in the Company in favour of the Pledgee and NewCo as the new pledgor will deliver the Escrow Document to the Escrow Agent; and

 

	 	
(ii) 

	
NewCo will simultaneously execute in favour of the Pledgee such an amending pledge agreement as is necessary;

 

(the conditions listed in (i) and (ii) will jointly be referred to as the “Conditions”).

 

	
3.08

	
The Pledgors shall not take any action, which could hinder the performance of this Share Pledge or give rise to a breach hereof.

 

	
3.09

	
The Pledgors shall take all necessary steps and actions to ensure that this Share Pledge is perfected in accordance with Cyprus and any other applicable law.

 

	
3.10

	
The Pledgors shall take all necessary steps and actions to ensure that the members of the Board of Directors of the Company who have been appointed by any of the Pledgors shall remain those appearing in Appendix B hereto as long as this Share Pledge is in force. In any case, if there is a need to change the composition of the Board of Directors of the Company, the Pledgors shall ensure that Clause 11 hereof is implemented.

 

	
3.11

	
The Pledgors shall not cause or permit the change in the Articles of Association of the Company without the Pledgee’s prior written consent, if such change alters in any way whatsoever the validity and effect of this Share Pledge.

    

  

Schedule 3 - 3

  

4.    DEPOSIT OF ESCROW DOCUMENTS

 

	
4.01

	
The Pledgors, simultaneously with the execution of this Share Pledge and the Escrow Agreement, shall deliver to the Escrow Agent

           

	 	
(a) 

	

  

All share certificates representing the Shares;

      

	 	
(b) 

	
Undated blank instruments of transfer in respect of the Shares duly executed by each of Pledgors, in the form set out in Appendices "A1", "A2", "A3" and "A4" hereto;

 

	 	
(c) 

	
An original undated blank resolution of the board of directors of the Company approving the transfer of the shares, in the form set out in Appendix "B" hereto;

 

	 	
(d) 

	
Original and dated irrevocable proxies and power of attorneys from each of the Pledgors, in the form set out in Appendices "C1", "C2", "C3" and"C4" hereto duly executed, accompanied by a certified true copy (with the original to follow) of a dated and duly executed resolution (or other corporate approval required by applicable law) approving the issuance of the said proxy and power of attorney with respect to Pledgor 1;

 

	 	
(e) 

	
Undated, duly signed letters of resignation from each of the Directors appointed by the Pledgors and the Secretary of the Company, in the form set out in Appendix "D" hereto;

 

	 	
(f) 

	
A letter of authority and undertaking from each of the Directors appointed by the Pledgors and the Secretary of the Company, in the form set out in Appendix "E" hereto;

 

	 	
(g) 

	
Undated, duly signed letters by the other shareholders of the Company, waiving their pre-emption rights in relation to the transfer of the Shares by the Pledgor to the Pledgee, in the form set out in Appendix “F” hereto.

 

(hereinafter documents under (a) to (g) jointly the “Escrow Documents”)

 

	
4.02

	
The Pledgors hereby irrevocably agree to waive, as against the Pledgee, the pre-emption rights that they have for any Further Shares pursuant to the Company’s Articles of Association (or otherwise) for the Security Period.

 

	
4.03.

	
The Pledgors will deliver or procure to be delivered to the Escrow Agent, immediately upon the issue of any Further Shares to the Pledgors:

 

	 	
(a) 

	
undated blank instruments of transfer in respect of the Further Shares, duly executed by the Pledgors, in the form set out in Appendices “A1” to “A4” hereto, as amended to refer to the Further Shares;

      

	 	
(b) 

	
The original Share Certificate(s) issued in relation to the Further Shares; and

     

	 	
(c) 

	
An original and undated blank resolution of the Director(s) of the Company approving of the transfer of the Further Shares, in the form set out in Appendix "B" hereto, as amended to refer to the Further Shares.

 

	
4.04

	
The Pledgors hereby undertake that they will procure that the provisions of s.138 of the Contract Law, Cap. 149 are fully complied with regard to this Share Pledge. Without prejudice to the generality of the foregoing, the Pledgors undertake that they will procure delivery (by courier) to the Pledgee, no later than 5 Business Days from the date of delivery to the Company by the Pledgee (whether by courier or by hand) of a notice of pledge of the Shares, accompanied by a certified copy of this Share Pledge, of a certificate from the Company in the form of Appendix “G” attached herewith, confirming that a memorandum of pledge has been entered in its Register of Members, together with a copy of the Company’s Register of Members certified as true and up to date copy thereof by the Secretary of Company, showing the said entry.

    

  

Schedule 3 - 4

  

5.   ENFORCEMENT

 

	
5.01

	
If on or prior to the second anniversary from the Closing Date the Pledgors are (i) in breach of and/or fail to comply with any of their Obligations and/or (ii) the Pledgors are in breach of any of the provisions of this Share Pledge or (iii) any step is taken for the dissolution of Pledgor 1 or any bankruptcy proceedings are initiated against Pledgors 2, 3 and 4, the Pledgee will deliver to the Pledgors a written notice by registered mail with acknowledgement of receipt asking them to remedy such Obligation or breach. Within 30 calendar days following delivery of the written notice by the Pledgee (or such extended time as the parties agree if they are negotiating a resolution), the Pledgors will be entitled to commence arbitration as described in Clause 20 for the determination of whether they are in breach of or have failed to comply with such Obligation or breach. If either (i) the arbitration determines that the Pledgors are in breach of or have failed to comply with such Obligation or breach or (ii) the Pledgors did not commence arbitration within 30 calendar days following delivery of the written notice by the Pledgee and such Obligation or breach remains unremedied for a period of at least 60 calendar days (such unremedied Obligation or breach being hereinafter called “Event of Default”) Clause 5.03 hereinbelow will apply.

 

	
5.02

	
Unless and until an Event of Default occurs the Pledgee shall not put into effect any of the Escrow Documents referred to in clause 4.01 hereof and the Pledgors shall have the right to exercise all voting and/or consensual powers pertaining to the Shares and/or the Further Shares or any part thereof for all purposes not inconsistent with the terms of this Share Pledge or the Agreement or any documents executed or to be executed pursuant hereto and thereto;

 

	 	
5.03.01

	
The Pledgee undertakes after an Event of Default, to use and put into effect the Escrow Documents in accordance with Clause 5.04 but only with respect to such number of the Shares and/or Further Shares as the Independent Accountant will have determined to be comprised in such Obligation after taking into consideration the total value of Shareholders Common Shares as set forth in Clause 11.8 of the Agreement. Upon the occurrence of the Event of Default, the Pledgee shall send a notice to the Independent Accountant and the Pledgors, which shall include the details of the Event of Default, requesting the determination of the value of the breach of the Obligation.  The Independent Accountant shall send a written notice to the Pledgors and the Pledgee in which he will state the value of the breach of such Obligation and the number of Shares and/or Further Shares which corresponds to the value of the specific Event of Default which shall be subject to the specific enforcement mechanism stipulated in Clause 5.04 below (the “Default Shares”).

 

	 	
5.03.02

	
Thereafter, if the value of the Obligation is equal to the total value of the Shares and/or Further Shares then the Pledgee shall send an Event of Default Notice (as defined in Clause 5.04 below) to the Escrow Agent asking for the release of the Escrow Documents and the Pledgee shall have the right to proceed in accordance with the provisions of Clause 5.04 below. If the value of the Obligation is less than the total value of the Shares and/or Further Shares, the Pledgee shall send an Event of Default Notice to the Escrow Agent for the release of the Escrow Documents, but shall have the right to put into effect the rights granted to the Pledgee under Clause 5.04 only in respect of that amount of Default Shares as indicated by the Independent Accountant (the “Partial Enforcement”).

 

	 	
5.03.03

	
In the event of Partial Enforcement, the Pledgors shall have the obligation to deliver or procure to be delivered to the Escrow Agent, upon notification by the Pledgee of completion of the Partial Enforcement, the updated Escrow Documents representing the remainder of the Shares and/or Further Shares which continue to be pledged and charged in accordance with the terms of this Share Pledge.  Any reference in this Share Pledge to the Shares and/or Further Shares shall from then on be a reference to the remaining amount of Common Shares (not part of the Partial Enforcement i.e. Shares and/or Further Shares – Default Shares = remaining amount of Shares and/or Further Shares) which are held by the Pledgors and which shall not exceed 25% of the Company’s total Common Shares. The provisions of this Share Pledge shall continue to apply and be binding to all the Parties, in relation to the remaining amount of Shares and/or Further Shares.

    

  

Schedule 3 - 5

  

 

	
5.04

	
At any time after an Event of Default, the Pledgee, subject to and in compliance with conditions provided in Clause 5.03 above acting in good faith, will deliver a written notice in the form of Appendix “H” to the Escrow Agent (the “Event of Default Notice”) and this Share Pledge shall become immediately enforceable and all powers conferred upon the Pledgee by this Share Pledge with respect to the Default Shares, shall be immediately exercisable upon the Pledgee’s wish and, without prejudice to the generality of the foregoing or to any remedies provided for by applicable law, the Pledgee may, subject to applicable law: (i) transfer, to any party it may decide and on terms selected in its sole discretion, legal and/or beneficial ownership of such an amount of Default Shares, as necessary, in compliance with the conditions provided in Clause 5.03 and (ii) sell the Default Shares or any part thereof, as necessary, in compliance with the conditions provided in Clause 5.03, at any such place and in such manner and at such price or prices as the Pledgee may deem fit.  In that regard:

 

	 	
5.04.01

	
The Pledgee, shall, subject to and in compliance with the conditions provided in Clause 5.03, have the sole and exclusive right to put into effect all or any of the Escrow Documents referred to in clause 4.01 hereof and to exercise all voting and consensual powers pertaining to the Default Shares or any part thereof to the exclusion of the Pledgors and shall exercise such powers in such manner as the Pledgee may in its sole discretion elect;

 

	 	
5.04.02

	
In the event of the Pledgee exercising all or any of its above rights and powers the Pledgors will procure that the Company shall register as owner or owners of such an amount of Default Shares as applicable, subject to and in compliance with the conditions of Clause 5.03, any and all persons entitled to own the same pursuant to the exercise by the Pledgee of its said rights;

 

	 	
5.04.03

	
Without limitation to the generality of Clause 5.04, in the event of the Pledgee exercising all or any of its rights and powers under the said Clause, the Pledgee shall be entitled but not obliged, in its sole discretion, to use and put into effect all or any of the Escrow Documents deposited with the Pledgee pursuant to Clauses 4.01 hereof and to register as owners of such an amount of Default Shares subject to and in compliance with the conditions of Clause 5.03,  the Pledgee and/or any nominees of the Pledgee or any purchasers of the Default Shares, in case the Default Shares were sold to one or more third parties.

 

	 	
5.04.04.

	
Any excess amounts received by the Pledgee in exercising its above rights shall be payable to the Pledgors simultaneously upon the receipt of such monies by the Pledgee.

 

	
5.05

	
Unavailability of any of the remedies set out in the present Clause shall not affect the effectiveness of any other remedies.

   

6.    POWER OF ATTORNEY

 

	
6.01

	
By way of security, and in order to more fully secure the performance of the obligations of the Pledgors under this Share Pledge, the Pledgors hereby appoint the Pledgee to be their true and lawful attorney with full power to act alone and with full power of substitution, until the Obligations have been discharged in full, for the purpose of doing in its name any and all acts whatsoever which the Pledgors themselves could do in connection with the Shares and/or Further Shares held by the Pledgors in case of an Event of Default subject to the conditions of Clause 5 above, including, but without limitation, (i) to insert the name of the Pledgee or its nominees or the name of any purchaser (or to make any alteration or addition as regards the particulars of the warrants shares or stocks affected thereby or any other addition which the Pledgee may consider desirable) in any transfer or other documents which the Pledgee may require for perfecting its title to or for vesting or enabling it to vest the Shares and/or the Further Shares in case of an Event of Default in the Pledgee or their nominees or in any purchaser, (ii) to present the same for registration in the name of the Pledgee or its nominees or of any purchaser (iii) otherwise to execute seal and deliver and otherwise perfect and do any such transfers and other documents as aforesaid and all such deeds, assurances, agreements, instruments, acts and things which may be required for the full exercise of all or any of the powers hereby conferred or which may be deemed proper on, or in connection with, any sale, disposition or obtaining by the Pledgee of the Shares and/or Further Shares in case of an Event of Default which is continuing in accordance with Clause 5 above.

    

  

Schedule 3 - 6

  

    

	
6.02

	
The Pledgors hereby ratify, confirm and agree to ratify and confirm any instrument, act or thing which any such attorney may execute or do under the provisions of this Clause 6 with effect as from the date of an Event of Default, for the purpose of carrying out the provisions of this Share Pledge and taking any action and executing any instruments which the Pledgee may deem necessary or advisable to accomplish the full benefit of this Share Pledge.

 

	
6.03

	
Subject to the provisions of Clause 5, the exercise of such powers as mentioned in Clause 6, by or on behalf of the Pledgee shall not put any person dealing with the Pledgee upon any inquiry as to whether the security created by this Share Pledge has become immediately enforceable nor shall such person be in any way affected by notice that the security created by this Share Pledge has not become enforceable and the exercise by the Pledgee of such power shall be conclusive evidence of its right to exercise the same.

     

7.   RELEASE OF SHARE PLEDGE

 

	
7.01

	
The security period of this Share Pledge shall be until the earlier of (i) the irrevocable and unconditional discharge of the Obligations of the Pledgors under the Agreement and/or this Share Pledge, or (ii) the termination of this Share Pledge in writing in accordance with clause 8 below or (iii) the second anniversary of the Closing Date ((i), (ii) and (iii) will together be referred to as the “Security Period”) unless in case of par. (iii) there is then pending an Event of Default which occurred within the Security Period, in which case this Share Pledge shall remain in full force and effect until Pledgors have cured to the Pledgee’s reasonable satisfaction each and every Event of Default.

 

	
7.02.

	
Upon the expiry of the Security Period, the Pledgee shall send to the Escrow Agent a written notice in the form of Appendix “I” (the “Release Notice”) signed by the authorised signatory of the Pledgee and the security created hereby shall unconditionally and automatically cease to exist and have no effect.

 

	
7.03

	
Upon receipt of the Release Notice by the Escrow Agent, the Escrow Agent shall proceed to release the Escrow Documents in accordance with the terms of the Escrow Agreement and re-deliver to the Pledgors the Escrow Documents.

 

8.    TERMINATION

 

This Share Pledge shall be terminated (i) when the Obligations of the Pledgors are irrevocably and unconditionally discharged by the Pledgee or (ii) subject to Clause 7.01 (iii) at the second anniversary from the Closing Date of the Agreement or (iii) by the mutual written agreement of the Pledgor and the Pledgee. Following termination the Pledgee shall deliver to the Escrow Agent the Release Notice in accordance with clause 7 above.

   

9.    NOTICES

 

All notices, demands and other communications required to be given pursuant to this Share Pledge including the enforceability of the Share Pledge shall be in writing and shall be deemed to have been received if given in writing (including telecopy or similar teletransmission) addressed as in the first page hereof (or to the addressee at such other address as the addressee shall have specified by notice actually received by the addresser), and if either (a) actually delivered in fully legible form to such address or (b) in the case of a letter, three days shall have elapsed after the same shall have been deposited in the mails (i) with first-class airmail postage prepaid and registered or certified, with return receipt requested, or (ii) with express air delivery postage prepaid, with receipt required for delivery.

    

  

Schedule 3 - 7

  

    

In addition of the above all notices under or in connection with Share Pledge could be given in writing by facsimile. The facsimile number of the Pledgors and the Pledgee are set out below:

 

The Pledgors:

 

7L Equity Partners (Emerging Europe) Limited

Carinthia House

9-12 The Grange

St Peter Port

Guernsey, GY1 4BF

Great Britain

Attn. Mr. Jacques Vermeulen

Tel.:  +44 1481 743 758

Fax:  +44 1481 734 301

Email: jacques.vermeulen@augentius.com

   

The Pledgee:

 

VelaTel Global Communications, Inc.

12526 High Bluff Drive, Suite 155

San Diego, California 92130 USA

Attn: Kenneth L. Waggoner, Esq.

Tel.:  +1 760 230 8986

Fax:  +1 760 359 7042

Email: kwaggoner@velatel.com

    

10.    NO WAIVER AND RIGHTS CUMULATIVE

 

No failure on the part of the Pledgee to exercise and no delay in exercising any right power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Pledgee of any right power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right power or remedy.  The remedies herein provided are cumulative and are not exclusive of any remedies provided by law.

    

11.    CHANGES

 

The Pledgors will procure that there shall be no transfer of shares in the Company or appointment of any further Director, Secretary or other officer of the Company without the prior consent in writing of the Pledgee

 

	
11.02

	
In the event of a change in and/or resignation of any of the director(s) and/or secretary of the Company appointed by the Pledgors, the Pledgors shall within two (2) Business Days from the date they receive a notice of such a change to procure to deliver to the Escrow Agent updated versions of the documents in the form attached herewith as Appendices B, D and E, duly executed by the new director(s) and/or secretary and/or officer of the Company appointed in their place.

 

	
11.03

	
In the event of a new shareholder subscribing to shares in the Company, then the Pledgors shall within two (2) Business Days from the date they receive a notice of such a change to procure to deliver to the Escrow Agent a waiver letter by this new shareholder in the form attached herewith as Appendix F.

   

12.    GRANTING OF TIME

 

The Pledgee may at all times, without discharging or in any way affecting this Share Pledge: (i) grant to the Pledgors and/or the Company and/or to any other person any time or indulgence and/or (ii) deal with, exchange, release, modify, or abstain from perfecting or enforcing this Share Pledge, any security guarantee or other right which the Pledgee may now or hereafter have regarding the Agreement or agree to any amendment to the said document and/or any document executed or to be executed pursuant thereto.

    

  

Schedule 3 - 8

  

     

13.    COSTS

 

Each Party shall bear its own legal fees with respect to the execution hereof. All other costs and expenses, taxes and duties in connection with the negotiation, preparation, completion and any registration of this Share Pledge will be paid by the Pledgors.

 

All costs incurred by the Pledgee related to the exercise of any of its powers and protection and enforcement of its interests and rights in relation with the Share Pledge in any court of law or otherwise shall, be borne by the Pledgors.

 

14.    ENTIRE AGREEMENT

 

This Share Pledge constitutes the entire understanding of the parties with respect to the subject matter hereof and supersedes any and all prior understandings and agreements, whether written or oral, with respect to such subject matter.

 

15.    SUCCESSORS AND ASSIGNS

 

This Share Pledge shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, legal representatives, successors, assigns and permitted transferees, except as may be expressly provided otherwise herein.

 

16.    SEVERABILITY

 

In case any one or more of the provisions contained in this Share Pledge shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Share Pledge and such invalid, illegal and unenforceable provision shall be modified and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.

 

17.    SECTION HEADINGS

 

The headings contained in this Share Pledge are for reference purposes only and shall not in any way affect the meaning or interpretation of this Share Pledge.

   

18.   AMENDMENT

 

This Share Pledge may only be amended by an instrument in writing duly signed by all the Parties.

 

19.    GOVERNING LAW

 

This Share Pledge shall be governed by and construed and enforced in accordance with the laws of Cyprus.

 

20.    ARBITRATION

 

All disputes arising in connection with this Agreement shall be finally settled by arbitration. The arbitration shall be held in Cyprus and conducted in the English language in accordance with the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules as at present in force. There shall be 3 arbitrators, one to be appointed by the claimant and/or claimants and one to be appointed by the respondent and/or respondents and the third to be appointed by the common agreement of the two arbitrators selected by the parties. In the event of a failure to agree on the appointment of arbitrators, the appointing authority shall be the London Court of International Arbitration. If the parties so agree, there shall be a sole arbitrator appointed by the London Court of International Arbitration Upon the award rendered an application may be made to the competent court for a judicial acceptance of the award and an order for enforcement.

    

  

Schedule 3 - 9

  

 

IN WITNESS whereof this Share Pledge has been duly executed the day and year first above written.

 

	SIGNED FOR THE PLEDGOR 1	 	SIGNED FOR THE PLEDGEE
	 	 	 
	
 

	 	

 

	in the presence of	 	 
	 	 	 
	

 

	 	

 

	Witness	 	Witness
	 	 	 
	

 

	 	

 

	Witness	 	Witness
	 	 	 
	 	 	 
	SIGNED FOR THE PLEDGOR 2	 	SIGNED FOR THE PLEDGOR 3
	 	 	 
	 

	 	

 

	in the presence of	 	 
	 	 	 
	

 

	 	

 

	Witness	 	Witness
	 	 	 
	

 

 	 	

 

	Witness	 	Witness
	 	 	 
	 	 	 
	SIGNED FOR THE PLEDGOR 4	 	 
	 	 	 
	

 

	 	 
	
in the presence of

	 	 
	 	 	 
	

 

	 	 
	Witness	 	 
	 	 	 
	

 

	 	 
	Witness	 	 

    

  

Schedule 3 - 10

  

   

APPENDIX "A1"

 

INSTRUMENT OF TRANSFER

I/WE

7L Capital Partners Emerging Europe LP, with registered office in Guernsey, Carinthia House, 9-12 The Grange, St. Peter Port, GY1 4BF

 

(hereinafter called the "transferor(s)")

in exchange of good and valuable consideration received by me/us by

Name   

of

 

 

(hereinafter called the "transferee(s)" do hereby transfer to the said transferee(s) the share(s) shown in the schedule hereto held by us/me in the undertaking called

HERLONG ΙNVESTMENTS LIMITED

to hold unto the said transferee(s) his/their executors, administrators and assigns.

AND I/WE the said transferee(s) do hereby agree to take the said shares in the aforementioned undertaking subject to the conditions aforesaid.

Date:

SCHEDULE

__________ fully paid ordinary shares of €[●] each serial no. _________________________, as per Share Certificate No._____ and _____

 

	THE TRANSFEROR(S)	 	THE TRANSFEREE(S)
	 	 	 
	

 

	 	

 

	 	 	 
	
Name:  7L Capital Partners Emerging Europe LP

	 	
Name:

	Address: As above	 	Address: As above
	 	 	 
	 	 	 
	

 

	 	

 

	Witness to the signature of Transferor(s)	 	Witness to the signature of Transferee(s)
	 	 	 
	 	 	 

    

  

Schedule 3 - 11

  

   

APPENDIX "A2"

 

INSTRUMENT OF TRANSFER

I

Karlo Vlah

 

(hereinafter called the "transferor(s)")

in exchange of good and valuable consideration received by me/us by

Name   

of

 

 

(hereinafter called the "transferee(s)" do hereby transfer to the said transferee(s) the share(s) shown in the schedule hereto held by me in the undertaking called

HERLONG ΙNVESTMENTS LIMITED

to hold unto the said transferee(s) his/their executors, administrators and assigns.

AND I/WE the said transferee(s) do hereby agree to take the said shares in the aforementioned undertaking subject to the conditions aforesaid.

Date:

SCHEDULE

__________ fully paid ordinary shares of €[●] each serial no. _________________________, as per Share Certificate No._____ and _____

 

 

	THE TRANSFEROR(S)	 	THE TRANSFEREE(S)
	 	 	 
	
KARLO VLAH

	 	

 

	 	 	 
	
 

	 	
Name:

	Address:	 	Address: As above
	 	 	 
	 	 	 
	

 

	 	

 

	Witness to the signature of Transferor(s)	 	Witness to the signature of Transferee(s)
	 	 	 
	 	 	 

       

  

Schedule 3 - 12

  

     

APPENDIX "A3"

 

INSTRUMENT OF TRANSFER

I

Durda Vlah

 

(hereinafter called the "transferor(s)")

in exchange of good and valuable consideration received by me/us by

Name   

of

 

 

(hereinafter called the "transferee(s)" do hereby transfer to the said transferee(s) the share(s) shown in the schedule hereto held by me in the undertaking called

HERLONG ΙNVESTMENTS LIMITED

to hold unto the said transferee(s) his/their executors, administrators and assigns.

AND I/WE the said transferee(s) do hereby agree to take the said shares in the aforementioned undertaking subject to the conditions aforesaid.

Date:

SCHEDULE

__________ fully paid ordinary shares of €[●] each serial no. _________________________, as per Share Certificate No._____ and _____

 

	THE TRANSFEROR(S)	 	THE TRANSFEREE(S)
	 	 	 
	
DURDA VLAH

	 	

 

	 	 	 
	
 

	 	
Name:

	Address:	 	Address: As above
	 	 	 
	 	 	 
	

 

	 	

 

	Witness to the signature of Transferor(s)	 	Witness to the signature of Transferee(s)
	 	 	 
	 	 	 

           

  

Schedule 3 - 13

  

   

APPENDIX "A4"

 

INSTRUMENT OF TRANSFER

I

Josip Vlah

 

(hereinafter called the "transferor(s)")

in exchange of good and valuable consideration received by me/us by

Name

of

 

 

(hereinafter called the "transferee(s)" do hereby transfer to the said transferee(s) the share(s) shown in the schedule hereto held by me in the undertaking called

HERLONG ΙNVESTMENTS LIMITED

to hold unto the said transferee(s) his/their executors, administrators and assigns.

AND I/WE the said transferee(s) do hereby agree to take the said shares in the aforementioned undertaking subject to the conditions aforesaid.

Date:

SCHEDULE

__________ fully paid ordinary shares of €[●] each serial no. _________________________, as per Share Certificate No._____ and _____

 

	THE TRANSFEROR(S)	 	THE TRANSFEREE(S)
	 	 	 
	
JOSIP VLAH

	 	

 

	 	 	 
	
 

	 	
Name:

	Address:	 	Address: As above
	 	 	 
	 	 	 
	

 

	 	

 

	Witness to the signature of Transferor(s)	 	Witness to the signature of Transferee(s)
	 	 	 
	 	 	 

              

  

Schedule 3 - 14

  

    

APPENDIX "B"

    

HERLONG ΙNVESTMENTS LIMITED

UNANIMOUS WRITTEN RESOLUTION OF THE BOARD OF DIRECTORS OF THE COMPANY DATED

By a unanimous written resolution of all the Directors of the Company, it is hereby resolved as follows:-

(1)    To approve of the following transfer of shares:

(i) ___________ fully paid ordinary shares of €[●] each serial no. __________________________ and __________________

from 7L Capital Partners Emerging Europe LP

 

(ii) ___________ fully paid ordinary shares of €[●] each serial no. __________________________ and __________________

from Karlo Vlah

 

(iii) ___________ fully paid ordinary shares of €[●] each serial no. __________________________ and __________________

From Durda Vlah

 

(iv) ___________ fully paid ordinary shares of €[●] each serial no. __________________________ and __________________

From Josip Vlah

 

to VelaTel Global Communications, Inc.

    

(2)   The secretary is instructed to take all appropriate steps to implement the above resolution.

(Sgd) __________

(Sgd) __________

(Sgd) __________

(Sgd) __________

(Sgd) __________

    

  

Schedule 3 - 15

  

   

APPENDIX "C1"

    

IRREVOCABLE PROXY AND POWER OF ATTORNEY

IN ACCORDANCE WITH SECTION 4.01 OF THE SHARE PLEDGE

DATED ............ 2011

	
1.  

	
We 7L Capital Partners Emerging Europe LP, with registered office in Guernsey, Carinthia House, 9-12 The Grange, St. Peter Port, GY1 4BF  hereby constitute and appoint _________________________________, ___________________________  ___________________________, as our true and lawful attorney and proxy being fully empowered and authorized to do all or any of the following acts and matters with effect from the occurrence of an Event of Default pursuant to the Share Pledge Agreement dated _____  ___  ____ between VelaTel Global Communications, Inc. as Pledgee, on the one hand, and 7L Capital Partners Emerging Group LP, Karlo Vlah, Durda Vlah and Josip Vlah as Pledgors, on the other hand (the “Share Pledge”):

	
  

	
(1)

	
To sell, transfer, assign, pledge or otherwise dispose or charge all or any of the Default Shares (as this term is defined in the Share Pledge) to or in favour of, such person or persons and under such terms as the Attorney may deem fit.

	
  

	
(2)

	
To vote and/or exercise all consensual powers discretions and rights at any general meeting of the Company or by executing any resolution in writing by such shareholders as fully as we would do.

	
  

	
(3)

	
To demand, receive and retain all dividends, interest or other moneys or assets accruing on or in respect of all or any of the Default Shares.

	
  

	
(4)

	
To exercise all rights and options, by way of acceptance of offer of new shares, rights or bonus issue, or other rights, benefits, or otherwise, accruing on or in respect of all or any of the Default Shares, and to require that all such rights and options be registered, transferred, assigned or otherwise dealt with as the Attorney may deem fit; all powers and authorities of the Attorney under this Power of Attorney in respect of the Default Shares may be likewise exercised by the Attorney in respect of any new shares, rights or bonus issue or other rights and benefits accruing in respect of the Default Shares.

	
  

	
(5)

	
To demand from the Company, its secretary or Register keeper and any other officer or person acting for the Company as well as from any competent authority, the issue and delivery to the Attorney of any certificates, statements or other documents of title evidencing the ownership of, or entitlement to, the Default Shares and any new shares, rights or bonus issue, or other rights and benefits accruing in respect of the Default Shares.

	
  

	
(6)

	
Generally to act and deal in respect of the Default Shares and any new shares, rights or bonus, or other rights and benefits accruing in respect of the Default Shares as fully as we could do.

	
  

	
(7)

	
To sign, execute and deliver any instruments of transfer, applications, assignments, receipts, deeds, agreements and documents whatsoever in relation to all or any of the powers authorities vested on the Attorney under this Power of Attorney, and to do so under such terms and conditions as the Attorney may deem fit;

	
  

	
(8)

	
To appoint any substitute or agent or attorney to do all or any of the acts and matters vested on the Attorney under this Power of Attorney.

	
2.

	
All and any proxies and/or powers of attorney previously given in favour of any person or persons (other than the Attorney) in relation to the Default Shares are hereby revoked.

	
3.

	
We hereby ratify and confirm all that the Attorney or any substitute or substitutes shall do or cause to be done by virtue hereof.

	
4.

	
We hereby acknowledge that the Shares and/or Further Shares have been pledged to the Attorney by the Share Pledge and this Power of Attorney is given by way of security and shall remain in full force and irrevocable for as long as the said  Share Pledge shall remain in force.

     

IN WITNESS whereof we have executed this Proxy and Power of Attorney this _____ day of _______

SIGNED by___________

7L Capital Partners Emerging Europe, LP

    

  

Schedule 3 - 16

  

   

APPENDIX "C2"

    

IRREVOCABLE PROXY AND POWER OF ATTORNEY

IN ACCORDANCE WITH SECTION 4.01 OF THE SHARE PLEDGE

DATED ............ 2011

	
1.  

	
I Karlo Vlah, resident of Croatia, Merhatovec 5, HR-40314 Selnica, OIB: 5891406711 hereby constitute and appoint _________________________________, ___________________________  ___________________________, as my true and lawful attorney and proxy being fully empowered and authorized to do all or any of the following acts and matters with effect from the occurrence of an Event of Default pursuant to the Share Pledge Agreement dated _____  ___  ____ between VelaTel Global Communications, Inc. as Pledgee, on the one hand, and 7L Capital Partners Emerging Group LP, Karlo Vlah, Durda Vlah and Josip Vlah as Pledgors, on the other hand (the “Share Pledge”):

   

	
  

	
(1)

	
To sell, transfer, assign, pledge or otherwise dispose or charge all or any of the Default Shares  (as this terms are defined in the Share Pledge) to or in favour of, such person or persons and under such terms as the Attorney may deem fit.

	
  

	
(2)

	
To vote and/or exercise all consensual powers discretions and rights at any general meeting of the Company or by executing any resolution in writing by such shareholders as fully as we would do.

	
  

	
(3)

	
To demand, receive and retain all dividends, interest or other moneys or assets accruing on or in respect of all or any of the Default Shares.

	
  

	
(4)

	
To exercise all rights and options, by way of acceptance of offer of new shares, rights or bonus issue, or other rights, benefits, or otherwise, accruing on or in respect of all or any of the Default Shares , and to require that all such rights and options be registered, transferred, assigned or otherwise dealt with as the Attorney may deem fit; all powers and authorities of the Attorney under this Power of Attorney in respect of the Default Shares  may be likewise exercised by the Attorney in respect of any new shares, rights or bonus issue or other rights and benefits accruing in respect of the Default Shares.

	
  

	
(5)

	
To demand from the Company, its secretary or Register keeper and any other officer or person acting for the Company as well as from any competent authority, the issue and delivery to the Attorney of any certificates, statements or other documents of title evidencing the ownership of, or entitlement to, the Default Shares and any new shares, rights or bonus issue, or other rights and benefits accruing in respect of the Shares and/or the Further Shares.

	
  

	
(6)

	
Generally to act and deal in respect of the Default Shares  and any new shares, rights or bonus, or other rights and benefits accruing in respect of the Shares and/or the Further Shares  as fully as we could do.

	
  

	
(7)

	
To sign, execute and deliver any instruments of transfer, applications, assignments, receipts, deeds, agreements and documents whatsoever in relation to all or any of the powers authorities vested on the Attorney under this Power of Attorney, and to do so under such terms and conditions as the Attorney may deem fit;

	
  

	
(8)

	
To appoint any substitute or agent or attorney to do all or any of the acts and matters vested on the Attorney under this Power of Attorney.

	
2.

	
All and any proxies and/or powers of attorney previously given in favour of any person or persons (other than the Attorney) in relation to the Default Shares are hereby revoked.

	
3.

	
I hereby ratify and confirm all that the Attorney or any substitute or substitutes shall do or cause to be done by virtue hereof.

	
4.

	
I hereby acknowledge that the Shares and/or Further Shares have been pledged to the Attorney by the Share Pledge and this Power of Attorney is given by way of security and shall remain in full force and irrevocable for as long as the said  Share Pledge shall remain in force.

   

IN WITNESS whereof we have executed this Proxy and Power of Attorney this _____ day of _______

SIGNED by___________

Karlo Vlah

     

  

Schedule 3 - 17

  

 

APPENDIX "C3"

    

IRREVOCABLE PROXY AND POWER OF ATTORNEY

IN ACCORDANCE WITH SECTION 4.01 OF THE SHARE PLEDGE

DATED ............ 2011

	
1.  

	
I Durda Vlah, resident of Croatia, Merhatovec 5, HR-40314 Selnica, OIB: 55417661185 hereby constitute and appoint _____________  _________________________  ___________  ________________ _________________________________________________ as my true and lawful attorney and proxy being fully empowered and authorized to do all or any of the following acts and matters with effect from the occurrence of an Event of Default pursuant to the Share Pledge Agreement dated _____  ___  ____ between VelaTel Global Communications, Inc. as Pledgee, on the one hand, and 7L Capital Partners Emerging Group LP, Karlo Vlah, Durda Vlah and Josip Vlah as Pledgors, on the other hand (the “Share Pledge”):

   

	
  

	
(1)

	
To sell, transfer, assign, pledge or otherwise dispose or charge all or any of the Default Shares  (as this terms are defined in the Share Pledge) to or in favour of, such person or persons and under such terms as the Attorney may deem fit.

	
  

	
(2)

	
To vote and/or exercise all consensual powers discretions and rights at any general meeting of the Company or by executing any resolution in writing by such shareholders as fully as we would do.

	
  

	
(3)

	
To demand, receive and retain all dividends, interest or other moneys or assets accruing on or in respect of all or any of the Default Shares.

	
  

	
(4)

	
To exercise all rights and options, by way of acceptance of offer of new shares, rights or bonus issue, or other rights, benefits, or otherwise, accruing on or in respect of all or any of the Default Shares , and to require that all such rights and options be registered, transferred, assigned or otherwise dealt with as the Attorney may deem fit; all powers and authorities of the Attorney under this Power of Attorney in respect of the Default Shares may be likewise exercised by the Attorney in respect of any new shares, rights or bonus issue or other rights and benefits accruing in respect of the Default Shares.

	
  

	
(5)

	
To demand from the Company, its secretary or Register keeper and any other officer or person acting for the Company as well as from any competent authority, the issue and delivery to the Attorney of any certificates, statements or other documents of title evidencing the ownership of, or entitlement to, the Default Shares and any new shares, rights or bonus issue, or other rights and benefits accruing in respect of the Default Shares.

	
  

	
(6)

	
Generally to act and deal in respect of the Default Shares  and any new shares, rights or bonus, or other rights and benefits accruing in respect of the Default Shares   as fully as we could do.

	
  

	
(7)

	
To sign, execute and deliver any instruments of transfer, applications, assignments, receipts, deeds, agreements and documents whatsoever in relation to all or any of the powers authorities vested on the Attorney under this Power of Attorney, and to do so under such terms and conditions as the Attorney may deem fit;

	
  

	
(8)

	
To appoint any substitute or agent or attorney to do all or any of the acts and matters vested on the Attorney under this Power of Attorney.

	
2.

	
All and any proxies and/or powers of attorney previously given in favour of any person or persons (other than the Attorney) in relation to the Default Shares are hereby revoked.

	
3.

	
I hereby ratify and confirm all that the Attorney or any substitute or substitutes shall do or cause to be done by virtue hereof.

	
4.

	
I hereby acknowledge that the Shares and/or Further Shares have been pledged to the Attorney by the Share Pledge and this Power of Attorney is given by way of security and shall remain in full force and irrevocable for as long as the said  Share Pledge shall remain in force.

IN WITNESS whereof we have executed this Proxy and Power of Attorney this _____ day of _______

SIGNED by___________

Durda Vlah

    

  

Schedule 3 - 18

  

   

APPENDIX "C3"

   

IRREVOCABLE PROXY AND POWER OF ATTORNEY

IN ACCORDANCE WITH SECTION 4.01 OF THE SHARE PLEDGE

DATED ............ 2011

	
1.  

	
I Josip Vlah, resident of Croatia, Merhatovec 5, HR-40314 Selnica, OIB: 24162783756 hereby constitute and appoint _________________________________, ___________________________  ___________________________, as my true and lawful attorney and proxy being fully empowered and authorized to do all or any of the following acts and matters with effect from the occurrence of an Event of Default pursuant to the Share Pledge Agreement dated _____  ___  ____ between VelaTel Global Communications, Inc. as Pledgee, on the one hand, and 7L Capital Partners Emerging Group LP, Karlo Vlah, Durda Vlah and Josip Vlah as Pledgors, on the other hand (the “Share Pledge”):

   

	
  

	
(1)

	
To sell, transfer, assign, pledge or otherwise dispose or charge all or any of the Default Shares  (as this terms are defined in the Share Pledge) to or in favour of, such person or persons and under such terms as the Attorney may deem fit.

	
  

	
(2)

	
To vote and/or exercise all consensual powers discretions and rights at any general meeting of the Company or by executing any resolution in writing by such shareholders as fully as we would do.

	
  

	
(3)

	
To demand, receive and retain all dividends, interest or other moneys or assets accruing on or in respect of all or any of the Default Shares.

	
  

	
(4)

	
To exercise all rights and options, by way of acceptance of offer of new shares, rights or bonus issue, or other rights, benefits, or otherwise, accruing on or in respect of all or any of the Default Shares , and to require that all such rights and options be registered, transferred, assigned or otherwise dealt with as the Attorney may deem fit; all powers and authorities of the Attorney under this Power of Attorney in respect of the Default Shares may be likewise exercised by the Attorney in respect of any new shares, rights or bonus issue or other rights and benefits accruing in respect of the Default Shares.

	
  

	
(5)

	
To demand from the Company, its secretary or Register keeper and any other officer or person acting for the Company as well as from any competent authority, the issue and delivery to the Attorney of any certificates, statements or other documents of title evidencing the ownership of, or entitlement to, the Default Shares and any new shares, rights or bonus issue, or other rights and benefits accruing in respect of the Default Shares.

	
  

	
(6)

	
Generally to act and deal in respect of the Default Shares  and any new shares, rights or bonus, or other rights and benefits accruing in respect of the Default Shares as fully as we could do.

	
  

	
(7)

	
To sign, execute and deliver any instruments of transfer, applications, assignments, receipts, deeds, agreements and documents whatsoever in relation to all or any of the powers authorities vested on the Attorney under this Power of Attorney, and to do so under such terms and conditions as the Attorney may deem fit;

	
  

	
(8)

	
To appoint any substitute or agent or attorney to do all or any of the acts and matters vested on the Attorney under this Power of Attorney.

	
2.

	
All and any proxies and/or powers of attorney previously given in favour of any person or persons (other than the Attorney) in relation to the Default Shares are hereby revoked.

	
3.

	
I hereby ratify and confirm all that the Attorney or any substitute or substitutes shall do or cause to be done by virtue hereof.

	
4.

	
I hereby acknowledge that the Shares and/or Further Shares have been pledged to the Attorney by the Share Pledge and this Power of Attorney is given by way of security and shall remain in full force and irrevocable for as long as the said  Share Pledge shall remain in force.

IN WITNESS whereof we have executed this Proxy and Power of Attorney this _____ day of _______

SIGNED by___________

Josip Vlah

    

  

Schedule 3 - 19

  

   

APPENDIX "D"

LETTER OF RESIGNATION

	
To:

	
HERLONG ΙNVESTMENTS LIMITED, of Nicosia Cyprus ("the Company")

	
CC:

	
VelaTel Global Communications, Inc.

Date:

Dear Sirs,

I hereby resign from my position as a Director of the Company with effect from the date of this letter.

I hereby confirm that I have no claim whatsoever against the Company for loss of office or otherwise.

Yours faithfully,

(Sgd) __________

[to be signed by each Director of the Company appointed by the Pledgors]

    

  

Schedule 3 - 20

  

   

APPENDIX "E"

LETTER OF AUTHORITY AND UNDERTAKING

	
TO:

	
VelaTel Global Communications, Inc.

("the Pledgee")

 

DATED: ___________, 2011

Dear Sirs,

HERLONG ΙNVESTMENTS LIMITED ("THE COMPANY")

I, the undersigned, holding the office of Director in the Company and for good and valuable consideration provided by the Pledgee (the receipt and sufficiency of which is hereby acknowledged) I hereby irrevocably authorise and undertake with the Pledgee that:

	
  

	
1)

	
For so long as any Obligations are outstanding (as these are defined in the Share Pledge of even date granted by 7L Capital Partners Emerging Europe LP, Karlo Vlah, Đurđa Vlah and Josip Vlah, as Pledgors) I will not act alone or in concert with any one or more of my fellow directors or officers of the Company or with any other person, enter into or accept or authorise any act or commitment in contravention of the covenants under the Agreement or the Share Pledge;

	
  

	
2)

	
I hereby irrevocably authorise the Pledgee at any time on or after the occurrence of a Default (as defined in the Share Pledge) to date, use and otherwise put into full effect the undated letter of resignation delivered by me to the Pledgee pursuant to the Share Pledge.

All capitalized terms in the Share Pledge shall have the same meaning in the present letter.

Yours faithfully,

 

[to be signed by each Director of the Company appointed by the Pledgors]

    

  

Schedule 3 - 21

  

   

APPENDIX "F"

WAIVER

To the Board of Directors

of HERLONG INVESTMENTS LIMITED

[insert address]

We, ____________________ of _________, hereby confirm that in connection with the proposed transfer of _______ shares of Euro 1,00 each from 7L Capital Partners Emerging Europe LP, Karlo Vlah, Đurđa Vlah and Josip Vlah, to  VelaTel Global Communications, Inc. we do not wish to exercise any options or rights vested in us by virtue of the provisions of the Company's Articles of Association and we declare that they may transfer such shares to any person or persons that they may consider proper.

Signed this ___________ day of ________, 20__

___________________________________

[insert name of Shareholder]

    

  

Schedule 3 - 22

  

   

APPENDIX "G"

   

CERTIFICATE

It is hereby certified that a Memorandum has been duly made in the Register of Members of the HERLONG INVESTMENTS LIMITED (the “Company”) to the effect that share certificate numbered ______ representing _____ shares in the issued capital of the Company, described in the schedule hereunder, have been pledged to VelaTel Global Communications, Inc.,  (the “Pledgee”) in accordance with the terms and conditions of the Share Pledge Agreement dated _____________ between VelaTel Global Communications, Inc., as Pledgee, on the one hand, and 7L Capital Partners Emerging Europe LP, Karlo Vlah, Đurđa Vlah and Josip Vlah as Pledgors, on the other hand (the “Share Pledge”), due notice of the said pledge having been given to the Company by the Pledgee, accompanied by a copy of the Pledge.

It is further certified that we have not heretofore received any other Notice of Pledge in relation to the said shares which is still subsisting.

SCHEDULE

[●] fully paid ordinary shares of €[●] each held by:

Messrs.

[________________]

Dated this ___ day of _______

______________________________

[NAME]

    

Secretary to the Company

    

  

Schedule 3 - 23

  

   

APPENDIX “H”

DEFAULT NOTICE

To:

Dear Sir,

We refer to the Escrow Agreement dated [INSERT] entered into between ourselves, VelaTel and yourselves (the “Escrow Agreement”) and hereby give you notice pursuant to Clause 3(b) thereof that in accordance with the terms and conditions of the Share Pledge Agreement dated ____________ between VelaTel Global Communications, Inc. as Pledgee, on the one hand, and 7L Capital Partners Emerging Europe LP, Karlo Vlah, Đurđa Vlah and Josip Vlah as Pledgors, on the other hand (the “Share Pledge”), an Event of Default (as this is defined in the Share Pledge) has taken place and hereby request that you release and deliver to us the __________________

Capitalised terms in the present letter have the same meaning as capitalised terms in the Share Pledge and the Escrow Agreement (as the case may be).

Yours Truly

_______________________________

Title:

    

  

Schedule 3 - 24

  

    

APPENDIX “I”

RELEASE NOTICE

To:

     

Dear Sir,

We refer to the Escrow Agreement dated [INSERT] entered into between ourselves, 7L Capital Partners Emerging Europe LP, Karlo Vlah, Đurđa Vlah and Josip Vlah and yourselves (the “Escrow Agreement”) and hereby give you notice pursuant to Clause 3 (c) thereof that in accordance with the terms and conditions of the Share Pledge Agreement dated ____________ between VelaTel Global Communications, Inc. as Pledgee, on the one hand, and 7L Capital Partners Emerging Group LP, Karlo Vlah, Đurđa Vlah and Josip Vlah as Pledgors, on the other hand (the “Share Pledge”) and hereby request that you release and deliver to the Pledgors the __________________

Capitalised terms in the present letter have the same meaning as capitalised terms in the Share Pledge and the Escrow Agreement.

Yours Truly

VelaTel Global Communications, Inc.

_______________________________

Title:

 

 

 

  

Schedule 3 - 25 

  

 

ESCROW AGREEMENT I

 

 

THIS ESCROW AGREEMENT dated the _________ day of December 2011 is made between:

 

1.   7L Capital Partners Emerging Europe LP a limited partnership incorporated in Guernsey, having its registered office in Guernsey, Carinthia House, 9-12 The Grange, St. Peter Port, GY1 4BF, duly and legally represented by Mr. Salvator Levis (hereinafter “7LCPEELP” or the “Pledgor 1").

 

2.   Karlo Vlah resident of Croatia, Merhatovec 5, HR-40314 Selnica, OIB: 5891406711 (“Pledgor 2”).

 

3.   Đurđa Vlah resident of Croatia Merhatovec 5, HR-40314 Selnica, OIB: 55417661185 (“Pledgor 3”).

 

4.   Josip Vlah resident of Croatia Merhatovec 5, HR-40314 Selnica, OIB: 24162783756 (“Pledgor 4”).

   

(the aforementioned numbers 1, 2, 3 and 4 hereinafter referred to jointly as “Pledgors”).

 

5.   VelaTel Global Communications, Inc., a United States (“US”) corporation, organized under the laws of the state of Nevada, with a principal place of business at 12526 High Bluff Drive, Suite 155, San Diego, California duly and legally represented by George Alvarez (hereinafter “VelaTel" or the "Pledgee").

 

AND

 

6.   Inter Jura Cy (Trusts) Limited, a private limited liability company incorporated under the laws of Cyprus, with registration number 19433, having its registered office at 1 Lampousas Street, 1095, Nicosia, Cyprus, duly and legally represented by [●] (hereinafter the “Escrow Agent”).

 

(Jointly hereinafter referred to as the “Parties”).

   

A.    WHEREAS, the Pledgors  are the registered owners of 16,281 Common Shares of par value €1 each in “HERLONG ΙNVESTMENTS LIMITED” (referred to as the “Company”) bearing issuance no [●],  which are embodied in share certificates no [●] and represent jointly 25% of the issued Common Shares in the share capital of the Company. Pledgor 1 holds 15,381 Common Shares in the Company (“Shares 1”). Pledgor 2 holds 450 Common Shares in the Company (“Shares 2”). Pledgor 3 holds 225 Common Shares in the Company (“Shares 3”). Pledgor 4 holds 225 Common Shares in the Company (“Shares 4”). Shares 1, Shares 2, Shares 3 and Shares 4 shall hereinafter jointly be referred to as “Shares”).

 

B.    WHEREAS, pursuant to a pledge agreement of even date (the “Share Pledge”) the Pledgors have pledged in favour of the Pledgee the Shares and/or any Further Shares and the Share Certificates. Copy of the Share Pledge is attached hereto in Schedule “●”;

 

C.    WHEREAS, pursuant to Section 4 of the Share Pledge the Pledgors agreed to deliver to the Escrow Agent the Escrow Documents referred to in clause 4.01 of the Share Pledge;

 

D.   WHEREAS, the Pledgee and the Pledgors have requested the Escrow Agent to act as the escrow agent of the Escrow Documents; and

 

E.    WHEREAS, the Escrow Agent has agreed to act as the escrow agent of the Escrow Documents.

   

  

Schedule 4 - 1

  

   

NOW IT IS HEREBY AGREED AS FOLLOWS:

 

1.   Definitions

 

Unless otherwise defined herein, capitalised terms used in this Agreement shall bear the meaning given to them in the Share Pledge.

 

“Business Day” means a day (other than a Saturday or Sunday) on which banks are open for business in Cyprus;

 

“Liability” means any loss, damage, cost, charge, claim, demand, expense, penalty, judgment, demand, action proceeding or other liability whatsoever (including, without limitation, in respect of taxes, duties, levies, imposts and other charges) and including any value added tax or similar tax charged or chargeable in respect thereof and legal fees and expenses on a full indemnity basis;

 

2.1   Appointment of the Escrow Agent

 

The Pledgee and the Pledgors hereby appoint the Escrow Agent as escrow agent in accordance with the terms of this Agreement and the Escrow Agent hereby accept his said appointment as escrow agent

 

2.2   Delivery of Escrow Documents

 

	
(a)

	
Simultaneously with the execution of this Agreement, the Pledgors shall transfer to the Escrow Agent the Escrow Documents which comprise of the following documents: (i) all share certificates representing the Shares; (ii) undated blank instrument of transfer in respect of the Shares duly executed by each of Pledgors, in the form set out in Appendices "A1", "A2", "A3" and "A4" hereto; (iii) undated blank resolution of the board of directors of the Company approving of the transfer of shares, in the form set out in Appendix "B" hereto; (iv) an irrevocable proxy and power of attorney from each of the Pledgors, in the form set out in Appendices "C1", "C2", "C3" and"C4"hereto; (v) undated, duly signed letters of resignation from each of the Directors appointed by the Pledgors and the Secretary of the Company, in the form set out in Appendix "D" hereto; (vi) a letter of authority and undertaking from each of the Directors appointed by the Pledgors and the Secretary of the Company, in the form set out in Appendix "E" hereto; (vii) a waiver letter signed by each shareholder of the Company, other than the Pledge, in the form set out in Appendix F;

 

	
(b)

	
In the time between the date of the execution of this Agreement and until expiry of the Security Period (as this is defined in the Share Pledge), each of the Pledgors irrevocably and unconditionally covenant with the Pledgee that: (i) Pledgor 1 shall procure that there shall be no change in the director of the Company appointed by Pledgor 1 without the prior consent in writing of the Pledgee. In the event of a change in and/or resignation of the director of the Company appointed by Pledgor 1, Pledgor 1 shall within two (2) Business Days from the date it receives a notice of such a change to procure to deliver to the Escrow Agent updated versions of the documents in the form attached herewith as Appendices B, D and E, duly executed by the new director of the Company appointed by Pledgor 1; and (ii) each of the Pledgors shall procure that in the event of a new shareholder subscribing to shares in the Company, then each of the Pledgors shall within two (2) Business Days from the date they receive a notice of such a change to procure to deliver to the Escrow Agent a waiver letter by this new shareholder in the form attached herewith as Appendix F.

 

	
(c)

	
If at any time between the date of the execution of this Agreement and until the expiry of the Security Period, any Further Shares are issued to the Pledgors, then each of the Pledgors will deliver or procure to be delivered to the Escrow Agent, immediately upon the issue of any Further Shares to the Pledgors: Undated blank instruments of transfer in respect of the Further Shares, duly executed by each of the Pledgor, in the form set out in Appendices "A1", "A2", "A3" and "A4" hereto, as amended to refer to the Further Shares: (i) the original Share Certificates issued in relation to the Further Shares; and (ii) an original and undated blank resolution of the Director of the Company appointed by Pledgor 1 approving of the transfer of the Further Shares, in the form set out in Appendix "B" hereto, as amended to refer to the Further Shares.

    

  

Schedule 4 - 2

  

   

3.   Duties of the Escrow Agent

 

	
(a) 

	
The Escrow Agent shall during the continuation of this Agreement keep the Escrow Documents in safe custody and shall not release all or any of them to any party except according to the provisions of this Agreement.

 

	
(b) 

	
(i) If at any time between the date of the execution of this Agreement and until expiry of the Security Period (as this is defined in the Share Pledge) the Escrow Agent receives written notice (the “Event of Default Notice”), according to the form of the attached Appendix “G” hereof, from the Pledgee, stating that the Pledgors are in breach of the Share Pledge and requesting the Escrow Agent to release such Escrow Documents as these appear in the Event of Default Notice to the Pledgee, the Escrow Agent shall, within two (2) Business Days of receipt of the Event of Default Notice, release and deliver the Escrow Documents to the Pledgee, provided that the outstanding fees of the Escrow Agent as set out in section 6 have been settled in full, in which case the duties and obligations of the Escrow Agent will expire and/or otherwise terminate without any Liability on the part of the Escrow Agent. Upon receipt of the Escrow Documents by the Pledgee, the Pledgee shall send a notice in writing to the Escrow Agent and the Pledgor that the Escrow Documents have been safely received.

    

Thereafter, the Pledgee shall have the sole right and responsibility to put into effect all or any Escrow Documents in accordance with provisions of the Share Pledge and deliver these to the secretary of the Company in order to record the transfer of the Default Shares in accordance with the Escrow Documents.

     

(ii) In case of Partial Enforcement (as this is defined in the Share Pledge) and upon notification by the Pledgee of completion of the Escrow Documents, the Pledgors shall deliver or procure to deliver to the Escrow Agent, the updated Escrow Documents representing the remainder of the Shares and/or Further Shares which continue to be pledged and charged in accordance with the terms of Share Pledge I. Any reference in this Escrow Agreement to the Shares and/or Further Shares shall from then on be a reference to the remaining amount of Common Shares (not part of the Partial Enforcement, i.e. Shares and/or Further Shares – Default Shares = remaining amount of Shares and/or Further Shares) which are held by the Pledgors and which shall not exceed 25% of the Company’s total Common Shares. The provisions of the Escrow Agreement shall continue to apply and be binding to all the Parties, in relation to the remaining amount of the Shares and/or Further Shares.

   

	
(c) 

	
If at any time between the date of the execution of this Agreement and until expiry of the Security Period (as this is defined in the Share Pledge) the Escrow Agent receives written notice (the “Release Notice”), according to the form of the attached Appendix “H” hereof, from the Pledgee, the Escrow Agent shall, within two (2) Business Days of receipt of the Release Notice, release and deliver the Escrow Documents as these appear in the Release Notice to the Pledgor provided that the outstanding fees of the Escrow Agent as set out in clause 6 have been settled in full, in which case the duties and obligations of the Escrow Agent will expire and/or otherwise terminate without any Liability on the part of the Escrow Agent. Upon receipt of the Escrow Documents by the Pledgors, the Pledgors shall send a notice in writing to the Escrow Agent and the Pledgee that the Escrow Documents have been safely received.

 

	
(d) 

	
In case of a Permitted Transfer subject to the terms and conditions of Clause 3.07 of the Share Pledge, the Pledgee shall send to the Escrow Agent a Release Notice, signed by the authorised signatory of the Pledgee, under the condition that NewCo will pledge and charge the Shares and/or Further Shares it holds in the Company in favour of the Pledgee. The Parties will simultaneously execute such an amending escrow agreement as is necessary and NewCo as the new pledgor will deliver the Escrow Document to the Escrow Agent.

   

  

Schedule 4 - 3

  

    

4.   Authority of the Escrow Agent

 

The Pledgee and each of the Pledgors hereby authorise the Escrow Agent and the Escrow Agent hereby agrees to hold and deliver the Escrow Documents in accordance with and subject to the terms and conditions of this Agreement.

 

If the Escrow Agent whether original, additional or substituted dies or gives notice of a desire to withdraw and is discharged from these trusts or refuses or becomes unfit to act then the Pledgee may by instrument appoint one other person to be an Escrow Agent in his place. The same will apply if any one of Escrow Agent’s successors is deceased or desires to withdraw or is discharged or refuses or becomes unfit to act.

 

5.   Termination

 

This Agreement shall be terminated on the delivery of the Escrow Documents by the Escrow Agent to either of the Pledgee and the Pledgors in accordance with this Agreement.

 

6.   Escrow Agents’ Fees

 

	
(a)

	
The initial fees of the Escrow Agent for the first year of the term of its acting as Escrow Agent shall be Euro [●] (plus any disbursements and VAT, if applicable) (the “Initial Fees”).  The Initial Fees shall be payable by the Pledgors upon execution and delivery of this Agreement.

 

	
(b)

	
An annual fee of Euro [●] (plus any disbursements and VAT, if applicable) shall be payable on every anniversary from the date of signature of this Agreement (the “Annual Fee”), until termination or expiry of the same.  The Annual Fee shall be payable by the Pledgor within five (5) Business Days from the date of issue of the relevant note of charges and out of pocket expenses by the Escrow Agent. No action shall be taken by the Escrow Agent in accordance with Section 3 unless all outstanding fees are settled in full.

 

	
(c)

	
An enforcement fee of Euro [●] (plus any disbursements and VAT, if applicable) shall be payable upon receipt by the Escrow Agent of the Event of Default Notice or the Release Notice (as the case may be) (the “Enforcement Fee”). The Enforcement Fee shall be payable by the Pledgor within five (5) Business Days from the date of issue of the relevant note of charges and out of pocket expenses by the Escrow Agent. No action shall be taken by the Escrow Agent in accordance with Section 3 unless all outstanding fees are settled in full.

 

	
(d)

	
Each of the Pledgors pro rata to their shareholding in the Company shall be liable for and shall pay to the Escrow Agent, ondemand, all charges, costs and expenses reasonably and properly incurred and documented (including legal expenses) which the Escrow Agent may incur in relation to the performance of its obligations hereunder.

 

7.   Rights and Obligations of Escrow Agent

 

	
(a) 

	
The Escrow Agent shall have the duties, and only those duties, set out expressly in this Agreement and there can be no other implied responsibilities or obligations upon the Escrow Agent.  The duties and obligations of the Escrow Agent in relation to the Escrow Documents will be terminated and discharged without any Liability when the Escrow Agent releases the Escrow Documents in accordance with Section 3.

 

	
(b) 

	
The Escrow Agent shall not be liable for any error of judgement or for any act done or omitted to be done by the Escrow Agent in good faith including, without limitation, any act done or omitted to be done by the Escrow Agent in compliance with its obligations under any applicable law or in accordance with an order of a court or tribunal or governmental authority.

    

  

Schedule 4 - 4

  

    

	
(c) 

	
Each of the Pledgors and/or the Pledgee undertakes to indemnify the Escrow Agent,  and hold the Escrow Agent harmless on demand, against any and all losses, claims, damages, costs, demands, Liabilities, expenses and/or proceedings whether arising under contract, tort or otherwise including,  reasonable costs of investigation, experts and counsel fees and disbursements which may be incurred or suffered by, or made against the Escrow Agent in connection with or arising in any way out of or in consequence of the Escrow Agent’s acceptance of its appointment as Escrow Agent hereunder or the performance or non-performance of the Escrow Agent’ duties hereunder, including, without limitation, any arbitration or litigation arising from this Agreement or the Share Pledge or other related agreement, except as arising out of fraud or gross negligence of the Escrow Agent.

 

	
(d) 

	
In no circumstances shall the Escrow Agent have any obligation to make any payment or make any transfer of shares pursuant to this Agreement under the terms and conditions of this Agreement.

 

	
(e) 

	
The Escrow Agent shall be unconditionally discharged from all further duties, obligation and under this Agreement and from all Liabilities upon the release of the Escrow Documents as provided in this Agreement.

 

	
(f) 

	
If there is a dispute under this Agreement and/or under the Share Pledge or other related agreement, the Escrow Agent shall be entitled, upon respective instruction from the court or an arbitral tribunal, to release the Escrow Documents to any court or arbitral tribunal of competent jurisdiction, and thereupon to be discharged from all further duties and obligations without any Liability under this Agreement and the Escrow Agent shall be indemnified in accordance with section 7(c).d

 

8.   Notices

 

	
(a) 

	
All notices, demands and other communications required to be given pursuant to this Agreement shall be in writing and may be given by post, hand or telecopy transmission addressed as provided below (or to the addressee at such other address as the addressee shall have specified by notice actually received by the addressor):

 

If to the Pledgee:

 

VelaTel Global Communications, Inc.

12526 High Bluff Drive, Suite 155

San Diego, CA  92130

Attn: Kenneth Waggoner

Tel: + (760) 230-8986

Fax: + (760) 359-7042

Email: kwaggoner@velatel.com

    

If to Pledgor:

 

7L Equity Partners (Emerging Europe) Limited

Carinthia House

9-12 The Grange

St Peter Port

Guernsey, GY1 4BF

Great Britain

Attn. Mr. Jacques Vermeulen

Tel.:  +44 1481 743 758

Fax:  +44 1481 734 301

Email: jacques.vermeulen@augentius.com

   

  

Schedule 4 - 5

  

     

If to Pledge Agent:

    

Inter Jura Cy (Trusts) Limited

1 Lampousas Street, 1095

Nicosia, Cyprus

Attn: ____

Tel:

Fax:

Email:

   

	
(b) 

	
Notices shall become effective upon actual receipt by the party intended unless expressly otherwise provided in this Agreement.

 

	
(c) 

	
The Pledgee and each of the Pledgors authorise the Escrow Agent to accept notices from each of them if they are signed on their behalf by the person signing the present Agreement on their behalf or by any other person appointed by their board of directors.

 

	
(d) 

	
The Escrow Agent shall not be held responsible for any loss, liability, damage or expense that may result from, or in connection with, any unauthorised instructions or equipment malfunction except if caused by fraud or negligence of the Escrow Agent.

 

9.   Delivery of Escrow Documents

 

Any delivery of the Escrow Documents by the Escrow Agent shall be deemed to be duly effected if they are delivered by hand to:

 

If to the Pledgors:

    

[●]

If to the Pledgee:

 

VelaTel Global Communications, Inc.

12526 High Bluff Drive, Suite 155

Sean Diego, CA 92130  USA

      

10.   Representations and Warranties

   

Each party represents and warrants to the other party that:

 

	
(a) 

	
such party has the power, authority and capacity (or, in the case of any party that is a company, all corporate power and authority, as the case may be) to execute, deliver and perform this Agreement;

 

	
(b) 

	
in the case of a party that is a company, the execution, delivery and performance of this Agreement by such party has been duly and validly authorized and approved by all necessary corporate action;

 

	
(c) 

	
this Agreement has been duly and validly executed and delivered by such party and constitutes a valid and legally binding obligation of such party, enforceable in accordance with its terms, subject to bankruptcy, insolvency, Or other similar laws affecting or relating to creditors’ rights; and

    

  

Schedule 4 - 6

  

   

	
(d) 

	
the execution, delivery and performance of this Agreement by such party does not and will not violate the terms of or result in the acceleration of any obligation under (A) any material contract, commitment or other material instrument to which such party is a party or by which such party is bound or (B) in the case of a party that is a company, its Articles of Association.

 

11.   Specific Performance

 

The rights of the parties under this Agreement are unique and, accordingly, the parties shall, in addition to such other remedies as may be available to any of them at law or in equity, have the right to enforce their rights hereunder by actions for specific performance to the extent permitted by law.

 

12.   Entire Agreement

 

This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and supersedes any and all prior understandings and agreements, whether written or oral, with respect to such subject matter.

 

13.   Successors and Assigns

 

This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, legal representatives, successors, assigns and permitted transferees, except as may be expressly provided otherwise herein.

 

14.   Severability

 

In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement and such invalid, illegal and unenforceable provision shall be modified and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.

 

15.   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 one and the same instrument.

 

16.   Section Headings

 

The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.

 

17.   Time

 

Time is of the essence for this Agreement.

 

18.   Arbitration

 

All disputes arising in connection with this Agreement shall be finally settled by arbitration. The arbitration shall be held in Cyprus and conducted in the English language in accordance with the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules as at present in force. There shall be 3 arbitrators, one to be appointed by the claimant and/or claimants and one to be appointed by the respondent and/or respondents and the third to be appointed by the common agreement of the two arbitrators selected by the parties. In the event of a failure to agree on the appointment of arbitrators, the appointing authority shall be the London Court of International Arbitration. If the parties so agree, there shall be a sole arbitrator appointed by the London Court of International Arbitration Upon the award rendered an application may be made to the competent court for a judicial acceptance of the award and an order for enforcement.

   

19.   Governing Law

 

This Agreement shall be governed by and construed and enforced in accordance with the laws (other than the conflict of laws rules) of Cyprus.

    

  

Schedule 4 - 7

  

    

IN WITNESS WHEREOF the parties hereto have set their hands, as of the day of the year first above mentioned.

    

	THE PLEDGEE	 	 
	 	 	 
	[ ●]	 	In the presence of:
	

 

	 	

 

	By:	 	Name:
	Title:	 	 
	 	 	 
	 	 	 
	SIGNED FOR THE PLEDGOR 1	 	 
	 	 	 
	
 

	 	 
	 	 	 
	SIGNED FOR THE PLEDGOR 2	 	SIGNED FOR THE PLEDGOR 3
	 	 	 
	

 

	 	

 

	
in the presence of

	 	 
	 	 	 
	

 

	 	

 

	Witness	 	Witness
	 	 	 
	

 

	 	

 

	Witness	 	Witness
	 	 	 
	 	 	 
	SIGNED FOR THE PLEDGOR 4	 	 
	 	 	 
	

 

	 	 
	
 

	 	 
	 	 	 
	

 

	 	 
	Witness	 	 
	 	 	 
	

 

	 	 
	Witness	 	 
	 	 	 
	 	 	 
	THE ESCROW AGENT	 	 
	 	 	 
	 	 	
In the presence of:

	 	 	 
	

 

	 	

 

	 	 	Name:

     

  

Schedule 4 - 8

  

   

APPENDIX "A1"

 

INSTRUMENT OF TRANSFER

 

I/WE

 

7L Capital Partners Emerging Europe LP, with registered office in Guernsey, Carinthia House, 9-12 The Grange, St. Peter Port, GY1 4BF

 

(hereinafter called the "transferor(s)")

 

in exchange of good and valuable consideration received by me/us by

 

Name

of

 

(hereinafter called the "transferee(s)" do hereby transfer to the said transferee(s) the share(s) shown in the schedule hereto held by us/me in the undertaking called

 

HERLONG ΙNVESTMENTS LIMITED

 

to hold unto the said transferee(s) his/their executors, administrators and assigns.

 

AND I/WE the said transferee(s) do hereby agree to take the said shares in the aforementioned undertaking subject to the conditions aforesaid.

 

Date:

 

SCHEDULE

   

__________ fully paid ordinary shares of €[●] each serial no. _________________________, as per Share Certificate No._____ and _____

   

 

	THE TRANSFEROR(S)	 	THE TRANSFEREE(S)
	 	 	 
	

 

	 	

 

	 	 	 
	
Name:  7L Capital Partners Emerging 

	 	
Name:

	Address: As above	 	Address: As above
	 	 	 
	 	 	 
	

 

	 	

 

	Witness to the signature of Transferor(s)	 	Witness to the signature of Transferee(s)
	 	 	 
	 	 	 

        

  

Schedule 4 - 9

  

   

APPENDIX "A2"

 

INSTRUMENT OF TRANSFER

 

I

 

Karlo Vlah

 

(hereinafter called the "transferor(s)")

 

in exchange of good and valuable consideration received by me/us by

 

Name

of

 

(hereinafter called the "transferee(s)" do hereby transfer to the said transferee(s) the share(s) shown in the schedule hereto held by me in the undertaking called

 

HERLONG ΙNVESTMENTS LIMITED

 

to hold unto the said transferee(s) his/their executors, administrators and assigns.

 

AND I/WE the said transferee(s) do hereby agree to take the said shares in the aforementioned undertaking subject to the conditions aforesaid.

 

Date:

 

SCHEDULE

 

__________ fully paid ordinary shares of €[●] each serial no. _________________________, as per Share Certificate No._____ and _____

 

 

	THE TRANSFEROR(S)	 	THE TRANSFEREE(S)
	
KARLO VLAH

	 	

 

	 	 	 
	
 

	 	
Name:

	Address:	 	Address: As above
	 	 	 
	 	 	 
	

 

	 	

 

	Witness to the signature of Transferor(s)	 	Witness to the signature of Transferee(s)
	 	 	 
	 

    

  

Schedule 4 - 10

  

   

APPENDIX "A3"

 

INSTRUMENT OF TRANSFER

 

I

 

Durda Vlah

 

(hereinafter called the "transferor(s)")

 

in exchange of good and valuable consideration received by me/us by

 

Name

of

 

(hereinafter called the "transferee(s)" do hereby transfer to the said transferee(s) the share(s) shown in the schedule hereto held by me in the undertaking called

 

HERLONG ΙNVESTMENTS LIMITED

 

to hold unto the said transferee(s) his/their executors, administrators and assigns.

 

AND I/WE the said transferee(s) do hereby agree to take the said shares in the aforementioned undertaking subject to the conditions aforesaid.

 

 

SCHEDULE

 

__________ fully paid ordinary shares of €[●] each serial no. _________________________, as per Share Certificate No._____ and _____

   

	THE TRANSFEROR(S)	 	THE TRANSFEREE(S)
	 	 	 
	
DURDA VLAH

	 	

 

	 	 	 
	
 

	 	
Name:

	Address:	 	Address: As above
	 	 	 
	 	 	 
	

 

	 	

 

	Witness to the signature of Transferor(s)	 	Witness to the signature of Transferee(s)
	 	 	 
	 	 	 

           

  

Schedule 4 - 11

  

   

APPENDIX "A4"

 

INSTRUMENT OF TRANSFER

 

I

 

Josip Vlah

 

(hereinafter called the "transferor(s)")

 

in exchange of good and valuable consideration received by me/us by

 

Name

of

 

(hereinafter called the "transferee(s)" do hereby transfer to the said transferee(s) the share(s) shown in the schedule hereto held by me in the undertaking called

 

HERLONG ΙNVESTMENTS LIMITED

 

to hold unto the said transferee(s) his/their executors, administrators and assigns.

 

AND I/WE the said transferee(s) do hereby agree to take the said shares in the aforementioned undertaking subject to the conditions aforesaid.

 

Date:

 

SCHEDULE

 

__________ fully paid ordinary shares of €[●] each serial no. _________________________, as per Share Certificate No._____ and _____

   

	THE TRANSFEROR(S)	 	THE TRANSFEREE(S)
	 	 	 
	
JOSIP VLAH

	 	

 

	 	 	 
	
 

	 	
Name:

	Address:	 	Address: As above
	 	 	 
	 	 	 
	

 

	 	

 

	Witness to the signature of Transferor(s)	 	Witness to the signature of Transferee(s)
	 	 	 
	 	 	 

   

  

Schedule 4 - 12

  

   

APPENDIX "B"

 

HERLONG ΙNVESTMENTS LIMITED

 

UNANIMOUS WRITTEN RESOLUTION OF THE BOARD OF DIRECTORS OF THE COMPANY DATED

 

By a unanimous written resolution of all the Directors of the Company, it is hereby resolved as follows:-

 

(1)       To approve of the following transfer of shares:

 

(i) ___________ fully paid ordinary shares of €[●] each serial no. __________________________ and __________________

 

from 7L Capital Partners Emerging Europe LP

 

(ii) ___________ fully paid ordinary shares of €[●] each serial no. __________________________ and __________________

 

from Karlo Vlah

 

(iii) ___________ fully paid ordinary shares of €[●] each serial no. __________________________ and __________________

 

From Durda Vlah

 

(iv) ___________ fully paid ordinary shares of €[●] each serial no. __________________________ and __________________

 

From Josip Vlah

 

to VelaTel Global Communications, Inc

 

(2)   The secretary is instructed to take all appropriate steps to implement the above resolution.

(Sgd) __________

(Sgd) __________

(Sgd) __________

(Sgd) __________

(Sgd) __________

   

  

Schedule 4 - 13

  

   

APPENDIX "C1"

 

IRREVOCABLE PROXY AND POWER OF ATTORNEY

IN ACCORDANCE WITH SECTION 4.01 OF THE SHARE PLEDGE

DATED ............ 2011

 

	
1.

	
We 7L Capital Partners Emerging, with registered office in Guernsey, Carinthia House, 9-12 The Grange, St. Peter Port, GY1 4BF, represented by Salvator Lavis, hereby constitute and appoint _________________________________, ___________________________  ___________________________, as our true and lawful attorney and proxy being fully empowered and authorized to do all or any of the following acts and matters with effect from the occurrence of an Event of Default pursuant to the Share Pledge Agreement dated _____  ___  ____ between VelaTel Global Communications, Inc. as Pledgee, on the one hand, and 7L Capital Partners Emerging Group LP, Karlo Vlah, Durda Vlah and Josip Vlah as Pledgors, on the other hand (the “Share Pledge”):

 

	
  

	
(1)

	
To sell, transfer, assign, pledge or otherwise dispose or charge all or any of the Default Shares (as this terms are defined in the Share Pledge) to or in favour of, such person or persons and under such terms as the Attorney may deem fit.

 

	
  

	
(2)

	
To vote and/or exercise all consensual powers discretions and rights at any general meeting of the Company or by executing any resolution in writing by such shareholders as fully as we would do.

 

	
  

	
(3)

	
To demand, receive and retain all dividends, interest or other moneys or assets accruing on or in respect of all or any of the Default Shares.

 

	
  

	
(4)

	
To exercise all rights and options, by way of acceptance of offer of new shares, rights or bonus issue, or other rights, benefits, or otherwise, accruing on or in respect of all or any of the Default Shares, and to require that all such rights and options be registered, transferred, assigned or otherwise dealt with as the Attorney may deem fit; all powers and authorities of the Attorney under this Power of Attorney in respect of the Default Shares may be likewise exercised by the Attorney in respect of any new shares, rights or bonus issue or other rights and benefits accruing in respect of the Default Shares.

 

	
  

	
(5)

	
To demand from the Company, its secretary or Register keeper and any other officer or person acting for the Company as well as from any competent authority, the issue and delivery to the Attorney of any certificates, statements or other documents of title evidencing the ownership of, or entitlement to, the Default Shares and any new shares, rights or bonus issue, or other rights and benefits accruing in respect of the Default Shares.

 

	
  

	
(6)

	
Generally to act and deal in respect of the Default Shares and any new shares, rights or bonus, or other rights and benefits accruing in respect of the Default Shares as fully as we could do.

 

	
  

	
(7)

	
To sign, execute and deliver any instruments of transfer, applications, assignments, receipts, deeds, agreements and documents whatsoever in relation to all or any of the powers authorities vested on the Attorney under this Power of Attorney, and to do so under such terms and conditions as the Attorney may deem fit;

 

	
  

	
(8)

	
To appoint any substitute or agent or attorney to do all or any of the acts and matters vested on the Attorney under this Power of Attorney.

 

	
2.

	
All and any proxies and/or powers of attorney previously given in favour of any person or persons (other than the Attorney) in relation to the Default Shares are hereby revoked.

 

	
3.

	
We hereby ratify and confirm all that the Attorney or any substitute or substitutes shall do or cause to be done by virtue hereof.

 

	
4.

	
We hereby acknowledge that the Shares and/or Further Shares have been pledged to the Attorney by the Share Pledge and this Power of Attorney is given by way of security and shall remain in full force and irrevocable for as long as the said  Share Pledge shall remain in force.

 

IN WITNESS whereof we have executed this Proxy and Power of Attorney this _____ day of _______

 

 

SIGNED by___________

7L Capital Partners Emerging Europe LP

    

  

Schedule 4 - 14

  

    

APPENDIX "C2"

 

IRREVOCABLE PROXY AND POWER OF ATTORNEY

IN ACCORDANCE WITH SECTION 4.01 OF THE SHARE PLEDGE

DATED ............ 2011

 

	
1.

	
I Karlo Vlah, resident of Croatia, Merhatovec 5, HR-40314 Selnica, OIB: 5891406711 hereby constitute and appoint _________________________________, ___________________________  ___________________________, as my true and lawful attorney and proxy being fully empowered and authorized to do all or any of the following acts and matters with effect from the occurrence of an Event of Default pursuant to the Share Pledge Agreement dated _____  ___  ____ between VelaTel Global Communications, Inc. as Pledgee, on the one hand, and 7L Capital Partners Emerging Group LP, Karlo Vlah, Durda Vlah and Josip Vlah as Pledgors, on the other hand (the “Share Pledge”):

 

	
  

	
(1)

	
To sell, transfer, assign, pledge or otherwise dispose or charge all or any of the Default Shares (as this terms are defined in the Share Pledge) to or in favour of, such person or persons and under such terms as the Attorney may deem fit.

 

	
  

	
(2)

	
To vote and/or exercise all consensual powers discretions and rights at any general meeting of the Company or by executing any resolution in writing by such shareholders as fully as we would do.

 

	
  

	
(3)

	
To demand, receive and retain all dividends, interest or other moneys or assets accruing on or in respect of all or any of the Default Shares.

 

	
  

	
(4)

	
To exercise all rights and options, by way of acceptance of offer of new shares, rights or bonus issue, or other rights, benefits, or otherwise, accruing on or in respect of all or any of the Default Shares, and to require that all such rights and options be registered, transferred, assigned or otherwise dealt with as the Attorney may deem fit; all powers and authorities of the Attorney under this Power of Attorney in respect of the Default Shares may be likewise exercised by the Attorney in respect of any new shares, rights or bonus issue or other rights and benefits accruing in respect of the Default Shares.

 

	
  

	
(5)

	
To demand from the Company, its secretary or Register keeper and any other officer or person acting for the Company as well as from any competent authority, the issue and delivery to the Attorney of any certificates, statements or other documents of title evidencing the ownership of, or entitlement to, the Default Shares and any new shares, rights or bonus issue, or other rights and benefits accruing in respect of the Default Shares.

 

	
  

	
(6)

	
Generally to act and deal in respect of the Default Shares and any new shares, rights or bonus, or other rights and benefits accruing in respect of the  Default Shares as fully as we could do.

 

	
  

	
(7)

	
To sign, execute and deliver any instruments of transfer, applications, assignments, receipts, deeds, agreements and documents whatsoever in relation to all or any of the powers authorities vested on the Attorney under this Power of Attorney, and to do so under such terms and conditions as the Attorney may deem fit;

 

	
  

	
(8)

	
To appoint any substitute or agent or attorney to do all or any of the acts and matters vested on the Attorney under this Power of Attorney.

 

	
2.

	
All and any proxies and/or powers of attorney previously given in favour of any person or persons (other than the Attorney) in relation to the Default Shares are hereby revoked.

 

	
3.

	
I hereby ratify and confirm all that the Attorney or any substitute or substitutes shall do or cause to be done by virtue hereof.

 

	
4.

	
I hereby acknowledge that the Shares and/or Further Shares have been pledged to the Attorney by the Share Pledge and this Power of Attorney is given by way of security and shall remain in full force and irrevocable for as long as the said  Share Pledge shall remain in force.

 

IN WITNESS whereof we have executed this Proxy and Power of Attorney this _____ day of _______

 

SIGNED by___________

Karlo Vlah

   

  

Schedule 4 - 15

  

   

APPENDIX "C3"

 

IRREVOCABLE PROXY AND POWER OF ATTORNEY

IN ACCORDANCE WITH SECTION 4.01 OF THE SHARE PLEDGE

DATED ............ 2011

 

	
1.

	
I Durda Vlah, resident of Croatia, Merhatovec 5, HR-40314 Selnica, OIB: 55417661185 hereby constitute and appoint _________________________________, ___________________________  ___________________________ as my true and lawful attorney and proxy being fully empowered and authorized to do all or any of the following acts and matters with effect from the occurrence of an Event of Default pursuant to the Share Pledge Agreement dated _____  ___  ____ between VelaTel Global Communications, Inc. as Pledgee, on the one hand, and 7L Capital Partners Emerging Group LP, Karlo Vlah, Durda Vlah and Josip Vlah as Pledgors, on the other hand (the “Share Pledge”):

 

	
  

	
(1)

	
To sell, transfer, assign, pledge or otherwise dispose or charge all or any of the Default Shares (as this terms are defined in the Share Pledge) to or in favour of, such person or persons and under such terms as the Attorney may deem fit.

 

	
  

	
(2)

	
To vote and/or exercise all consensual powers discretions and rights at any general meeting of the Company or by executing any resolution in writing by such shareholders as fully as we would do.

 

	
  

	
(3)

	
To demand, receive and retain all dividends, interest or other moneys or assets accruing on or in respect of all or any of the Default Shares.

 

	
  

	
(4)

	
To exercise all rights and options, by way of acceptance of offer of new shares, rights or bonus issue, or other rights, benefits, or otherwise, accruing on or in respect of all or any of the Default Shares, and to require that all such rights and options be registered, transferred, assigned or otherwise dealt with as the Attorney may deem fit; all powers and authorities of the Attorney under this Power of Attorney in respect of the Default Shares may be likewise exercised by the Attorney in respect of any new shares, rights or bonus issue or other rights and benefits accruing in respect of the Default Shares.

 

	
  

	
(5)

	
To demand from the Company, its secretary or Register keeper and any other officer or person acting for the Company as well as from any competent authority, the issue and delivery to the Attorney of any certificates, statements or other documents of title evidencing the ownership of, or entitlement to, the Default Shares and any new shares, rights or bonus issue, or other rights and benefits accruing in respect of the Default Shares.

 

	
  

	
(6)

	
Generally to act and deal in respect of the Default Shares and any new shares, rights or bonus, or other rights and benefits accruing in respect of the Default Shares as fully as we could do.

 

	
  

	
(7)

	
To sign, execute and deliver any instruments of transfer, applications, assignments, receipts, deeds, agreements and documents whatsoever in relation to all or any of the powers authorities vested on the Attorney under this Power of Attorney, and to do so under such terms and conditions as the Attorney may deem fit;

 

	
  

	
(8)

	
To appoint any substitute or agent or attorney to do all or any of the acts and matters vested on the Attorney under this Power of Attorney.

 

	
2.

	
All and any proxies and/or powers of attorney previously given in favour of any person or persons (other than the Attorney) in relation to the Default Shares are hereby revoked.

 

	
3.

	
I hereby ratify and confirm all that the Attorney or any substitute or substitutes shall do or cause to be done by virtue hereof.

 

	
4.

	
I hereby acknowledge that the Shares and/or Further Shares have been pledged to the Attorney by the Share Pledge and this Power of Attorney is given by way of security and shall remain in full force and irrevocable for as long as the said  Share Pledge shall remain in force.

 

IN WITNESS whereof we have executed this Proxy and Power of Attorney this _____ day of _______

 

SIGNED by___________

Durda Vlah

    

  

Schedule 4 - 16

  

   

APPENDIX "C4"

 

IRREVOCABLE PROXY AND POWER OF ATTORNEY

IN ACCORDANCE WITH SECTION 4.01 OF THE SHARE PLEDGE

DATED ............ 2011

 

	
1.

	
I Josip Vlah, resident of Croatia, Merhatovec 5, HR-40314 Selnica, OIB: 24162783756 hereby constitute and appoint _________________________________, ___________________________  ___________________________, as my true and lawful attorney and proxy being fully empowered and authorized to do all or any of the following acts and matters with effect from the occurrence of an Event of Default pursuant to the Share Pledge Agreement dated _____  ___  ____ between VelaTel Global Communications, Inc. as Pledgee, on the one hand, and 7L Capital Partners Emerging Group LP, Karlo Vlah, Durda Vlah and Josip Vlah as Pledgors, on the other hand (the “Share Pledge”):

 

	
  

	
(1)

	
To sell, transfer, assign, pledge or otherwise dispose or charge all or any of the Default Shares and/or the Further Shares (as this terms are defined in the Share Pledge) to or in favour of, such person or persons and under such terms as the Attorney may deem fit.

 

	
  

	
(2)

	
To vote and/or exercise all consensual powers discretions and rights at any general meeting of the Company or by executing any resolution in writing by such shareholders as fully as we would do.

 

	
  

	
(3)

	
To demand, receive and retain all dividends, interest or other moneys or assets accruing on or in respect of all or any of the Default Shares.

 

	
  

	
(4)

	
To exercise all rights and options, by way of acceptance of offer of new shares, rights or bonus issue, or other rights, benefits, or otherwise, accruing on or in respect of all or any of the Default Shares, and to require that all such rights and options be registered, transferred, assigned or otherwise dealt with as the Attorney may deem fit; all powers and authorities of the Attorney under this Power of Attorney in respect of the Default Shares may be likewise exercised by the Attorney in respect of any new shares, rights or bonus issue or other rights and benefits accruing in respect of the Default Shares.

 

	
  

	
(5)

	
To demand from the Company, its secretary or Register keeper and any other officer or person acting for the Company as well as from any competent authority, the issue and delivery to the Attorney of any certificates, statements or other documents of title evidencing the ownership of, or entitlement to, the Default Shares and any new shares, rights or bonus issue, or other rights and benefits accruing in respect of the Default Shares.

 

	
  

	
(6)

	
Generally to act and deal in respect of the Default Shares and any new shares, rights or bonus, or other rights and benefits accruing in respect of the  Default Shares as fully as we could do.

 

	
  

	
(7)

	
To sign, execute and deliver any instruments of transfer, applications, assignments, receipts, deeds, agreements and documents whatsoever in relation to all or any of the powers authorities vested on the Attorney under this Power of Attorney, and to do so under such terms and conditions as the Attorney may deem fit;

 

	
  

	
(8)

	
To appoint any substitute or agent or attorney to do all or any of the acts and matters vested on the Attorney under this Power of Attorney.

 

	
2.

	
All and any proxies and/or powers of attorney previously given in favour of any person or persons (other than the Attorney) in relation to the Default Shares are hereby revoked.

 

	
3.

	
I hereby ratify and confirm all that the Attorney or any substitute or substitutes shall do or cause to be done by virtue hereof.

 

	
4.

	
I hereby acknowledge that the Shares and/or Further Shares have been pledged to the Attorney by the Share Pledge and this Power of Attorney is given by way of security and shall remain in full force and irrevocable for as long as the said  Share Pledge shall remain in force.

 

IN WITNESS whereof we have executed this Proxy and Power of Attorney this _____ day of _______

 

SIGNED by___________

Josip Vlah

    

  

Schedule 4 - 17

  

   

APPENDIX "D"

 

LETTER OF RESIGNATION

 

	
To:

	
HERLONG ΙNVESTMENTS LIMITED, of Nicosia Cyprus ("the Company")

	
CC:

	
VelaTel Global Communications, Inc

Date:

 

Dear Sirs,

 

I hereby resign from my position as a Director of the Company with effect from the date of this letter.

 

I hereby confirm that I have no claim whatsoever against the Company for loss of office or otherwise.

 

Yours faithfully,

 

(Sgd) __________

 

[to be signed by each Director of the Company appointed by the Pledgors]

    

  

Schedule 4 - 18

  

    

APPENDIX "E"

 

LETTER OF AUTHORITY AND UNDERTAKING

 

	
TO:

	
VelaTel Global Communications, Inc

("the Pledgee")

 

DATED: _________, 2011

 

Dear Sirs,

 

HERLONG ΙNVESTMENTS LIMITED ("The Company")

 

I, the undersigned, holding the office of Director in the Company and for good and valuable consideration provided by the Pledgee (the receipt and sufficiency of which is hereby acknowledged) I hereby irrevocably authorise and undertake with the Pledgee that:

 

	
  

	
1)

	
For so long as any Obligations are outstanding (as these are defined in the Share Pledge of even date granted by 7L Capital Partners Emerging Europe LP, Karlo Vlah, Đurđa Vlah and Josip Vlah, as Pledgors) I will not act alone or in concert with any one or more of my fellow directors or officers of the Company or with any other person, enter into or accept or authorise any act or commitment in contravention of the covenants under the Agreement or the Share Pledge;

 

	
  

	
2)

	
I hereby irrevocably authorise the Pledgee at any time on or after the occurrence of a Default (as defined in the Share Pledge) to date, use and otherwise put into full effect the undated letter of resignation delivered by me to the Pledgee pursuant to the Share Pledge.

 

All capitalized terms in the Share Pledge shall have the same meaning in the present letter.

 

Yours faithfully,

 

 

 

[to be signed by each Director of the Company appointed by the Pledgors]

    

  

Schedule 4 - 19

  

   

APPENDIX "F"

 

WAIVER

 

To the Board of Directors

of HERLONG INVESTMENTS LIMITED

[insert address]

 

We, ______________________ of _________, hereby confirm that in connection with the proposed transfer of _________ shares of Euro 1,00 each from 7L Capital Partners Emerging Europe LP, Karlo Vlah, Đurđa Vlah and Josip Vlah, to  VelaTel Global Communications, Inc. we do not wish to exercise any options or rights vested in us by virtue of the provisions of the Company's Articles of Association and we declare that they may transfer such shares to any person or persons that they may consider proper.

 

  

Signed this ___________ day of ________, 20__

___________________________________

[insert name of Shareholder]

    

  

Schedule 4 - 20

  

     

APPENDIX “H”

 

DEFAULT NOTICE

 

To:

 

________________________

 

Dear Sir,

 

We refer to the Escrow Agreement dated [INSERT] entered into between ourselves, VelaTel and yourselves (the “Escrow Agreement”) and hereby give you notice pursuant to Clause 3(b) thereof that in accordance with the terms and conditions of the Share Pledge Agreement dated ______________ between VelaTel Global Communications, Inc. as Pledgee, on the one hand, and 7L Capital Partners Emerging Europe LP, Karlo Vlah, Đurđa Vlah and Josip Vlah as Pledgors, on the other hand (the “Share Pledge”), an Event of Default (as this is defined in the Share Pledge) has taken place and hereby request that you release and deliver to us the __________________

 

Capitalised terms in the present letter have the same meaning as capitalised terms in the Share Pledge and the Escrow Agreement (as the case may be).

 

Yours Truly

_______________________________

Title:

     

  

Schedule 4 - 21

  

   

APPENDIX “I”

 

RELEASE NOTICE

 

To:

 

________________________

 

Dear Sir,

 

We refer to the Escrow Agreement dated [INSERT] entered into between ourselves, 7L Capital Partners Emerging Europe LP, Karlo Vlah, Đurđa Vlah and Josip Vlah and yourselves (the “Escrow Agreement”) and hereby give you notice pursuant to Clause 3 (c) thereof that in accordance with the terms and conditions of the Share Pledge Agreement dated ______________ between VelaTel Global Communications, Inc. as Pledgee, on the one hand, and 7L Capital Partners Emerging Group LP, Karlo Vlah, Đurđa Vlah and Josip Vlah as Pledgors, on the other hand (the “Share Pledge”) and hereby request that you release and deliver to the Pledgors the __________________

 

Capitalised terms in the present letter have the same meaning as capitalised terms in the Share Pledge and the Escrow Agreement.

 

Yours Truly

 

VelaTel Global Communications, Inc.

_______________________________

Title:

 

 

  

Schedule 4 - 22 

  

 

SHARE PLEDGE AGREEMENT II

 

 

THIS SHARE PLEDGE AGREEMENT (the "Share Pledge") dated the ___ day of December, 2011 is made between:

 

1.   VelaTel Global Communications, Inc., a United States (“US”) corporation, organized under the laws of the state of Nevada, with a principal place of business at 12526 High Bluff Drive, Suite 155, San Diego, California duly and legally represented by  George Alvarez (hereinafter “VelaTel" or the “Pledgor")

 

AND

 

2.   7L Capital Partners Emerging Europe LP a limited partnership incorporated in Guernsey, having its registered office in Guernsey, Carinthia House, 9-12 The Grange, St. Peter Port, GY1 4BF, duly and legally represented by Mr. Salvator Levis (hereinafter “7LCP” or the "Pledgee").

 

(Jointly hereinafter referred to as the “Parties”)

   

WHEREAS:

   

	
A.

	
At the date of this Share Pledge the Pledgor is the registered owner of 48,843 Common Shares of par value € 1 each in “HERLONG ΙNVESTMENTS LIMITED” (referred to as the “Company”) bearing issuance no [●], which are embodied in share certificates no [●] and [●] and represent 75% of the issued Common Shares in the share capital of the Company (hereinafter referred to as “Shares”).

 

	
B.

	
The Pledgor has agreed to provide in favour of the Pledgee a pledge over the Shares, which are legally held by the Pledgor, as security for the performance by the Pledgor of its obligations under the Business Cooperation Agreement between the Pledgor, the Pledgee, the Company, Karlo Vlah, Đurđa Vlah and Josip Vlah dated [●] (hereinafter referred to as the “Agreement”).

 

NOW, THEREFORE, in consideration of the premises and of the mutual covenants set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

   

1.    CHARGE AND PLEDGE

 

	
1.01

	
As security for all present and future liabilities and obligations that the Pledgor has towards the Pledgee and/or the Companies under the Agreement starting from the execution of the same, i.e. for the fulfilment by the Pledgor of its obligations pursuant to Sections 13 and 14 of the Agreement and especially its undertakings that it will fulfil its obligations and will pay to the Company the amounts described in Section 13.2 I-VI of the Agreement (the “Obligations”), the Pledgor hereby pledges, charges and assigns to the Pledgee the Shares, any further ordinary shares in the Company at any time issued to the Pledgor during the Security Period (as defined in clause 7 below), whether in addition to or in exchange of or in substitution of or in replacement of the Shares (the “Further Shares”) and pledges all of the aforementioned share certificates numbered ___ (the “Share Certificate 1”) and ___ (the “Share Certificate 2”) representing the Shares, as well as any substitute/additional share certificate issued in replacement of the above (together the “Share Certificates”).

 

	
1.02

	
The Pledgor will take any and all further legal steps required by the Pledgee to obtain legal protection for the Pledgee’s rights under this Share Pledge. Any required step shall be reasonable, without prejudice to the rights and obligations of the Pledgor and should be expressed in writing by the Pledgee.

    

  

Schedule 5 - 1

  

   

	
1.03

	
The Pledgor undertakes the obligation to deliver the Escrow Documents 1 and Escrow Documents 2 as the terms are defined in clause 4 to [●] (“Escrow Agent”), in order to be held in escrow according to the terms and conditions of an escrow agreement (the “Escrow Agreement”) which is being signed at the same time with the Share Pledge.

 

	
1.04

	
Except as otherwise defined herein, all terms used herein and defined in the Agreement shall be interpreted herein as so defined.

   

2.   REPRESENTATIONS AND WARRANTIES

 

	
2.01 

	
The Pledgor hereby represents and warrants to the Pledgee that:

 

	 	
(a) 

	
the Pledgor is a company validly existing under the laws of the state of Nevada and has full power and authority to carry on its business as it is being conducted and to own its assets;

 

	 	
(b) 

	
the Pledgor is the registered owner of all of the Shares charged pursuant to this Share Pledge, and has full right in and title to the said Shares and the said Shares are free from any charge, lien or encumbrance of any kind save as created pursuant to (or referred to) in this Share Pledge;

 

	 	
(c) 

	
the Pledgor has full power and authority: (i) to execute and deliver this Share Pledge and all notices, certificates and other documents related to this transaction and (ii) to comply with the provisions of, and perform all its obligations under this Share Pledge;

 

	 	
(d) 

	
the Pledgor has taken all necessary corporate and other action to authorize the execution and delivery of this Share Pledge;

 

	 	
(e) 

	
this Share Pledge constitutes the Pledgor’s legal, valid and binding obligations enforceable against the Pledgor in accordance with its terms;

 

	 	
(f) 

	
the entry into and performance by the Pledgor of this Share Pledge does not and will not violate in any respect: (i) any law or regulation of any governmental or official authority or body, or (ii) the constitutional documents of the Pledgor, or (iii) any agreement, contract or other undertaking to which the Pledgor is a party or which is binding upon the Pledgor or any of its property or assets;

 

	 	
(g) 

	
all consents, licenses, approvals and authorisations which are required in connection with the execution, validity, performance or enforceability of this Share Pledge have been obtained and are valid and subsisting at the date hereof;

   

3.   PRESERVATION OF SHARES AND SECURITY

 

During the Security Period (as defined in clause 7 below) and until the Obligations have been discharged in full, the Parties covenant to each other as follows:

	
3.01  

	
The Pledgor shall defend at its own cost the Shares and all the Pledgee’s rights, title and interest in and to the Shares and to any Further Shares against the claims of any third parties; in the event of failure by the Pledgor to diligently defend against or discharge any claim that contests or is otherwise inconsistent with any such rights, title, or interest of the Pledgee, the Pledgee shall inform in writing the Pledgor requesting the latter to forthwith proceed to any action required so that the Pledgor’s obligations under this clause are fulfilled. In case the Pledgor does not proceed to the actions required within 10 Business days, the Pledgee in its sole discretion, may contest, settle or discharge any such claim, and Pledgor shall pay to the Pledgee, upon written demand, the costs and expenses, including attorney’s fees, thereof.

 

	
3.02  

	
The Pledgor shall promptly notify the Pledgee of any attachment or other legal process levied or attempted to be levied against any of the Shares and/or Further Shares, of any loss or damage to the Shares and/or Further Shares and of any other event affecting any of the Shares and /or the Further Shares that might in any way have an adverse effect on the validity or enforceability of the Share Pledge created hereby or on the rights or remedies of the Pledgee hereunder.

    

  

Schedule 5 - 2

  

   

	
3.03  

	
The Parties agree that the pledge shall not be extended to voting rights, dividends, interest and other monies paid or payable or rights or property accruing as at or after the date hereof on or in respect of all or any of the Shares and/or the Further Shares, unless there is an Event of  Default (as described below), in which case the total of the rights attached to the Shares and/or the Further Shares shall be exercised by the Pledgee, upon the latter’s written notice towards the Pledgor and the Company.

 

	
3.04  

	
The Pledgor shall from time to time furnish notices and obtain consents from all other persons, and properly ensure all other recordations and registrations, as the Pledgee may determine to be necessary in its sole discretion for the realisation of the Pledgee’s rights hereunder.

 

	
3.05  

	
The Pledgor shall not create or permit to exist by any means any pledge, charge, lien, transfer of rights, assignment, agreement or arrangement for security of any kind on or in connection with any part of the Shares and/or any Further Shares other than this Share Pledge.

 

	
3.06  

	
The Pledgor subject to the provisions of clause 3.07 below shall not sell, assign, transfer, lease or otherwise dispose or attempt to dispose in any manner all or any part of the Shares and/or the Further Shares.

 

	
3.07  

	
The Pledgor pursuant to the provisions of clause 17.2.1 of the Agreement will be entitled to sell and transfer subject to the prior consent of the Pledgee conditional on the terms and conditions of this clause 3.07 (the “Permitted Transfer”), part of the Shares which shall not exceed 24% of the Company’s total issued Common Shares (the “Permitted Percentage”). It is explicitly acknowledged and agreed between the Parties that should the transfer of such number of Shares which corresponds to the Permitted Percentage (the “Transferred Shares”) take place before the end of the Security Period (as this is defined in clause 7 below), the Pledgee will consent to the release and delivery of the Escrow Documents No. 1 (as defined in Clause 4 below) back to the Pledgor in accordance with the terms of Clause 7 below, on the following conditions being met:

 

	 	
(i) 

	
the Pledgor’s shareholding percentage in the Company remaining after the transfer of the Transferred Shares will not lead to its losing control of the Company’s Common Shares; and

 

	 	
(ii) 

	
that the Transferred Shares will continue to be pledged in favour of the Pledgee and the new shareholder thereof will pledge and charge the Transferred Shares in favour of the Pledgee; and

 

	 	
(iii) 

	
the new shareholder of the Transferred Shares will simultaneously enter into a share pledge agreement over the Transferred Shares containing similar provisions as this Share Pledge in the form set out in Schedule C;

 

(the conditions listed in (i), (ii) and (iii) will jointly be referred to as the “Conditions”).

 

Failure to comply with the Conditions will give the right to the Pledgee to refuse the proposed transfer of the Transferred Shares and by extension, the release and delivery of the Escrow Documents No. 1. In case of successful and full compliance with the Conditions and completion of the Permitted Transfer any reference in this Share Pledge to the Shares shall from then on be a reference to the remaining amount of Common Shares which are owned by the Pledgor and which shall be greater than 50.9% of the Company’s total Common Shares.

 

	
3.08

	
The Pledgor shall not take any action, which could hinder the performance of this Share Pledge or give rise to a breach hereof.

 

	
3.09

	
The Pledgor shall take all necessary steps and actions to ensure that this Share Pledge is perfected in accordance with Cyprus and any other applicable law.

 

	
3.10

	
The Pledgor shall take all necessary steps and actions to ensure that the members of the Board of Directors of the Company shall remain those appearing in Appendix B hereto as long as this Share Pledge is in force. In any case, if there is a need to change the composition of the Board of Directors of the Company, the Pledgor shall ensure that clause 10 hereof is implemented.

 

	
3.11

	
The Pledgor shall not cause or permit the change in the Articles of Association of the Company without the Pledgee’s prior written consent, if such change alters in any way whatsoever the validity and effect of this Share Pledge.

   

  

Schedule 5 - 3

  

   

4.    DEPOSIT OF ESCROW DOCUMENTS

 

	
4.01

	
The Pledgor, simultaneously with the execution of this Share Pledge and the Escrow Agreement, shall deliver to the Escrow Agent:

 

	 	
(a)

	
 
All share certificates representing  approximately 24% of the issued Common Shares of the Company (i.e. 15,630 Ordinary shares) (the “Shares No. 1”);

 

	
  

	
(hereinafter referred to as “Escrow Documents No. 1”)

 

	
4.02

	
The Pledgor, simultaneously with the execution of this Share Pledge and the Escrow Agreement, shall deliver to the Escrow Agent:

 

	 	
(a)

	
 
All share certificates representing approximately 51% of the issued Common Shares of the Company (i.e. 33,213 ordinary shares) (the “Shares No. 2”);

 

	 	
(b) 

	
Undated blank instrument of transfer in respect of the Shares duly executed by the Pledgor, in the form set out in Appendix "A" hereto;

 

	 	
(c)

	
An original, undated blank resolution of the board of directors of the Company approving the transfer of any of the Shares , in the form set out in Appendix "B" hereto;

 

	 	
(b) 

	
An original and dated irrevocable proxy and power of attorney from the Pledgor, in the form set out in Appendix "C" hereto duly executed, accompanied by a certified true copy (with the original to follow) of a dated and duly executed resolution (or other corporate approval required by applicable law) approving the issuance of the said proxy and power of attorney;

 

	 	
(c) 

	
Undated, duly signed letters of resignation from each of the Directors and the Secretary of the Company, in the form set out in Appendix "D" hereto;

 

	 	
(d) 

	
A letter of authority and undertaking from each of the Directors and the Secretary of the Company, in the form set out in Appendix "E" hereto;

 

	 	
(e) 

	
Undated, duly signed letters by the other shareholders of the Company, waiving their pre-emption rights in relation to the transfer of the Shares by the Pledgor to the Pledgee, in the form set out in Appendix “F” hereto.

 

(hereinafter the documents under (a) to (g) above shall jointly be referred to as the “Escrow Documents No. 2”).

 

The Escrow Documents No.1 and Escrow Documents No. 2 shall jointly be referred to as the “Escrow Documents”.

 

	
4.03

	
In case of a Permitted Transfer, the Pledgor shall deliver or procure to be delivered to the Escrow Agent simultaneously with the transfer of the Transferred Shares and the completion of the Conditions, a share certificate representing the Shares represented by the remainder of the Permitted Percentage which continues to be pledged and charged in accordance with the terms of this Share Pledge.

 

	
4.04

	
The Pledgor hereby irrevocably agrees to waive, as against the Pledgee, the pre-emption rights that it has for any Further Shares pursuant to the Company’s Articles of Association (or otherwise) for the Security Period.

 

	
4.05

	
The Pledgor will deliver or procure to be delivered to the Escrow Agent, immediately upon the issue of any Further Shares to the Pledgor:

       

  

Schedule 5 - 4

  

    

	 	
(a) 

	
An undated blank instrument of transfer in respect of the Further Shares, duly executed by the Pledgor, in the form set out in Appendix "A" hereto, as amended to refer to the Further Shares;

	 	
(b) 

	
The original Share Certificate(s) issued in relation to the Further Shares; and

 

	 	
(c)

	
An original and undated blank resolution of the Director(s) of the Company approving of the transfer of the Further Shares, in the form set out in Appendix "B" hereto, as amended to refer to the Further Shares.

 

	
4.06

	
The Pledgor hereby undertakes that it will procure that the provisions of s.138 of the Contract Law, Cap. 149 are fully complied with regard to this Share Pledge. Without prejudice to the generality of the foregoing, the Pledgor undertakes that it will procure delivery (by courier) to the Pledgee, no later than 5 Business Days from the date of delivery to the Company by the Pledgee (whether by courier or by hand) of a notice of pledge of the Shares, accompanied by a certified copy of this Share Pledge, of a certificate from the Company in the form of Appendix “G” attached herewith, confirming that a memorandum of pledge has been entered in its Register of Members, together with a copy of the Company’s Register of Members certified as true and up to date copy thereof by the Secretary of Company, showing the said entry.

   

5.   ENFORCEMENT

 

	
5.01  

	
A. If the Pledgor is (i) in breach of and/or fails to comply with any of its Obligations described in Section 13.2 I-VI(i) of the Agreement and/or (ii) the Pledgor is in breach of any of the provisions of this Share Pledge or (iii) any step is taken for the dissolution of Pledgor, the Pledgee will deliver to the Pledgor a written notice by registered mail with acknowledgement of receipt asking it to remedy such Obligation or breach. If such Obligation or breach remains unremedied for a period of at least 60 Business Days (any such unremedied Obligations or breaches being hereinafter called "Event of Default") Clause 5.03 hereinbelow will apply.

     

B. If the Pledgor is in breach of and/or fails to comply with its Obligation described in Section 13.2 VI(ii) of the Agreement the Pledgee will deliver to the Pledgor a written notice by registered mail with acknowledgement of receipt asking it to remedy such Obligation or breach. Within 30 calendar days following delivery of the written notice by the Pledgee (or such extended time as the parties agree if they are negotiating a resolution), the Pledgor will be entitled to commence arbitration as described in Clause 20 for the determination of whether it is in breach of or has failed to comply with its Obligation described in Section 13.2 VI (ii). If either (i) the arbitration determines that the Pledgor is in breach of or has failed to comply with its Obligation described in Section 13.2 VI (ii) or (ii) the Pledgor did not commence arbitration within 30 calendar days following delivery of the written notice by the Pledgee and such Obligation or breach remains unremedied for a period of at least 60 calendar days (such unremedied Obligation or breach being hereinafter called "Event of Default") Clause 5.03 hereinbelow will apply.

    

	
5.02

	
Unless and until an Event of Default occurs, the Pledgee shall not put into effect any of the Escrow Documents referred to in clause 4.01 and/or clause 4.02 hereof and the Pledgor shall have the right to exercise all voting and/or consensual powers pertaining to the Shares and/or the Further Shares and/or any part thereof for all purposes not inconsistent with the terms of this Share Pledge or the Agreement or any documents executed or to be executed pursuant hereto and thereto;

 

	
5.03

	
At any time after an Event of Default, the Pledgee,  acting in good faith, will deliver a written notice in the form of Appendix “H” to the Escrow Agent (the “Event of Default Notice”) and this Share Pledge shall become immediately enforceable and all powers conferred upon the Pledgee by this Share Pledge or otherwise, shall be immediately exercisable upon the Pledgee’s wish and, without prejudice to the generality of the foregoing or to any remedies provided for by applicable law, the Pledgee may, subject to applicable law: (i) transfer, to any party it may decide and on terms selected in its sole discretion, legal and/or beneficial ownership of the Shares and/or Further Shares and (ii) sell the Shares and/or Further Shares or any part thereof at any such place and in such manner and at such price or prices as the Pledgee may deem fit. In that regard:

    

  

Schedule 5 - 5

  

    

	
  

	
5.03.01

	
The Pledgee shall have the sole and exclusive right to put into effect all or any of the Escrow Documents referred to in clause 4.01 and/or clause 4.02 hereof and to exercise all voting and consensual powers pertaining to the Shares and/or Further Shares or any part thereof to the exclusion of the Pledgor and shall exercise such powers in such manner as the Pledgee may in its sole discretion elect;

 

	
  

	
5.03.02

	
In the event of the Pledgee exercising all or any of its above rights and powers the Pledgor will procure that the Company shall register as owner or owners of the Shares and/or Further Shares any and all persons entitled to own the same pursuant to the exercise by the Pledgee of its said rights;

 

	
  

	
5.03.03

	
Without limitation to the generality of Clause 5.02, in the event of the Pledgee exercising all or any of its rights and powers under the said Clause, the Pledgee shall be entitled but not obliged, in its sole discretion, to use and put into effect all or any of the Escrow Documents deposited with the Pledgee pursuant to Clauses 4.01 and/o Clause 4.02 hereof and to register as owners of the Shares and/or Further Shares the Pledgee and/or any nominees of the Pledgee or any purchasers of the Shares and/or Further Shares, in case the Shares and/or Further Shares were sold to one or more third parties.

 

	
5.04

	
Unavailability of any of the remedies set out in the present Clause shall not affect the effectiveness of any other remedies.

    

6.   POWER OF ATTORNEY

    

	
6.01

	
By way of security, and in order to more fully secure the performance of the obligations of the Pledgor under this Share Pledge, the Pledgor hereby appoints the Pledgee to be his or its true and lawful attorney with full power to act alone and with full power of substitution, until the Obligations have been discharged in full, for the purpose of doing in its name any and all acts whatsoever which the Pledgor itself could do in connection with the Shares and/or Further Shares held by the Pledgor in case of an Event of Default, subject to the conditions of Clause 5 above, including, but without limitation, (i) to insert the name of the Pledgee or their nominees or the name of any purchaser (or to make any alteration or addition as regards the particulars of the warrants shares or stocks affected thereby or any other addition which the Pledgee may consider desirable) in any transfer or other documents which the Pledgee may require for perfecting their title to or for vesting or enabling them to vest the Shares and/or the Further Shares in case of an Event of Default in the Pledgee or their nominees or in any purchaser, (ii) to present the same for registration in the name of the Pledgee or their nominees or of any purchaser (iii) otherwise to execute seal and deliver and otherwise perfect and do any such transfers and other documents as aforesaid and all such deeds, assurances, agreements, instruments, acts and things which may be required for the full exercise of all or any of the powers hereby conferred or which may be deemed proper on, or in connection with, any sale, disposition or obtaining by the Pledgee of the Shares and/or Further Shares in case of an Event of Default which is continuing in accordance with Clause 5 above.

 

	
6.02

	
The Pledgor hereby ratifies and confirms and agrees to ratify and confirm any instrument, act or thing which any such attorney may execute or do under the provisions of this Clause 6 with effect as from the date of an Event of Default, for the purpose of carrying out the provisions of this Share Pledge and taking any action and executing any instruments which the Pledgee may deem necessary or advisable to accomplish the full benefit of this Share Pledge.

 

	
6.03

	
Subject to the provisions of Clause 5, the exercise of such powers as mentioned in Clause 6, by or on behalf of the Pledgee shall not put any person dealing with the Pledgee upon any inquiry as to whether the security created by this Share Pledge has become immediately enforceable nor shall such person be in any way affected by notice that the security created by this Share Pledge has not become enforceable and the exercise by the Pledgee of such power shall be conclusive evidence of their right to exercise the same.

       

  

Schedule 5 - 6

  

7.   RELEASE OF SHARE PLEDGE

 

	
7.01

	
The security period of this Share Pledge shall be from the date of signing of this Share Pledge until the earlier of (i) the irrevocable and unconditional discharge of the Obligations of the Pledgor under the Agreement and/or this Share Pledge, or (ii) the termination of this Share Pledge in writing in accordance with clause 8 below (together the “Security Period”).

 

	
7.02

	
Upon the expiry of the Security Period, the Pledgee shall send to the Escrow Agent a written notice in the form of Appendix “I” (the “Release Notice”) signed by the authorised signatory of the Pledgee and the security created hereby shall unconditionally and automatically cease to exist and have no effect.

 

	
7.03

	
In case of a Permitted Transfer subject to the terms and conditions of Clause 3.07 above, the Pledgee shall send to the Escrow Agent a Release Notice in relation only to the Escrow Documents No. 1, signed by the authorised signatory of the Pledgee, however the security created hereby shall continue to exist and be of effect in accordance with the terms of Clause 3.07.

 

	
7.04

	
Upon receipt of the Release Notice by the Escrow Agent, the Escrow Agent shall proceed to release the Escrow Documents in accordance with the terms of the Escrow Agreement and re-deliver to the Pledgor the Escrow Documents.

 

8.   TERMINATION

 

Unless and until the Obligations of the Pledgor are irrevocably and unconditionally discharged by the Pledgee, this Share Pledge shall only be terminated by the mutual written agreement of the Pledgor and the Pledgee. Thereafter, the Pledgee shall deliver to the Escrow Agent the Release Notice in accordance with clause 7 above.

 

9.   NOTICES

 

All notices, demands and other communications required to be given pursuant to this Share Pledge including the enforceability of the Share Pledge shall be in writing and shall be deemed to have been received if given in writing (including telecopy or similar teletransmission) addressed as in the first page hereof (or to the addressee at such other address as the addressee shall have specified by notice actually received by the addresser), and if either (a) actually delivered in fully legible form to such address or (b) in the case of a letter, three days shall have elapsed after the same shall have been deposited in the mails (i) with first-class airmail postage prepaid and registered or certified, with return receipt requested, or (ii) with express air delivery postage prepaid, with receipt required for delivery.

 

In addition of the above all notices under or in connection with Share Pledge could be given in writing by facsimile. The facsimile number of the Pledgor and the Pledgee are set out below:

 

The Pledgor:

 

VelaTel Global Communications, Inc.

12526 High Bluff Drive, Suite 155

San Diego, California 92130 USA

Attn: Kenneth L. Waggoner, Esq.

Tel.:  +1 760 230 8986

Fax:  +1 760 359 7042

Email: kwaggoner@velatel.com

   

  

Schedule 5 - 7

  

   

The Pledgee:

 

7L Equity Partners (Emerging Europe) Limited

Carinthia House

9-12 The Grange

St Peter Port

Guernsey, GY1 4BF

Great Britain

Attn. Mr. Jacques Vermeulen

Tel.:  +44 1481 743 758

Fax:  +44 1481 734 301

Email: jacques.vermeulen@augentius.com

   

10.   NO WAIVER AND RIGHTS CUMULATIVE

 

No failure on the part of the Pledgee to exercise and no delay in exercising any right power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Pledgee of any right power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right power or remedy.  The remedies herein provided are cumulative and are not exclusive of any remedies provided by law.

   

11.    CHANGES

 

	
11.01

	
The Pledgor will procure that there shall be no transfer of shares in the Company or appointment of any further Director, Secretary or other officer of the Company without the prior consent in writing of the Pledgee, which consent subject to the provisions of clause 3.07 the Pledgee is obliged to give.

 

	
11.02

	
In the event of a change in and/or resignation of any of the director(s) and/or secretary of the Company, the Pledgor shall within two (2) Business Days from the date it receives a notice of such a change to procure to deliver to the Escrow Agent updated versions of the documents in the form attached herewith as Appendices B, D and E, duly executed by the new director(s) and/or secretary and/or officer of the Company appointed in their place.

 

	
11.03

	
In the event of a new shareholder subscribing to and/or acquiring any shares in the Company, then the Pledgor shall within two (2) Business Days from the date it receives a notice of such a change to procure to deliver to the Escrow Agent a waiver letter by this new shareholder in the form attached herewith as Appendix F.

   

12.    GRANTING OF TIME

 

The Pledgee may at all times, without discharging or in any way affecting this Share Pledge: (i) grant to the Pledgor and/or the Company and/or to any other person any time or indulgence and/or (ii) deal with, exchange, release, modify, or abstain from perfecting or enforcing this Share Pledge, any security guarantee or other right which the Pledgee may now or hereafter have regarding the Agreement or agree to any amendment to the said document and/or any document executed or to be executed pursuant thereto.

    

13.    COSTS

 

Each Party shall bear its own legal fees with respect to the execution hereof. All other costs and expenses, taxes and duties in connection with the negotiation, preparation, completion and any registration of this Share Pledge will be paid by the Pledgor.

 

All costs incurred by the Pledgee related to the exercise of any of its powers and protection and enforcement of its interests and rights in relation with the Share Pledge in any court of law or otherwise shall, be borne by the Pledgor.

       

  

Schedule 5 - 8

  

     

14.    ENTIRE AGREEMENT

 

This Share Pledge constitutes the entire understanding of the parties with respect to the subject matter hereof and supersedes any and all prior understandings and agreements, whether written or oral, with respect to such subject matter.

    

15.    SUCCESSORS AND ASSIGNS

 

This Share Pledge shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, legal representatives, successors, assigns and permitted transferees, except as may be expressly provided otherwise herein.

   

16.    SEVERABILITY

 

In case any one or more of the provisions contained in this Share Pledge shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Share Pledge and such invalid, illegal and unenforceable provision shall be modified and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.

   

17.    CLAUSE HEADINGS

 

The headings contained in this Share Pledge are for reference purposes only and shall not in any way affect the meaning or interpretation of this Share Pledge.

   

18.    AMENDMENT

 

This Share Pledge may only be amended by an instrument in writing duly signed by both Parties.

   

19.    GOVERNING LAW

 

This Share Pledge shall be governed by and construed and enforced in accordance with the laws of Cyprus.

   

20.    ARBITRATION

 

All disputes arising in connection with this Agreement shall be finally settled by arbitration. The arbitration shall be held in Cyprus and conducted in the English language in accordance with the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules as at present in force. There shall be 3 arbitrators, one to be appointed by the claimant and/or claimants and one to be appointed by the respondent and/or respondents and the third to be appointed by the common agreement of the two arbitrators selected by the parties. In the event of a failure to agree on the appointment of arbitrators, the appointing authority shall be the London Court of International Arbitration. If the parties so agree, there shall be a sole arbitrator appointed by the London Court of International Arbitration Upon the award rendered an application may be made to the competent court for a judicial acceptance of the award and an order for enforcement.

   

  

Schedule 5 - 9

  

    

IN WITNESS whereof this Share Pledge has been duly executed the day and year first above written.

 

	SIGNED FOR THE PLEDGOR	 	SIGNED FOR THE PLEDGEE
	 	 	 
	

 

	 	

 

	in the presence of	 	 
	 	 	 
	

 

	 	

 

	Witness 1	 	Witness 1
	 	 	 
	

 

	 	

 

	Witness 2	 	Witness 2

   

  

Schedule 5 - 10

  

    

APPENDIX "A"

 

INSTRUMENT OF TRANSFER

I/WE

VelaTel Global Communications, Inc, with registered office in San Diego California (12526 High Bluff Drive, Suite 155, San Diego),

(hereinafter called the "transferor(s)")

in exchange of good and valuable consideration received by me/us by

Name

of

 

 

(hereinafter called the "transferee(s)" do hereby transfer to the said transferee(s) the share(s) shown in the schedule hereto held by us/me in the undertaking called

HERLONG ΙNVESTMENTS LIMITED

to hold unto the said transferee(s) his/their executors, administrators and assigns.

AND I/WE the said transferee(s) do hereby agree to take the said shares in the aforementioned undertaking subject to the conditions aforesaid.

Date:

SCHEDULE

__________ fully paid ordinary shares of €[●] each serial no. _________________________, as per Share Certificate No._____ and _____

 

	THE TRANSFEROR(S)	 	THE TRANSFEREE(S)
	 	 	 
	

 

	 	

 

	 	 	 
	
Name:  VelaTel Global Communications, Inc.   

	 	
Name:

	Address: As above	 	Address: As above
	 	 	 
	 	 	 
	

 

	 	

 

	Witness to the signature of Transferor(s)	 	Witness to the signature of Transferee(s)
	 	 	 
	 	 	 

       

  

Schedule 5 - 11

  

   

APPENDIX "B"

   

HERLONG ΙNVESTMENTS LIMITED

UNANIMOUS WRITTEN RESOLUTION OF THE BOARD OF DIRECTORS OF THE COMPANY DATED

By a unanimous written resolution of all the Directors of the Company, it is hereby resolved as follows:-

(1)    To approve of the following transfer of shares:

 

___________ fully paid ordinary shares of €[●] each serial no. __________________________ and __________________

from VelaTel Global Communications, Inc.

 

to 7L Capital Partners Emerging Europe LP

    

(2)   The secretary is instructed to take all appropriate steps to implement the above resolution.

(Sgd) __________

(Sgd) __________

(Sgd) __________

(Sgd) __________

(Sgd) __________

       

  

Schedule 5 - 12

  

   

APPENDIX "C"

IRREVOCABLE PROXY AND POWER OF ATTORNEY

IN ACCORDANCE WITH CLAUSE 4.01 OF THE SHARE PLEDGE

DATED ............ 2011

	
1.

	
We, VelaTel Global Communications, Inc, a United States corporation, organized under the laws of Nevada, with a principal place of business at 12526 High Bluff Drive, Suite 155, San Diego, California duly and legally represented by ........hereby constitute and appoint ___________________________, a legal entity incorporated and existing under the laws of the ___________________________ and having its registered office at ___________________________, as our true and lawful attorney and proxy being fully empowered and authorized to do all or any of the following acts and matters with effect from the occurrence of an Event of Default pursuant to the Share Pledge Agreement dated _____  ___  ____ between 7L Capital Partners Emerging Europe LP as Pledgee, on the one hand, and VelaTel Global Communications, Inc., as Pledgor, on the other hand (the “Share Pledge”):

	
  

	
(1)

	
To sell, transfer, assign, pledge or otherwise dispose or charge all or any of the Shares and/or the Further Shares (as this terms are defined in the Share Pledge) to or in favour of, such person or persons and under such terms as the Attorney may deem fit.

	
  

	
(2)

	
To vote and/or exercise all consensual powers discretions and rights at any general meeting of the Company or by executing any resolution in writing by such shareholders as fully as we would do.

	
  

	
(3)

	
To demand, receive and retain all dividends, interest or other moneys or assets accruing on or in respect of all or any of the Shares and/or the Further Shares.

	
  

	
(4)

	
To exercise all rights and options, by way of acceptance of offer of new shares, rights or bonus issue, or other rights, benefits, or otherwise, accruing on or in respect of all or any of the Shares and/or the Further Shares, and to require that all such rights and options be registered, transferred, assigned or otherwise dealt with as the Attorney may deem fit; all powers and authorities of the Attorney under this Power of Attorney in respect of the Shares and/or the Further Shares may be likewise exercised by the Attorney in respect of any new shares, rights or bonus issue or other rights and benefits accruing in respect of the Shares.

	
  

	
(5)

	
To demand from the Company, its secretary or Register keeper and any other officer or person acting for the Company as well as from any competent authority, the issue and delivery to the Attorney of any certificates, statements or other documents of title evidencing the ownership of, or entitlement to, the Shares and/or the Further Shares and any new shares, rights or bonus issue, or other rights and benefits accruing in respect of the Shares and/or the Further Shares.

	
  

	
(6)

	
Generally to act and deal in respect of the Shares and/or the Further Shares and any new shares, rights or bonus, or other rights and benefits accruing in respect of the Shares and/or the Further Shares  as fully as we could do.

	
  

	
(7)

	
To sign, execute and deliver any instruments of transfer, applications, assignments, receipts, deeds, agreements and documents whatsoever in relation to all or any of the powers authorities vested on the Attorney under this Power of Attorney, and to do so under such terms and conditions as the Attorney may deem fit;

	
  

	
(8)

	
To appoint any substitute or agent or attorney to do all or any of the acts and matters vested on the Attorney under this Power of Attorney.

	
2.

	
All and any proxies and/or powers of attorney previously given in favour of any person or persons (other than the Attorney) in relation to the Shares and/or Further Shares are hereby revoked.

	
3.

	
We hereby ratify and confirm all that the Attorney or any substitute or substitutes shall do or cause to be done by virtue hereof.

	
4.

	
We hereby acknowledge that the Shares and/or Further Shares have been pledged to the Attorney by the Share Pledge and this Power of Attorney is given by way of security and shall remain in full force and irrevocable for as long as the said  Share Pledge shall remain in force.

   

IN WITNESS whereof we have executed this Proxy and Power of Attorney this _____ day of _______

SIGNED by___________

For and on behalf of VELATEL GLOBAL COMMUNICATIONS, INC.

   

  

Schedule 5 - 13

  

   

APPENDIX "D"

LETTER OF RESIGNATION

	
To:

	
HERLONG ΙNVESTMENTS LIMITED, of Nicosia Cyprus ("the Company")

	
CC:

	
7L CAPITAL PARTNERS EMERGING EUROPE LP

Date:

Dear Sirs,

I hereby resign from my position as a Director/Secretary of the Company with effect from the date of this letter.

I hereby confirm that I have no claim whatsoever against the Company for loss of office or otherwise.

Yours faithfully,

  

(Sgd) __________

[Name of Director/Secretary of the Company]

   

  

Schedule 5 - 14

  

   

APPENDIX "E"

LETTER OF AUTHORITY AND UNDERTAKING

	
TO:

	
7L CAPITAL PARTNERS EMERGING EUROPE LP

("the Pledgee")

        

DATED: ___________, 2011

Dear Sirs,

RE: HERLONG ΙNVESTMENTS LIMITED ("THE COMPANY")

I, the undersigned, holding the office of [Director/Secretary] in the Company referred to in the Share Pledge Agreement dated ________ between 7L Capital Partners Emerging Europe LP as Pledgee, on the one hand, and VelaTel Global Communications, Inc., as Pledgor, on the other hand (the “Share Pledge”) and for good and valuable consideration provided by the Pledgee (the receipt and sufficiency of which is hereby acknowledged) I hereby irrevocably authorise and undertake with the Pledgee that:

	
  

	
1)

	
For so long as any Obligations are outstanding (as these are defined in the Share Pledge) I will not act alone or in concert with any one or more of my fellow directors or officers of the Company or with any other person, enter into or accept or authorise any act or commitment in contravention of the covenants under the Share Pledge;

	
  

	
2)

	
I hereby irrevocably authorise the Pledgee at any time on or after the occurrence of an Event of Default (as defined in the Share Pledge) which is continuing, to date, use and otherwise put into full effect the undated letter of resignation delivered by me to the Pledgee pursuant to the Share Pledge.

All capitalized terms in the Share Pledge shall have the same meaning in the present letter.

Yours faithfully,

 

[Director] [Secretary]

      

  

Schedule 5 - 15

  

     

APPENDIX "F"

WAIVER

To the Board of Directors

of HERLONG INVESTMENTS LIMITED

[insert address]

We, ____________________ of _________, hereby confirm that in connection with the proposed transfer of _______ shares of Euro 1,00 each from VelaTel Global Communications, Inc. of the state of Nevada to 7L CAPITAL PARNTERS EMERGING EUROPE LP, of Guernsey, we do not wish to exercise any options or rights vested in us by virtue of the provisions of the Company's Articles of Association and we declare that they may transfer such shares to any person or persons that they may consider proper.

Signed this ___________ day of ________, 20__

___________________________________

[insert name of Shareholder]

   

  

Schedule 5 - 16

  

     

APPENDIX “G”

CERTIFICATE

It is hereby certified that a Memorandum has been duly made in the Register of Members of the HERLONG INVESTMENTS LIMITED (the “Company”) to the effect that share certificate numbered ______ representing ______ shares in the issued capital of the Company, described in the schedule hereunder, have been pledged to 7L Capital Partners Emerging Europe LP (the “Pledgee”) in accordance with the terms and conditions of the Share Pledge Agreement dated ___________ between 7L Capital Partners Emerging Europe LP as Pledgee, on the one hand, and VelaTel Global Communications, Inc., as Pledgor, on the other hand (the “Share Pledge”), due notice of the said pledge having been given to the Company by the Pledgee, accompanied by a copy of the Pledge.

It is further certified that we have not heretofore received any other Notice of Pledge in relation to the said shares which is still subsisting.

SCHEDULE

[●] fully paid ordinary shares of €[●] each held by:

Messrs.

[________________]

Dated this ___ day of _______

______________________________

[NAME]

Secretary to the Company

    

  

Schedule 5 - 17

  

    

APPENDIX “H”

EVENT OF DEFAULT NOTICE

To:

______________________

Dear Sir,

We refer to the Escrow Agreement dated [INSERT] entered into between ourselves, VelaTel and yourselves (the “Escrow Agreement”) and hereby give you notice pursuant to Clause 3(b) thereof that in accordance with the terms and conditions of the Share Pledge Agreement dated ____________ between 7L Capital Partners Emerging Europe LP as Pledgee, on the one hand, and VelaTel Global Communications, Inc., as Pledgor, on the other hand (the “Share Pledge”), an Event of Default (as this is defined in the Share Pledge) has taken place and hereby request that you release and deliver to us the ____________

Capitalised terms in the present letter have the same meaning as capitalised terms in the Share Pledge and the Escrow Agreement (as the case may be).

Yours Truly

7L Capital Partners Emerging Europe LP

_______________________________

Title:

   

  

Schedule 5 - 18

  

   

APPENDIX “I”

RELEASE NOTICE

To:

______________________

Dear Sir,

We refer to the Escrow Agreement dated [INSERT] entered into between ourselves, VelaTel and yourselves (the “Escrow Agreement”) and hereby give you notice pursuant to Clause 3 (c) or 3 (d) (as the case may be) thereof that in accordance with the terms and conditions of the Share Pledge Agreement dated ____________ between 7L Capital Partners Emerging Europe LP as Pledgee, on the one hand, and VelaTel Global Communications, Inc., as Pledgor, on the other hand (the “Share Pledge”) and hereby request that you release and deliver to the Pledgor the ____________

Capitalised terms in the present letter have the same meaning as capitalised terms in the Share Pledge and the Escrow Agreement.

Yours Truly

7L Capital Partners Emerging Europe LP

_______________________________

Title:

 

 

 

 

  

Schedule 5 - 19  

  

 

ESCROW AGREEMENT II

 

THIS ESCROW AGREEMENT dated the ........... day of December 2011  is made between:

 

1.           VelaTel Global Communications, Inc., a United States (“US”) corporation, organized under the laws of the state of Nevada, with a principal place of business at 12526 High Bluff Drive, Suite 155, San Diego, California duly and legally represented by George Alvarez (hereinafter “VelaTel" or the “Pledgor").

 

2.           7L Capital Partners Emerging Europe LP a limited partnership incorporated in Guernsey, having its registered office in Guernsey, Carinthia House, 9-12 The Grange, St. Peter Port, GY1 4BF, duly and legally represented by Salvator Levis (hereinafter “7LCPEELP” or the "Pledgee").

 

AND

 

3.           Inter Jura Cy (Trusts) Limited, a private limited liability company incorporated under the laws of Cyprus, with registration number 19433, having its registered office at 1 Lampousas Street, 1095, Nicosia, Cyprus, duly and legally represented by [●]  (hereinafter the “Escrow Agent”).

 

(Jointly hereinafter referred to as the “Parties”).

 

 

	
A.

	
WHEREAS, the Pledgor is the registered owner of [●] Common Shares of par value € 1 each in “HERLONG ΙNVESTMENTS LIMITED” (referred to as the “Company”) bearing issuance no [●], which are embodied in share certificate no [●] and no [●] and represent 75% of the issued Common Shares in the share capital of the Company (hereinafter referred to as  “Shares”).

 

	
B.

	
WHEREAS, pursuant to a pledge agreement of even date (the “Share Pledge”) the Pledgor has pledged in favour of the Pledgee the Shares and/or any Further Shares and the Share Certificates. Copy of the Share Pledge is attached hereto in Schedule “●”;

 

	
C.

	
WHEREAS, pursuant to Section 4 of the Share Pledge the Pledgor agreed to deliver to the Escrow Agent the Escrow Documents referred to in clause 4.01 and clause 4.02 of the Share Pledge;

 

	
D.

	
WHEREAS, the Pledgee and the Pledgor have requested the Escrow Agent to act as the escrow agent of the Escrow Documents; and

 

	
E.

	
WHEREAS, the Escrow Agent has agreed to act as the escrow agent of the Escrow Documents.

 

NOW IT IS HEREBY AGREED AS FOLLOWS:

 

1.           Definitions

 

Unless otherwise defined herein, capitalised terms used in this Agreement shall bear the meaning given to them in the Share Pledge.

 

“Business Day” means a day (other than a Saturday or Sunday) on which banks are open for business in Cyprus;

 

“Liability” means any loss, damage, cost, charge, claim, demand, expense, penalty, judgment, demand, action proceeding or other liability whatsoever (including, without limitation, in respect of taxes, duties, levies, imposts and other charges) and including any value added tax or similar tax charged or chargeable in respect thereof and legal fees and expenses on a full indemnity basis;

 

  

Schedule 6 - page 1

  

2.1           Appointment of the Escrow Agent

 

The Pledgee and the Pledgor hereby appoint the Escrow Agent as escrow agent in accordance with the terms of this Agreement and the Escrow Agent hereby accept his said appointment as escrow agent

 

2.2           Delivery of Escrow Documents

 

	 	
(a)

	
Simultaneously with the execution of this Agreement, the Pledgor shall transfer to the Escrow Agent the Escrow Documents No. 1 which comprise of the following documents: All share certificates representing   approximately 24% of the issued Common Shares of the Company (i.e. 15,630 ordinary shares) (the “Shares No. 1”);

 

	 	
(b)

	
 
Simultaneously with the execution of this Agreement, the Pledgor shall transfer to the Escrow Agent the Escrow Documents, No. 2 which comprise of the following documents:(i) all share certificates representing  approximately 51% of the issued Common Shares of the Company (i.e. 33,213 ordinary shares) (the “Shares No. 2”); (ii) undated blank instrument of transfer in respect of the Shares duly executed by the Pledgor, in the form set out in Appendix "A" hereto; (iii) undated blank resolution of the board of directors of the Company approving of the transfer of shares, in the form set out in Appendix "B" hereto; (iv) an irrevocable proxy and power of attorney from the Pledgor, in the form set out in Appendix "C" hereto; (v) undated, duly signed letters of resignation from each of the Directors and the Secretary of the Company, in the form set out in Appendix "D" hereto; (vi) a letter of authority and undertaking from each of the Directors and the Secretary of the Company, in the form set out in Appendix "E" hereto; (vii) a waiver letter signed by each shareholder of the Company, other than the Pledge, in the form set out in Appendix F;

 

	 	
(c)

	
In the time between the date of the execution of this Agreement and until expiry of the Security Period (as this is defined in the Share Pledge), the Pledgor irrevocably and unconditionally covenants with the Pledgee that: (i) the Pledgor shall procure that there shall be no change in the director(s), secretary or other officer of the Company without the prior consent in writing of the Pledgee. In the event of a change in and/or resignation of any of the director(s) and/or secretary of the Company, the Pledgor shall within two (2) Business Days from the date it receives a notice of such a change to procure to deliver to the Escrow Agent updated versions of the documents in the form attached herewith as Appendices B, D and E, duly executed by the new director(s) and/or secretary and/or officer of the Company appointed in their place; and (ii) the Pledgor shall procure that in the event of a new shareholder subscribing to shares in the Company, then the Pledgor shall within two (2) Business Days from the date it receives a notice of such a change to procure to deliver to the Escrow Agent a waiver letter by this new shareholder in the form attached herewith as Appendix F.

 

	 	
(d)

	
If at any time between the date of the execution of this Agreement and until the expiry of the Security Period, any Further Shares are issued to the Pledgor, then the Pledgor will deliver or procure to be delivered to the Escrow Agent, immediately upon the issue of any Further Shares to the Pledgor: (i) An undated blank instrument of transfer in respect of the Further Shares, duly executed by the Pledgor, in the form set out in Appendix "A" hereto, as amended to refer to the Further Shares; (ii) The original Share Certificate(s) issued in relation to the Further Shares; and (iii) an original and undated blank resolution of the Director(s) of the Company approving of the transfer of the Further Shares, in the form set out in Appendix "B" hereto, as amended to refer to the Further Shares.

 

3.           Duties of the Escrow Agent

 

	 	
(a)

	
The Escrow Agent shall during the continuation of this Agreement keep the Escrow Documents in safe custody and shall not release all or any of them to any party except according to the provisions of this Agreement.

 

  

Schedule 6 - page 2

  

	 	
(b)

	
If at any time between the date of the execution of this Agreement and until expiry of the Security Period (as this is defined in the Share Pledge) the Escrow Agent receives written notice (the “Event of Default Notice”), according to the form of the attached Appendix “G” hereof, from the Pledgee, stating that the Pledgor is in breach of the Share Pledge and requesting the Escrow Agent to release such Escrow Documents (either Escrow Documents No. 2 or Escrow Documents No.1 and Escrow Documents No. 2 together, as the case may be) as these appear in the Event of Default Notice to the Pledgee, the Escrow Agent shall, within two (2) Business Days of receipt of the Default Notice, release and deliver the Escrow Documents to the Pledgee, provided that the outstanding fees of the Escrow Agent as set out in section 6 have been settled in full, in which case the duties and obligations of the Escrow Agent will expire and/or otherwise terminate without any Liability on the part of the Escrow Agent. Upon receipt of the Escrow Documents by the Pledgee, the Pledgee shall send a notice in writing to the Escrow Agent and the Pledgor that the Escrow Documents have been safely received.

 

Thereafter, the Pledgee shall have the sole right and responsibility to put into effect all or any Escrow Documents in accordance with the provisions of the Share Pledge and deliver these to the secretary of the Company in order to record the transfer of the Shares in accordance with the Escrow Documents.

 

	 	
(c)

	
If at any time between the date of the execution of this Agreement and until expiry of the Security Period (as this is defined in the Share Pledge) the Escrow Agent receives written notice (the “Release Notice”), according to the form of the attached Appendix “H” hereof, from the Pledgee, the Escrow Agent shall, within two (2) Business Days of receipt of the Release Notice, release and deliver such Escrow Documents (either Escrow Documents No. 2 or Escrow Documents No.1 and Escrow Documents No. 2 together, as the case may be) as these appear in the Release Notice to the Pledgor provided that the outstanding fees of the Escrow Agent as set out in clause 6 have been settled in full, in which case the duties and obligations of the Escrow Agent will expire and/or otherwise terminate without any Liability on the part of the Escrow Agent. Upon receipt of the Escrow Documents by the Pledgor, the Pledgor shall send a notice in writing to the Escrow Agent and the Pledgee that the Escrow Documents have been safely received.

 

	 	
(d)

	
In case of a Permitted Transfer subject to the terms and conditions of Clause 3.07 of the Share Pledge, (i) the Pledgee shall send to the Escrow Agent a Release Notice in relation only to the Escrow Documents No. 1, signed by the authorised signatory of the Pledgee, however the security created under the Share Pledge shall continue to exist and be of effect in accordance with the terms of Clause 3.07 of the Share Pledge and the Escrow Documents No. 2 shall continue to be held by the Escrow Agent in accordance with the terms of this Agreement. The Escrow Documents No. 2 shall be released in accordance with the terms of this Agreement. (ii)  the Pledgor shall deliver or procure to be delivered to the Escrow Agent simultaneously with the transfer of the Transferred Shares and the completion of the Conditions, a share certificate representing the Shares represented by the remainder of the Permitted Percentage which continues to be pledged and charged in accordance with the terms of Share Pledge II.

 

4.           Authority of the Escrow Agent

 

The Pledgee and the Pledgor hereby authorise the Escrow Agent and the Escrow Agent hereby agrees to hold and deliver the Escrow Documents in accordance with and subject to the terms and conditions of this Agreement.

 

If the Escrow Agent whether original, additional or substituted dies or gives notice of a desire to withdraw and is discharged from these trusts or refuses or becomes unfit to act then the Pledgee may by instrument appoint one other person to be an Escrow Agent in his place. The same will apply if any one of Escrow Agent’s successors is deceased or desires to withdraw or is discharged or refuses or becomes unfit to act.

 

  

Schedule 6 - page 3

  

5.           Termination

 

This Agreement shall be terminated on the delivery of the Escrow Documents by the Escrow Agent to either of the Pledgee and the Pledgor in accordance with this Agreement.

 

6.           Escrow Agents’ Fees

 

	 	
(a)

	
The initial fees of the Escrow Agent for the first year of the term of its acting as Escrow Agent shall be Euro [●] (plus any disbursements and VAT, if applicable) (the “Initial Fees”).  The Initial Fees shall be payable by the Pledgor upon execution and delivery of this Agreement.

 

	 	
(b)

	
An annual fee of Euro [●] (plus any disbursements and VAT, if applicable)  shall be payable on every anniversary from the date of signature of this Agreement (the “Annual Fee”), until termination or expiry of the same.  The Annual Fee shall be payable by the Pledgor within five (5) Business Days from the date of issue of the relevant note of charges and out of pocket expenses by the Escrow Agent. No action shall be taken by the Escrow Agent in accordance with Section 3 unless all outstanding fees are settled in full.

 

	 	
(c)

	
An enforcement fee of Euro [●] (plus any disbursements and VAT, if applicable) shall be payable upon receipt by the Escrow Agent of the Event of Default Notice or the Release Notice (as the case may be) (the “Enforcement Fee”). The Enforcement Fee shall be payable by the Pledgor within five (5) Business Days from the date of issue of the relevant note of charges and out of pocket expenses by the Escrow Agent. No action shall be taken by the Escrow Agent in accordance with Section 3 unless all outstanding fees are settled in full.

 

	 	
(d)

	
The Pledgor shall be liable for and shall pay to the Escrow Agent, ondemand, all charges, costs and expenses reasonably and properly incurred and documented (including legal expenses) which the Escrow Agent may incur in relation to the performance of its obligations hereunder.

 

7.           Rights and Obligations of Escrow Agent

 

	 	
(a)

	
The Escrow Agent shall have the duties, and only those duties, set out expressly in this Agreement and there can be no other implied responsibilities or obligations upon the Escrow Agent.  The duties and obligations of the Escrow Agent in relation to the Escrow Documents will be terminated and discharged without any Liability when the Escrow Agent releases the Escrow Documents in accordance with Section 3.

 

	 	
(b)

	
The Escrow Agent shall not be liable for any error of judgement or for any act done or omitted to be done by the Escrow Agent in good faith including, without limitation, any act done or omitted to be done by the Escrow Agent in compliance with its obligations under any applicable law or in accordance with an order of a court or tribunal or governmental authority.

 

	 	
(c)

	
The Pledgor and/or the Pledgee undertakes to indemnify the Escrow Agent,  and hold the Escrow Agent harmless on demand, against any and all losses, claims, damages, costs, demands, Liabilities, expenses and/or proceedings whether arising under contract, tort or otherwise including,  reasonable costs of investigation, experts and counsel fees and disbursements which may be incurred or suffered by, or made against the Escrow Agent in connection with or arising in any way out of or in consequence of the Escrow Agent’s acceptance of its appointment as Escrow Agent hereunder or the performance or non-performance of the Escrow Agent’ duties hereunder, including, without limitation, any arbitration or litigation arising from this Agreement or the Share Pledge or other related agreement, except as arising out of fraud or gross negligence of the Escrow Agent.

 

  

Schedule 6 - page 4

  

	 	
(d)

	
In no circumstances shall the Escrow Agent have any obligation to make any payment or make any transfer of shares pursuant to this Agreement under the terms and conditions of this Agreement.

 

	 	
(e)

	
The Escrow Agent shall be unconditionally discharged from all further duties, obligation and under this Agreement and from all Liabilities upon the release of the Escrow Documents as provided in this Agreement.

 

	 	
(f)

	
If there is a dispute under this Agreement and/or under the Share Pledge or other related agreement, the Escrow Agent shall be entitled, upon respective instruction from the court or an arbitral tribunal, to release the Escrow Documents to any court or arbitral tribunal of competent jurisdiction, and thereupon to be discharged from all further duties and obligations without any Liability under this Agreement and the Escrow Agent shall be indemnified in accordance with section 7(c).d

 

8.           Notices

 

	 	
(a)

	
All notices, demands and other communications required to be given pursuant to this Agreement shall be in writing and may be given by post, hand or telecopy transmission addressed as provided below (or to the addressee at such other address as the addressee shall have specified by notice actually received by the addressor):

 

If to the Pledgee:

 

7L Equity Partners (Emerging Europe) Limited

Carinthia House

9-12 The Grange

St Peter Port

Guernsey, GY1 4BF

Great Britain

Attn. Mr. Jacques Vermeulen

Tel.:  +44 1481 743 758

Fax:  +44 1481 734 301

Email: jacques.vermeulen@augentius.com

 

If to the Pledgor:

 

VelaTel Global Communications, Inc.

12526 High Bluff Drive, Suite 155

San Diego, CA  92130

Attn: Kenneth Waggoner

Tel: + (760) 230-8986

Fax: + (760) 359-7042

Email: kwaggoner@velatel.com

 

If to the Escrow Agent:

 

Inter Jura Cy (Trusts) Limited

1 Lampousas Street, 1095

Nicosia, Cyprus

Attn: ____

Tel:

Fax:

Email:

  

Schedule 6 - page 5

  

	 	
(b)

	
Notices shall become effective upon actual receipt by the party intended unless expressly otherwise provided in this Agreement.

 

	 	
(c)

	
The Pledgee and the Pledgor authorise the Escrow Agent to accept notices from each of them if they are signed on their behalf by the person signing the present Agreement on their behalf or by any other person appointed by their board of directors.

 

	 	
(d)

	
The Escrow Agent shall not be held responsible for any loss, liability, damage or expense that may result from, or in connection with, any unauthorised instructions or equipment malfunction except if caused by fraud or negligence of the Escrow Agent.

 

9.           Delivery of Escrow Documents

 

Any delivery of the Escrow Documents by the Escrow Agent shall be deemed to be duly effected if they are delivered by hand to:

 

If to the Pledgor:

 

VelaTel Global Communications, Inc.

12526 High Bluff Drive, Suite 155

Sean Diego, CA 92130  USA

 

If to the Pledgee:

[●]

10.           Representations and Warranties

 

Each party represents and warrants to the other party that:

 

	 	
(a)

	
such party has the power, authority and capacity (or, in the case of any party that is a company, all corporate power and authority, as the case may be) to execute, deliver and perform this Agreement;

 

	 	
(b)

	
in the case of a party that is a company, the execution, delivery and performance of this Agreement by such party has been duly and validly authorized and approved by all necessary corporate action;

 

	 	
(c)

	
this Agreement has been duly and validly executed and delivered by such party and constitutes a valid and legally binding obligation of such party, enforceable in accordance with its terms, subject to bankruptcy, insolvency, Or other similar laws affecting or relating to creditors’ rights; and

 

	 	
(d)

	
the execution, delivery and performance of this Agreement by such party does not and will not violate the terms of or result in the acceleration of any obligation under (A) any material contract, commitment or other material instrument to which such party is a party or by which such party is bound or (B) in the case of a party that is a company, its Articles of Association.

 

11.           Specific Performance

 

The rights of the parties under this Agreement are unique and, accordingly, the parties shall, in addition to such other remedies as may be available to any of them at law or in equity, have the right to enforce their rights hereunder by actions for specific performance to the extent permitted by law.

 

  

Schedule 6 - page 6

  

12.           Entire Agreement

 

This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and supersedes any and all prior understandings and agreements, whether written or oral, with respect to such subject matter.

 

13.           Successors and Assigns

 

This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, legal representatives, successors, assigns and permitted transferees, except as may be expressly provided otherwise herein.

 

14.           Severability

 

In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement and such invalid, illegal and unenforceable provision shall be modified and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.

 

15.           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 one and the same instrument.

 

16.           Section Headings

 

The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.

 

17.           Time

 

Time is of the essence for this Agreement.

 

18.           Arbitration

 

 All disputes arising in connection with this Agreement shall be finally settled by arbitration. The arbitration shall be held in Cyprus and conducted in the English language in accordance with the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules as at present in force. There shall be 3 arbitrators, one to be appointed by the claimant and/or claimants and one to be appointed by the respondent and/or respondents and the third to be appointed by the common agreement of the two arbitrators selected by the parties. In the event of a failure to agree on the appointment of arbitrators, the appointing authority shall be the London Court of International Arbitration. If the parties so agree, there shall be a sole arbitrator appointed by the London Court of International Arbitration Upon the award rendered an application may be made to the competent court for a judicial acceptance of the award and an order for enforcement.

 

19.           Governing Law

 

This Agreement shall be governed by and construed and enforced in accordance with the laws (other than the conflict of laws rules) of Cyprus.

 

  

Schedule 6 - page 7

  

IN WITNESS WHEREOF the parties hereto have set their hands, as of the day of the year first above mentioned.

 

	
THE PLEDGEE

	  
	 	 
	
[ ●]

	
In the presence of:

	  	  
	  	  
	

 

	

 

	
By:

	
Name:

	
Title:

	  
	  	  
	  	  
	
THE PLEDGOR

	  
	 	 
	
[●]

	
In the presence of:

	  	  
	  	  
	
 

	
 

	  	
Name:

	  	  
	  	  
	
THE ESCROW AGENT

	  
	 	 
	  	
In the presence of:

	  	  
	  	  
	

 

	

 

	  	
Name:

  

Schedule 6 - page 8

  

APPENDIX "A"

 

INSTRUMENT OF TRANSFER

 

I/WE

 

VelaTel Global Communications, Inc, with registered office in San Diego California (12526 High Bluff Drive, Suite 155, San Diego),

 

(hereinafter called the "transferor(s)")

 

in exchange of good and valuable consideration received by me/us by

 

Name

 

of

 

(hereinafter called the "transferee(s)" do hereby transfer to the said transferee(s) the share(s) shown in the schedule hereto held by us/me in the undertaking called

 

HERLONG ΙNVESTMENTS LIMITED

 

to hold unto the said transferee(s) his/their executors, administrators and assigns.

 

AND I/WE the said transferee(s) do hereby agree to take the said shares in the aforementioned undertaking subject to the conditions aforesaid.

 

Date:

 

SCHEDULE

 

............. fully paid ordinary shares of €[●] each serial no. ............................................., as per Share Certificate No.......... and .......

 

	
THE TRANSFEROR(S)

	
THE TRANSFEREE(S)

	  	  
	  	  
	  	  
	  	  
	

 

	

 

	
Name: VelaTel Global Communications, Inc

	
Name:

	
Address: As above

	
Address: As above

	  	  
	  	  
	  	  
	

 

	

 

	
Witness to the signature

	
Witness to the signature

	
of Transferor(s)

	
of Transferee(s)

  

Schedule 6 - page 9

  

APPENDIX "B"

 

HERLONG ΙNVESTMENTS LIMITED

 

UNANIMOUS WRITTEN RESOLUTION OF THE BOARD OF DIRECTORS OF THE COMPANY DATED

 

By a unanimous written resolution of all the Directors of the Company, it is hereby resolved as follows:-

 

(1)       To approve of the following transfer of shares:

 

.................. fully paid ordinary shares of €[●] each serial no. ............................................. and ...............................

 

from VelaTel Global Communications, Inc

 

to 7L Capital Partners Emerging Europe LP

 

	
  

	
(2)

	
The secretary is instructed to take all appropriate steps to implement the above resolution.

 

..............................................................

(Sgd)  ..................

..............................................................

(Sgd)  ..................

..............................................................

((Sgd)  ..................

..............................................................

(Sgd)  ..................

..............................................................

(Sgd)  ..................

 

 

  

Schedule 6 - page 10

  

 

 

APPENDIX "C"

 

IRREVOCABLE PROXY AND POWER OF ATTORNEY

IN ACCORDANCE WITH CLAUSE 4.01 OF THE SHARE PLEDGE

DATED ............ 2011

 

	
1.

	
We, VelaTel Global Communications, Inc, a Unites States corporation, organized under the laws of Nevada, with a principal place of business at 12526 High Bluff Drive, Suite 155, San Diego, California duly and legally represented by George Alvarez hereby constitute and appoint ...................................................................., a legal entity incorporated and existing under the laws of the .........................................and having its registered office at............................................................., as our true and lawful attorney and proxy being fully empowered and authorized to do all or any of the following acts and matters with effect from the occurrence of an Event of Default pursuant to the Share Pledge Agreement dated ... ... ... between 7L Capital Partners Emerging Group LP as Pledgee, on the one hand, and VelaTel Global Communications, Inc., as Pledgor, on the other hand (the “Share Pledge”):

 

	
  

	
(1)

	
To sell, transfer, assign, pledge or otherwise dispose or charge all or any of the Shares and/or the Further Shares (as this terms are defined in the Share Pledge) to or in favour of, such person or persons and under such terms as the Attorney may deem fit.

 

	
  

	
(2)

	
To vote and/or exercise all consensual powers discretions and rights at any general meeting of the Company or by executing any resolution in writing by such shareholders as fully as we would do.

 

	
  

	
(3)

	
To demand, receive and retain all dividends, interest or other moneys or assets accruing on or in respect of all or any of the Shares and/or the Further Shares.

 

	
  

	
(4)

	
To exercise all rights and options, by way of acceptance of offer of new shares, rights or bonus issue, or other rights, benefits, or otherwise, accruing on or in respect of all or any of the Shares and/or the Further Shares, and to require that all such rights and options be registered, transferred, assigned or otherwise dealt with as the Attorney may deem fit; all powers and authorities of the Attorney under this Power of Attorney in respect of the Shares and/or the Further Shares may be likewise exercised by the Attorney in respect of any new shares, rights or bonus issue or other rights and benefits accruing in respect of the Shares.

 

	
  

	
(5)

	
To demand from the Company, its secretary or Register keeper and any other officer or person acting for the Company as well as from any competent authority, the issue and delivery to the Attorney of any certificates, statements or other documents of title evidencing the ownership of, or entitlement to, the Shares and/or the Further Shares and any new shares, rights or bonus issue, or other rights and benefits accruing in respect of the Shares and/or the Further Shares.

 

	
  

	
(6)

	
Generally to act and deal in respect of the Shares and/or the Further Shares and any new shares, rights or bonus, or other rights and benefits accruing in respect of the Shares and/or the Further Shares  as fully as we could do.

 

	
  

	
(7)

	
To sign, execute and deliver any instruments of transfer, applications, assignments, receipts, deeds, agreements and documents whatsoever in relation to all or any of the powers authorities vested on the Attorney under this Power of Attorney, and to do so under such terms and conditions as the Attorney may deem fit;

 

  

Schedule 6 - page 11

  

	
  

	
(8)

	
To appoint any substitute or agent or attorney to do all or any of the acts and matters vested on the Attorney under this Power of Attorney.

 

	
2.

	
All and any proxies and/or powers of attorney previously given in favour of any person or persons (other than the Attorney) in relation to the Shares and/or Further Shares are hereby revoked.

 

	
3.

	
We hereby ratify and confirm all that the Attorney or any substitute or substitutes shall do or cause to be done by virtue hereof.

 

	
4.

	
We hereby acknowledge that the Shares and/or Further Shares have been pledged to the Attorney by the Share Pledge and this Power of Attorney is given by way of security and shall remain in full force and irrevocable for as long as the said  Share Pledge shall remain in force.

 

IN WITNESS whereof we have executed this Proxy and Power of Attorney this ......day of ..........

 

SIGNED by  ............................

For and on behalf of VelaTel Global Communications, Inc.

  

Schedule 6 - page 12

  

APPENDIX "D"

 

LETTER OF RESIGNATION

 

	
To:

	
HERLONG ΙNVESTMENTS LIMITED, of Nicosia Cyprus ("the Company")

 

	
CC:

	
7L CAPITAL PARTNERS EMERGING EUROPE LP

 

Date:

 

Dear Sirs,

 

I hereby resign from my position as a Director/Secretary of the Company with effect from the date of this letter.

 

I hereby confirm that I have no claim whatsoever against the Company for loss of office or otherwise.

 

Yours faithfully,

..............................................................

(Sgd)  .............................

[Name of Director/Secretary of the Company]

  

Schedule 6 - page 13

  

APPENDIX "E"

 

LETTER OF AUTHORITY AND UNDERTAKING

 

	
TO:

	
7L CAPITAL PARTNERS EMERGING EUROPE LP

 

           ("the Pledgee")                                                                           

 

DATED: ............., 2011

 

Dear Sirs,

 

RE: HERLONG ΙNVESTMENTS LIMITED ("THE COMPANY")

 

I, the undersigned, holding the office of [Director/Secretary] in the Company referred to in the Share Pledge Agreement dated ........... between 7L Capital Partners Emerging Group LP as Pledgee, on the one hand, and VelaTel Global Communications, Inc., as Pledgor, on the other hand (the “Share Pledge”) and for good and valuable consideration provided by the Pledgee (the receipt and sufficiency of which is hereby acknowledged) I hereby irrevocably authorise and undertake with the Pledgee that:

 

	
  

	
1)

	
For so long as any Obligations are outstanding (as these are defined in the Share Pledge) I will not act alone or in concert with any one or more of my fellow directors or officers of the Company or with any other person, enter into or accept or authorise any act or commitment in contravention of the covenants under the Share Pledge;

 

	
  

	
2)

	
I hereby irrevocably authorise the Pledgee at any time on or after the occurrence of an Event of Default (as defined in the Share Pledge) which is continuing, to date, use and otherwise put into full effect the undated letter of resignation delivered by me to the Pledgee pursuant to the Share Pledge.

 

All capitalized terms in the Share Pledge shall have the same meaning in the present letter.

 

Yours faithfully,

...................

[Director] [Secretary]

  

Schedule 6 - page 14

  

APPENDIX "F"

 

WAIVER

 

To the Board of Directors

 

of HERLONG INVESTMENTS LIMITED

 

[insert address]

 

We, ......................... of ............. , hereby confirm that in connection with the proposed transfer of .......... shares of Euro 1,00 each from VelaTel Global Communications, Inc. of the state of Nevada to 7L CAPITAL PARTNERS EMERGING EUROPE LP, of Guernsey, we do not wish to exercise any options or rights vested in us by virtue of the provisions of the Company's Articles of Association and we declare that they may transfer such shares to any person or persons that they may consider proper.

 

Signed this ........ day of .........., 20...

 

..................................................................

[insert name of Shareholder]

  

Schedule 6 - page 15

  

APPENDIX “G”

 

DEFAULT NOTICE

 

To:

 

..........................

 

Dear Sir,

 

We refer to the Escrow Agreement dated [INSERT] entered into between ourselves, VelaTel and yourselves (the “Escrow Agreement”) and hereby give you notice pursuant to section 3(b) thereof that in accordance with the terms and conditions of the Share Pledge Agreement dated ................ between 7L Capital Partners Emerging Group LP as Pledgee, on the one hand, and VelaTel Global Communications, Inc., as Pledgor, on the other hand (the “Share Pledge”), an Event of Default (as this is defined in the Share Pledge) has taken place and hereby request that you release and deliver to us the..........................

 

Capitalised terms in the present letter have the same meaning as capitalised terms in the Share Pledge and the Escrow Agreement (as the case may be).

 

Yours Truly

 

7L Capital Partners Emerging Europe LP

_______________________________

Title:

  

Schedule 6 - page 16

  

APPENDIX “H”

 

RELEASE NOTICE

 

To:

 

....................

 

Dear Sir,

 

We refer to the Escrow Agreement dated [INSERT] entered into between ourselves, VelaTel and yourselves (the “Escrow Agreement”) and hereby give you notice pursuant to section 3 (c) or 3 (d) (as the case may be) thereof that in accordance with the terms and conditions of the Share Pledge Agreement dated ................ between 7L Capital Partners Emerging Group LP as Pledgee, on the one hand, and VelaTel Global Communications, Inc., as Pledgor, on the other hand (the “Share Pledge”) and hereby request that you release and deliver to the Pledgor the ..................

 

Capitalised terms in the present letter have the same meaning as capitalised terms in the Share Pledge and the Escrow Agreement.

 

Yours Truly

 

7L Capital Partners Emerging Europe LP

_______________________________

Title:

 

 

  

Schedule 6 - page 17

  

 

 

Key Managers of Herlong and Their Compensation

 

 

 

	
Name

	
Position

	
Annual Compensation

	
Salvator Levis

	
Group CEO

	
EUR 90,000

	
Hajdi Mostic

	
Group CFO

	
EUR 24,000

	
Karlo Vlah

	
Group Chief Technical Officer and

Croatia & Montenegro Deputy CEO

	
EUR 72,000

	
Lejla Ibrahimpacic

	
Group Administration Officer

	
EUR 24,000

 

 

 

  

Schedule 7 - page 1

  

 

CONTRACT FOR SERVICES

 

 

This Contract (the “Agreement”) is made the ____ day of __________, 20__.

 

BETWEEN:

 

	
1.

	
HERLONG INVESTMENTS LIMITED a company incorporated in Cyprus, having its registered office in Cyprus (2 Agapinoros Street, IRIS TOWER, 5th floor, Flat/Office 502, P.C. 1076, Nicosia) duly and legally represented by _____________ (hereinafter the “Company”)

 

and

 

	
2.

	
______________, holder of __________ passport number _____________ (hereinafter the “Consultant”).

 

Together the Company and the Consultant hereinafter the “Parties”, and separately the “Party”.

 

WHEREBY IT IS AGREED as follows:

 

 

	
1.

	
APPOINTMENT AND DURATION

 

	 	
1.1

	
The Consultant and the Company have agreed that the Consultant will provide its services to the Company in the capacity of _________________.  The Consultant shall offer its services to the Company, as well as to any branches, subsidiaries or affiliates (the “Group”), i.e., any entity that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with the Company.

 

	 	
1.2

	
The Agreement commences on ___________________ or shall be terminated in accordance with the terms of paragraph 4. hereof.

 

	 	
1.3

	
The place where the Consultant shall render its services shall be that as dictated from time to time by the Company and the Group.  It is expressly acknowledged that the Consultant shall render its services outside Cyprus.

 

 

	
2.

	
DUTIES AND EXCLUSIVE SERVICE

 

	 	
2.1

	
During the continuance of the Agreement the Consultant shall without prejudice to the duties imposed by law use its best endeavors to promote, develop and extend the interests of the Company and the Group.

 

	 	
2.2

	
The Consultant shall perform such duties consistent with this Agreement.  It shall provide its services and exercise such powers, authorities and discretions as the Company and the Group shall from time to time delegate to its on such terms and conditions and subject to such directions as the Company and the Group may from time to time reasonably give and shall do all other acts and things in the ordinary course of business of the Company and the Group as may be necessary or conducive to the interest of the Company and the Group, provided that these powers, authorities, directions, acts, and things fall within its Description of Position/Services as in Schedule 2.

 

	 	
2.3

	
The Consultant will devote its full time and efforts exclusively to the Company and will not during the subsistence of this Agreement enter the employment of any other natural or legal person or become interested directly or indirectly in any business or activity which may be competitive to the interest of the Company or otherwise do anything inconsistent with the performance of its duties hereunder.

 

  

Schedule 8 - Page 1

  

 

	
3.

	
FEES AND EXPENSES

 

	 	
3.1

	
As compensation for the services rendered to the Company, the Consultant will receive a fee of €________ (_____________-and-00/100 Euro) per month payable monthly in arrears.

 

	 	
3.2

	
To collect the fee, the Consultant must first issue an invoice, as that exhibited in Schedule 1 of the Agreement, for the appropriate sum, following the month the services were provided and the Company shall pay its within 10 business days as of the receipt of the relevant invoice.

 

	 	
3.3

	
The Company undertakes the obligation to reimburse the Consultant for all accommodation, travel, out-of-pocket expenses, reasonably and properly incurred by it in the performance of its duties, provided that the budget of the said expenses has been pre-approved by the Company’s competent bodies, that reimbursement of the aforementioned expenses are in line with the Company’s policy and procedures, and that satisfactory evidence of expenditure is presented.

	
4.

	
TERMINATION and COMPENSATION

 

The Agreement shall terminate upon:

 

(a) a two-month prior written notice sent by the Consultant to the Company

 

(b) a two-month prior written notice sent by the Company to the Consultant

 

(c) mutual written consent.

 

In case of termination under (b) above, the Company agrees to pay to the Consultant a sum equal to two monthly fees (as stated in Article 3 of this Agreement), payable within 30 days from expiration of the Agreement.

 

	
5.

	
INDEMNIFICATION

 

The Company covenants and agrees to defend, indemnify and hold harmless the Consultant from and against any and all losses, costs, expenses, liabilities, claims or legal damages (collectively, "Losses") arising in its capacity as a consultant, or under any other capacity, provided, however, that the Company will not be responsible for any Losses to the extent that such Losses are the result of willful misconduct or bad faith on the part of the Consultant.

 

	
6.

	
FORCE MAJEURE

 

None of the parties to this contract will be liable for any delay or failure to perform, totally or in part, its obligations under this contract if such delay or failure to perform was caused by an unforeseeable event whose consequences are unavoidable for the contractual party that invokes it.

 

	
7.

	
CONFIDENTIAL INFORMATION

 

	 	
7.1

	
The Consultant shall not (except in the proper course of its duties or as required by law) either during the continuance of its services or for a term of 2 years after the termination of the present agreement

 

	 	
(a)

	
divulge or communicate to any person or knowingly permit or enable any person to acquire any professional or trade secret or other confidential information concerning the business, finances, dealings, transactions or affairs of the Company or of any company affiliated or associated with the Company or of any agent, client or customer of any such company or any details thereof which may have come to its knowledge during or in the course of this Agreement or prior to the date of this Agreement (the “Confidential Information”); or

 

  

Schedule 8 - Page 2

  

	 	
(b)

	
use or attempt to use any of the Confidential Information for its own use in any manner which may injure or cause loss either directly or indirectly to the Company or any affiliated or associated company or any of their respective businesses or may be likely to do so or for any purpose other than in the discharge of its duties hereunder.

 

Provided that the foregoing restrictions shall not apply to any part of the Confidential Information which shall come into the public domain, otherwise than through unauthorized disclosure of the Confidential Information or any part thereof.

 

	 	
7.2

	
During the continuance of the Agreement the Consultant shall use its best endeavors to prevent the unauthorized publication or disclosure of the Confidential Information or any part thereof.

 

	 	
7.3

	
All notes and memoranda of the Confidential Information, which shall be acquired, received or made by the Consultant during the course of this Agreement hereunder or prior to the date of this Agreement, shall be the property of the Company and shall be surrendered by the Consultant to someone duly authorized in that behalf at the termination of the Agreement or at the request of the Company during the course of this Agreement.

 

 

	
8.

	
MISCELLANEOUS

 

	 	
8.1

	
Entire Agreement

 

This Agreement constitutes the entire and only agreement between the parties relating to rendering by the Consultant to the Company of the services set out herein and this Agreement supersedes and cancels any and all previous contracts, arrangements or understanding with respect thereto.

 

	 	
8.2

	
Amendment

 

This Agreement may be amended, modified, superseded, cancelled, renewed or extended only by an agreement in writing executed by both parties hereto.

 

	 	
8.3

	
Independent Contractor

 

It is expressly agreed that the consultant is not an employee or executive of the Company for any purpose whatsoever, but is an independent contractor.  The Company is interested only in the results obtained by the Consultant, who shall have sole control of the manner and means of performing under this Agreement.

 

The Consultant does not have, nor shall it hold herself out as having, any right, power, or authority to create any contract or obligation, either express or implied, on behalf, in the name of, or binding upon the Company, or to pledge Company’s credit, or to extend credit in the Company’s name unless Company shall consent thereto in advance in writing.

 

	 	
8.4

	
Notices

 

All notices and other communications required or permitted under this Agreement shall be in writing and sent by fax and nationally recognized express courier service.  Such notices and other communications shall be effective upon receipt to the following addresses or such other addresses as any party shall notify to the other party:

 

 

  

Schedule 8 - Page 3

  

	  	
If to the Company

	
7L Capital Partners Limited

2 Agapinoros Street

IRIS Tower

5th floor, Flat/Office 502

P.C. 1076, Nicosia

Republic of Cyprus

	  	
Attention:   

	
____________________

	  	
Email:   

	
____________________

	  	
Fax:   

	
____________________

	  	  	  
	  	
If to the Consultant

	
____________________

____________________

____________________

	  	
Email:   

	
____________________

 

 

	 	
8.5

	
Governing Law

 

  This Agreement and the rights and obligations of the parties hereto shall be construed in accordance with the laws of the Republic of Cyprus without giving effect to the principles of conflict of laws.

 

	 	
8.6

	
Jurisdiction

 

  The parties hereto hereby irrevocably submit to the exclusive jurisdiction of the Courts of Cyprus.

 

 

 IN WITNESS WHEREOF, the Company and the Consultant have executed this Agreement as at the date first above written.

 

 

 

THE CONTRACTING PARTIES

 

 

 

 

	  	
On behalf of the Company

	  	
On behalf of the Consultant

	  
	  	
 

	  	

 

	  

 

 

 

 

 

  

Schedule 8 - Page 4

  

SCHEDULE 1

 

 

[NAME]

 

[Home Address]

 

[Telephone]

 

 

 

..................................., 20.....

 

 

 

INVOICE NO..... /201...

 

As per clause 3.2. of the Agreement

 

Dated ......................... 201...

 

 

Amount due for Services rendered for the period of [Date] for a total [Euro Amounts]

 

 

Payment to be kindly made by transfer to [account number]

 

 

 

  

Schedule 8 - Page 5

  

SCHEDULE 2

 

 

DESCRIPTION OF POSITION / SERVICES

 

 

The Consultant will provide the following services to the Company as well as to any branches, subsidiaries or affiliates of the Company (the “Group”) (i.e. any entity that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with the Company):

 

	
  

	
·

 

	
  

	
·

 

 

 

Schedule 8 - Page 6peix_8k-ex1001.htm

EXHIBIT 10.1

 

SECURITIES PURCHASE AGREEMENT

THIS SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of December 8, 2011 by and among Pacific Ethanol, Inc., a Delaware corporation with headquarters located at 400 Capitol Mall, Suite 2060, Sacramento, CA 95814 (the “Company”), and the investors listed on the Schedule of Investors attached hereto as Exhibit A (individually, an “Investor” and collectively, the “Investors”).

 

RECITALS

 

A.   The Company and each Investor are executing and delivering this Agreement in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”), and Rule 506 of Regulation D (“Regulation D”) as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the 1933 Act.

 

B.   Each Investor, severally and not jointly, wishes to purchase, and the Company wishes to sell, upon the terms and conditions stated in this Agreement, (i) that aggregate number of shares of the Common Stock, par value $0.001 per share, of the Company (the “Common Stock”), set forth opposite such Investor’s name in column two on the Schedule of Investors in Exhibit A (which aggregate amount for all Investors together shall be 7,625,000 shares of Common Stock and shall collectively be referred to herein as the “Common Shares”) and (ii) warrants, in substantially the form attached hereto as Exhibit B (the “Warrants”) to acquire up to that number of additional shares of Common Stock set forth opposite such Investor’s name in column three on the Schedule of Investors (the shares of Common Stock issuable upon exercise of or otherwise pursuant to the Warrants, collectively, the “Warrant Shares”).

 

C.   At the Closing, the parties hereto shall execute and deliver a Registration Rights Agreement, in form attached hereto as Exhibit C (the “Registration Rights Agreement”), pursuant to which the Company has agreed to provide certain registration rights with respect to the Registrable Securities (as defined in the Registration Rights Agreement), under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws.

 

D.  The Common Shares, the Warrants and the Warrant Shares issued pursuant to this Agreement are collectively are referred to herein as the “Securities”.

 

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and the Investors agree as follows:

 

ARTICLE I

DEFINITIONS

 

1.1 Definitions.  In addition to the terms defined elsewhere in this Agreement, the following terms have the meanings indicated:

 

“1933 Act” has the meaning set forth in the Recitals.

 

  

1

  

 

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the 1933 Act.

 

“Agent” has the meaning set forth in Section 3.1(l).

 

“Agreement” has the meaning set forth in the Preamble.

 

“Available Undersubscription Amount” has the meaning set forth in Section 4.9(b).

 

“Basic Amount” has the meaning set forth in Section 4.9(a).

 

“Board of Directors” means the Company’s board of directors.

 

“Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.

 

“Buy-In Price” has the meaning set forth in Section 4.1(d).

 

“Closing” means the closing of the purchase and sale of the Securities pursuant to Section 2.1.

 

“Closing Date” means 10:00 a.m., New York City Time, on the first (1st) Business Day on which the conditions to the Closing set forth in Sections 5.2 and 5.2 are satisfied or waived (or such later date and time as is mutually agreed to by the Company and each Investor). 

 

“Closing Price” means, for any date, the closing price per share of the Common Stock for such date (or the nearest preceding date) on the primary Eligible Market or exchange or quotation system on which the Common Stock is then listed or quoted.

 

“Company” has the meaning set forth in the Preamble.

 

“Company Counsel” means Rutan & Tucker, LLP, counsel to the Company.

 

“Common Shares” has the meaning set forth in the Recitals.

 

“Common Stock” means the common stock of the Company, par value $0.001 per share.

 

“Common Stock Equivalents” means, collectively, Options and Convertible Securities.

 

“Contingent Obligation” has the meaning set forth in Section 3.1(aa).

 

“Convertible Securities” means any stock or securities (other than Options) convertible into or exercisable or exchangeable for Common Stock.

 

“Disclosure Materials” has the meaning set forth in Section 3.1(g).

 

“DTC” has the meaning set forth in Section 4.1(c).

 

 

  

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“8-K Filing” has the meaning set forth in Section 4.6.

 

“Eligible Market” means any of The New York Stock Exchange, The NYSE Amex LLC, The NASDAQ Capital Market or The NASDAQ Global Select Market.

 

“Environmental Laws” has the meaning set forth in Section 3.1(dd).

 

“1934 Act” means the Securities Exchange Act of 1934, as amended.

 

“Excluded Events” has the meaning set forth in Section 6.1(d)(ii).

 

“Excluded Investors” means the Agent and its Affiliates.

 

“Excluded Securities” means the issuance of (a) shares of Common Stock or options to employees, officers or directors of the Company, or consultants to the Company, in their capacity as such pursuant to any stock or option plan or employment agreement duly adopted for such purpose, by a majority of the non-employee members of the Board of Directors or a majority of the members of a committee of non-employee directors established for such purpose, (b) securities upon the exercise or exchange of or conversion of the securities issued hereunder or pursuant to the Warrants and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Agreement, provided that such securities have not been amended since the date of this Agreement to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such securities, and (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided that any such issuance shall only be to a Person (or to the equity holders of a Person) which is, itself or through its subsidiaries, an operating company or an owner of an asset in a business synergistic with the business of the Company and shall provide to the Company additional benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities.

 

“GAAP” has the meaning set forth in Section 3.1(g).

 

“Hazardous Materials” has the meaning set forth in Section 3.1(dd).

 

“Indebtedness” has the meaning set forth in Section 3.1(aa).

 

“Insolvent” has the meaning set forth in Section 3.1(h).

 

“Intellectual Property Rights” has the meaning set forth in Section 3.1(t).

 

“Investor” has the meaning set forth in the Preamble.

 

“Lien” means any lien, charge, claim, security interest, encumbrance, right of first refusal or other restriction.

 

  

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“Losses” means any and all losses, claims, damages, liabilities, settlement costs and expenses, including, without limitation and reasonable attorneys’ fees.

 

“Lyles Registration Rights Agreement” means that certain Registration Rights Agreement dated as of March 27, 2008 by and among the Company and Lyles United, LLC.

 

“Material Adverse Effect” means (i) a material adverse effect on the results of operations, assets, business or financial condition of the Company and the Subsidiaries, taken as a whole on a consolidated basis, or (ii) materially and adversely impair the Company’s ability to perform its obligations under any of the Transaction Documents, provided, that none of the following alone shall be deemed, in and of itself, to constitute a Material Adverse Effect: (i) a change in the market price or trading volume of the Common Stock or (ii) changes in general economic conditions or changes affecting the industry in which the Company operates generally (as opposed to Company-specific changes) so long as such changes do not have a disproportionate effect on the Company and its Subsidiaries taken as a whole.

 

“Material Permits” has the meaning set forth in Section 3.1(v).

 

“Notice of Acceptance” has the meaning set forth in Section 4.9(b).

 

“Offer” has the meaning set forth in Section 4.9(a).

 

“Offered Securities” has the meaning set forth in Section 4.9(a).

 

“Offer Notice” has the meaning set forth in Section 4.9(a).

 

“Offer Period” has the meaning set forth in Section 4.9(b).

 

“Options” means any outstanding rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.

 

“Person” means any individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, or joint stock company.

 

“Pre-Notice” has the meaning set forth in Section 4.9(a).

 

“Press Release” has the meaning set forth in Section 4.6.

 

“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, or a partial proceeding, such as a deposition), whether commenced or threatened in writing.

 

“Refused Securities” has the meaning set forth in Section 4.9(c).

 

“Registrable Securities” has the meaning ascribed to it in the Registration Rights Agreement.

 

“Regulation D” has the meaning set forth in the Recitals.

 

 

  

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“Required Delivery Date” has the meaning set forth in Section 4.1(a).

 

“Rule 144” and “Rule 424” means Rule 144 and Rule 424, respectively, promulgated by the SEC pursuant to the 1933 Act, as such Rules may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same effect as such Rule.

 

“SEC” means the Securities and Exchange Commission.

 

“SEC Reports” has the meaning set forth in Section 3.1(g).

 

“Securities” has the meaning set forth in the Recitals.

 

“Shares” means shares of the Company’s Common Stock.

 

“Short Sales” has the meaning set forth in Section 3.2(h).

 

“Subsequent Placement” has the meaning set forth in Section 4.8.

 

“Subsequent Placement Agreement” has the meaning set forth in Section 4.9(c).

 

“Subsequent Placement Documents” has the meaning set forth in Section 4.9(g).

 

“Subsidiary” means any direct or indirect wholly-owned subsidiary of the Company.

 

“Trading Day” means (a) any day on which the Common Stock is listed or quoted and traded on its primary Trading Market, (b) if the Common Stock is not then listed or quoted and traded on any Eligible Market, then a day on which trading occurs on The NASDAQ Capital Market (or any successor thereto), or (c) if trading ceases to occur on The NASDAQ Capital Market (or any successor thereto), any Business Day.

 

“Trading Market” means The NASDAQ Capital Market or any other Eligible Market, or any national securities exchange, market or trading or quotation facility on which the Common Stock is then listed or quoted.

 

“Transaction Documents” means this Agreement, the schedules and exhibits attached hereto, the Warrants, the Registration Rights Agreement and the Transfer Agent Instructions.

 

“Transfer Agent” means American Stock Transfer & Co, LLC, or any successor transfer agent for the Company.

 

“Transfer Agent Instructions” means, with respect to the Company, the Irrevocable Transfer Agent Instructions, in the form of Exhibit E, executed by the Company and delivered to and acknowledged in writing by the Transfer Agent.

 

“Undersubscription Amount” has the meaning set forth in Section 4.9(a).

 

  

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“Variable Rate Transaction” means a transaction in which the Company or any Subsidiary (i) issues or sells any Convertible Securities either (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the shares of Common Stock at any time after the initial issuance of such Convertible Securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such Convertible Securities or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock, other than pursuant to a customary “weighted average” anti-dilution provision or (ii) enters into any agreement (including, without limitation, an equity line of credit) whereby the Company or any Subsidiary may sell securities at a future determined price (other than standard and customary “preemptive” or “participation” rights).

 

“Warrants” has the meaning set forth in the Recitals.

 

“Warrant Shares” has the meaning set forth in the Recitals.

 

ARTICLE II

PURCHASE AND SALE

 

2.1 Closing.  Subject to the terms and conditions set forth in this Agreement, at the Closing the Company shall issue and sell to each Investor, and each Investor shall, severally and not jointly, purchase from the Company, such number of Common Shares and Warrants for the price set forth opposite such Investor’s name on Exhibit A hereto under the headings “Common Shares” and “Warrants”.  The date and time of the Closing and shall be 10:00 a.m., New York City Time, on the Closing Date.  The Closing shall take place at the offices of the Company’s Counsel.

 

2.2 Closing Deliveries.

 

(a) At the Closing, the Company shall deliver or cause to be delivered to each Investor the following:

 

(i) one or more stock certificates (or copies thereof provided by the Transfer Agent), free and clear of all restrictive and other legends (except as expressly provided in Section 4.1(b)), evidencing such number of Common Shares set forth opposite such Investor’s name on Exhibit A hereto under the heading “Common Shares,” registered in the name of such Investor;

 

(ii) a Warrant, issued in the name of such Investor, pursuant to which such Investor shall have the right to acquire such number of Warrant Shares set forth opposite such Investor’s name on Exhibit A hereto under the heading “Warrant Shares”;

 

(iii) a legal opinion of Company Counsel dated the Closing Date, in the form of Exhibit D, executed by such counsel and delivered to the Investors and the Agent;

 

(iv) a duly executed Transfer Agent Instructions acknowledged by the Company’s transfer agent;

 

  

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(v) the Company shall have delivered to each Investor a certificate executed by the Secretary of the Company and dated as of the Closing Date, certifying as to (i)  the resolutions adopted by the Company’s board of directors approving this Agreement, (ii) the Certificate of Incorporation of the Company and (iii) the Bylaws of the Company, each as in effect at the Closing;

 

(vi) Each and every representation and warranty of the Company shall be true and correct as of the date when made and as of the Closing Date as though originally made at that time (except for representations and warranties that speak as of a specific date, which shall be true and correct as of such specific date) and the Company shall have performed, satisfied and complied in all respects with the covenants, agreements and conditions required to be performed, satisfied or complied with by the Company at or prior to the Closing Date. The Company shall have delivered to each Investor a certificate executed by the Chief Executive Officer of the Company, dated as of the Closing Date, to the foregoing effect;

 

(vii) a duly executed Registration Rights Agreement; and

 

(viii) approval by each applicable Trading Market of an additional shares listing application covering all of the Registrable Securities.

 

(b) At the Closing, each Investor shall deliver or cause to be delivered to the Company the following:

 

(i) a duly executed Securities Purchase Agreement;

 

(ii) a duly executed Registration Rights Agreement; and

 

(iii) the purchase price set forth opposite such Investor’s name on Exhibit A hereto under the heading “Purchase Price” in United States dollars and in immediately available funds, by wire transfer to an account designated in writing to such Investor by the Company for such purpose.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES

 

3.1 Representations and Warranties of the Company.  The Company hereby represents and warrants to the Investors and the Agent as follows (which representations and warranties shall be deemed to apply, where appropriate, to each Subsidiary of the Company):

 

(a) Subsidiaries.  The Company has no Subsidiaries other than those listed in Schedule 3.1(a) hereto.  Except as disclosed in Schedule 3.1(a) hereto, the Company owns, directly or indirectly, all of the capital stock or comparable equity interests of each Subsidiary free and clear of any Lien and all the issued and outstanding shares of capital stock or comparable equity interest of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights.

 

(b) Organization and Qualification.  Each of the Company and the Subsidiaries is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite legal authority to own and use its properties and assets and to carry on its business as currently conducted.  Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents.  Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.

 

 

  

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(c) Authorization; Enforcement.  The Company has the requisite corporate authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents to which it is a party and otherwise to carry out its obligations hereunder and thereunder.  The execution and delivery of each of the Transaction Documents to which it is a party by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and no further consent or action is required by the Company, its Board of Directors or its stockholders.  Each of the Transaction Documents to which it is a party has been (or upon delivery will be) duly executed by the Company and is, or when delivered in accordance with the terms hereof, will constitute, the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors rights generally, and (ii) the effect of rules of law governing the availability of specific performance and other equitable remedies.

 

(d) No Conflicts.  The execution, delivery and performance of the Transaction Documents to which it is a party by the Company and the consummation by the Company of the transactions contemplated hereby and thereby do not, and will not, (i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound, or affected, except to the extent that such conflict, default, termination, amendment, acceleration or cancellation right would not reasonably be expected to have a Material Adverse Effect, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including, assuming the accuracy of the representations and warranties of the Investors set forth in Section 3.2 hereof, federal and state securities laws and regulations and the rules and regulations of any self-regulatory organization to which the Company or its securities are subject, including all applicable Trading Markets), or by which any property or asset of the Company or a Subsidiary is bound or affected, except to the extent that such violation would not reasonably be expected to have a Material Adverse Effect.

 

  

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(e) The Securities. The Securities (including the Warrant Shares) are duly authorized and, when issued and paid for in accordance with the Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens and will not be subject to preemptive or similar rights of stockholders (other than those imposed by the Investors).  The Company has reserved from its duly authorized capital stock the maximum number of shares of Common Stock issuable upon exercise of the Warrants.  The offer, issuance and sale of the Shares, the Warrants and the Warrant Shares to the Investors pursuant to the Agreement, and in the case of the Warrant Shares, pursuant to the Warrants, are exempt from the registration requirements of the 1933 Act.

 

(f) Capitalization.  The aggregate number of shares and type of all authorized, issued and outstanding classes of capital stock, options and other securities of the Company (whether or not presently convertible into or exercisable or exchangeable for shares of capital stock of the Company) is set forth in Schedule 3.1(f) hereto.  All outstanding shares of capital stock are duly authorized, validly issued, fully paid and nonassessable and have been issued in compliance in all material respects with all applicable securities laws.  Except as disclosed in Schedule 3.1(f) hereto, the Company did not have outstanding at December 8, 2011 any other options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or entered into any agreement giving any Person any right to subscribe for or acquire, any shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock.  Except as set forth on Schedule 3.1(f) hereto, and except for customary adjustments as a result of stock dividends, stock splits, combinations of shares, reorganizations, recapitalizations, reclassifications or other similar events, there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) and the issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Investors) and will not result in a right of any holder of securities to adjust the exercise, conversion, exchange or reset price under such securities.  To the knowledge of the Company, except as disclosed in the SEC Reports and any Schedules filed with the SEC pursuant to Rule 13d-1 of the 1933 Act by reporting persons or in Schedule 3.1(f) hereto, no Person or group of related Persons beneficially owns (as determined pursuant to Rule 13d-3 under the 1933 Act), or has the right to acquire, by agreement with or by obligation binding upon the Company, beneficial ownership of in excess of 5% of the outstanding Common Stock.

 

(g) SEC Reports; Financial Statements.  The Company has filed all reports required to be filed by it under the 1933 Act, including pursuant to Section 13(a) or 15(d) thereof, for the 12 months preceding the date hereof on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension and has filed all reports required to be filed by it under the 1933 Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof.  Such reports required to be filed by the Company under the 1933 Act, including pursuant to Section 13(a) or 15(d) thereof, together with any materials filed or furnished by the Company under the 1933 Act, whether or not any such reports were required being collectively referred to herein as the “SEC Reports” and, together with this Agreement and the Schedules to this Agreement, the “Disclosure Materials.”  Except as set forth on Schedule 3.1(g), there are no unresolved comment letters from the Staff of the SEC (the “Comment Letter”).  The matters addressed in the Comment Letter, if resolved adversely to the Company, would not result in any Material Adverse Effect.  The existence of, and the matters addressed in, the Comment Letter as disclosed to the Investors, does not constitute material nonpublic information with respect to the Company.  As of their respective dates, the SEC Reports filed by the Company complied in all material respects with the requirements of the 1933 Act and the 1933 Act and the rules and regulations of the SEC promulgated thereunder, and none of the SEC Reports, when filed by the Company, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.  The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the SEC with respect thereto as in effect at the time of filing.  Such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements, the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP or may be condensed or summary statements, and fairly present in all material respects the consolidated financial position of the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, year-end audit adjustments.  All material agreements to which the Company or any Subsidiary is a party or to which the property or assets of the Company or any Subsidiary are subject are included as part of or identified in the SEC Reports, to the extent such agreements are required to be included or identified pursuant to the rules and regulations of the SEC.

  

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(h) Since the date of the latest audited financial statements included within the SEC Reports, except as disclosed in the SEC Reports, (i) there has been no event, occurrence or development that, individually or in the aggregate, has had or that would result in a Material Adverse Effect, (ii) the Company has not incurred any material liabilities other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or required to be disclosed in filings made with the SEC, (iii) the Company has not altered its method of accounting or the changed its auditors, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders, in their capacities as such, or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock (except for repurchases by the Company of shares of capital stock held by employees, officers, directors, or consultants pursuant to an option of the Company to repurchase such shares upon the termination of employment or services), and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock-based plans.  The Company has not taken any steps to seek protection pursuant to any bankruptcy law nor does the Company have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact which would reasonably lead a creditor to do so.  The Company is not as of the date hereof, and after giving effect to the transactions contemplated hereby to occur at the applicable Closing, will not be Insolvent (as defined below).  For purposes of this Section 3.1(h), “Insolvent” means (i) the present fair saleable value of the Company’s assets is less than the amount required to pay the Company’s total Indebtedness (as defined in Section 3.1(aa)), (ii) the Company is unable to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured, (iii) the Company intends to incur or believes that it will incur debts that would be beyond its ability to pay as such debts mature or (iv) the Company has unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted.

 

(i) Absence of Litigation.  There is no action, suit, claim, or proceeding, or, to the Company’s knowledge, inquiry or investigation, before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries that could, individually or in the aggregate, have a Material Adverse Effect.

 

(j) Compliance.  Neither the Company nor any Subsidiary, except in each case as would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect, (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received written notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is or has been in violation of any statute, rule or regulation of any governmental authority.

 

(k) Title to Assets.  The Company and the Subsidiaries have good and marketable title to all real property owned by them that is material to the business of the Company and the Subsidiaries and good and marketable title in all personal property owned by them that is material to the business of the Company and the Subsidiaries, in each case free and clear of all Liens, except for Liens that do not, individually or in the aggregate, have or result in a Material Adverse Effect.  Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases of which the Company and the Subsidiaries are in material compliance.

 

(l) No General Solicitation; Placement Agent’s Fees.  Neither the Company, nor any of its affiliates, nor any Person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Securities.  The Company shall be responsible for the payment of any placement agent’s fees, financial advisory fees, or brokers’ commission (other than for persons engaged by any Investor or its investment advisor) relating to or arising out of the issuance of the Securities pursuant to this Agreement.  The Company shall pay, and hold each Investor harmless against, any liability, loss or expense (including, without limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in connection with any such claim for fees arising out of the issuance of the Securities pursuant to this Agreement.  The Company acknowledges that is has engaged Lazard Capital Markets LLC as its lead placement agent (the “Agent”) in connection with the sale of the Securities.  Other than the Agent, the Company has not engaged any placement agent or other agent in connection with the sale of the Securities.

 

(m) Private Placement.  Neither the Company nor any of its Affiliates nor, any Person acting on the Company’s behalf has, directly or indirectly, at any time within the past six months, made any offer or sale of any security or solicitation of any offer to buy any security under circumstances that would (i) eliminate the availability of the exemption from registration under Regulation D under the 1933 Act in connection with the offer and sale by the Company of the Securities as contemplated hereby or (ii) cause the offering of the Securities pursuant to the Transaction Documents to be integrated with prior offerings by the Company for purposes of any applicable law, regulation or stockholder approval provisions, including, without limitation, under the rules and regulations of any Trading Market.  The Company is not required to be registered as, and is not an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.  The Company is not required to be registered as, a United States real property holding corporation within the meaning of the Foreign Investment in Real Property Tax Act of 1980.

 

  

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(n) [Intentionally Omitted.]

 

(o) Listing and Maintenance Requirements.  Except as disclosed in Schedule 3.1(o), the Company has not, in the twelve months preceding the date hereof, received notice (written or oral) from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market.  The Company is in compliance with all such listing and maintenance requirements.

 

(p) Registration Rights.  Except as described in Schedule 3.1(p), the Company has not granted or agreed to grant to any Person any rights (including “piggy-back” registration rights) to have any securities of the Company registered with the SEC or any other governmental authority that have not been satisfied or waived.

 

(q) Application of Takeover Protections. There is no control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s charter documents or the laws of its state of incorporation that is or could become applicable to any of the Investors as a result of the Investors and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including, without limitation, as a result of the Company’s issuance of the Securities and the Investors’ ownership of the Securities.

 

(r) Disclosure.  The Company confirms that neither it nor any officers, directors or Affiliates, has provided any of the Investors (other than Excluded Investors) or their agents or counsel with any information that constitutes or might constitute material, nonpublic information (other than this Agreement and the Schedules to this Agreement).  The Company understands and confirms that each of the Investors will rely on the foregoing representations in effecting purchases and sales of securities of the Company (other than Excluded Investors).  All disclosure provided by the Company to the Investors regarding the Company, its business and the transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on the behalf of the Company are true and correct in all material respects and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading.  To the Company’s knowledge, except for the transactions contemplated by this Agreement, no event or circumstance has occurred or information exists with respect to the Company or any of its Subsidiaries or its or their business, properties, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed.  The Company acknowledges and agrees that no Investor (other than Excluded Investors) makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those set forth in the Transaction Documents.

 

  

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(s) Acknowledgment Regarding Investors’ Purchase of Securities.  Based upon the assumption that the transactions contemplated by this Agreement are consummated in all material respects in conformity with the Transaction Documents, the Company acknowledges and agrees that each of the Investors (other than Excluded Investors) is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby.  The Company further acknowledges that no Investor (other than Excluded Investors) is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any advice given by any Investor (other than Excluded Investors) or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to the Investors’ purchase of the Securities.  The Company further represents to each Investor that the Company’s decision to enter into this Agreement has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.

 

(t) Patents and Trademarks.  The Company and its Subsidiaries own, or possess adequate rights or licenses to use, all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and other intellectual property rights (“Intellectual Property Rights”) necessary to conduct their respective businesses now conducted.  None of the Company’s Intellectual Property Rights have expired or terminated, or are expected to expire or terminate, within three years from the date of this Agreement.  The Company does not have any knowledge of any infringement by the Company or its Subsidiaries of Intellectual Property Rights of others.  Except as disclosed in the SEC Reports, there is no claim, action or proceeding being made or brought, or to the knowledge of the Company, being threatened, against the Company or its Subsidiaries regarding its Intellectual Property Rights.

 

(u) Insurance.  The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses and location in which the Company and the Subsidiaries are engaged.

 

(v) Regulatory Permits.  The Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports (“Material Permits”), except where the failure to possess such permits does not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, and neither the Company nor any Subsidiary has received any written notice of proceedings relating to the revocation or modification of any Material Permit.

 

(w) Transactions With Affiliates and Employees.  Except as set forth or incorporated by reference in the Company’s SEC Reports, none of the officers, directors or employees of the Company is presently a party to any transaction that would be required to be reported on Form 10-K with the Company or any of its Subsidiaries (other than for ordinary course services as employees, officers or directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any such officer, director or employee or, to the Company’s knowledge , any corporation, partnership, trust or other entity in which any such officer, director, or employee has a substantial interest or is an officer, director, trustee or partner.

 

  

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(x) Internal Accounting Controls.  Except as set forth in the Company’s SEC Reports, the Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

 

(y) Sarbanes-Oxley Act. Except as set forth in the Company’s SEC Reports, the Company is in compliance in all material respects with applicable  requirements of the Sarbanes-Oxley Act of 2002 and applicable rules and regulations promulgated by the SEC thereunder, except where such noncompliance would not have, individually or in the aggregate, a Material Adverse Effect.

 

(z) Foreign Corrupt Practices.  Neither the Company nor any of its Subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee or other Person acting on behalf of the Company or any of its Subsidiaries has, in the course of its actions for, or on behalf of, the Company (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

 

(aa) Indebtedness.  Except as disclosed in the SEC Reports and in Schedule 3.1(aa), neither the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as defined below), (ii) is in violation of any term of or in default under any contract, agreement or instrument relating to any Indebtedness, except where such violations and defaults would not result, individually or in the aggregate, in a Material Adverse Effect, or (iii) is a party to any contract, agreement or instrument relating to any Indebtedness, the performance of which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse Effect.  Schedule 3.1(aa) provides a description of the terms of any such outstanding Indebtedness.  For purposes of this Agreement:  (x) “Indebtedness” of any Person means, without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business), (C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (F) all monetary obligations under any leasing or similar arrangement which, in connection with generally accepted accounting principles, consistently applied for the periods covered thereby, is classified as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above; (y) “Contingent Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto; and (z) “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.

 

  

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(bb) Employee Relations.  Neither Company nor any of its Subsidiaries is a party to any collective bargaining agreement or employs any member of a union.  The Company believes that its relations with its employees are as disclosed in the SEC Reports.  Except as disclosed in the SEC Reports, during the period covered by the SEC Reports, no executive officer of the Company or any of its Subsidiaries (as defined in Rule 501(f) of the 1933 Act) has notified the Company or any such Subsidiary that such officer intends to leave the Company or any such Subsidiary or otherwise terminate such officer’s employment with the Company or any such Subsidiary.  To the knowledge of the Company or any such Subsidiary, no executive officer of the Company or any of its Subsidiaries is in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject the Company or any such Subsidiary to any liability with respect to any of the foregoing matters.

 

(cc) Labor Matters.  The Company and its Subsidiaries are in compliance in all material respects with all federal, state, local and foreign laws and regulations respecting labor, employment and employment practices and benefits, terms and conditions of employment and wages and hours, except where failure to be in compliance would not, either individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.

 

(dd) Environmental Laws.  The Company and its Subsidiaries (i) are in compliance in all material respects with any and all Environmental Laws (as hereinafter defined), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance in all material respects with all terms and conditions of any such permit, license or approval where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so comply would be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.  The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder.

 

(ee) Subsidiary Rights.  Except as set forth in Schedule 3.1(ee), the Company or one of its Subsidiaries has the unrestricted right to vote, and (subject to limitations imposed by applicable law) to receive dividends and distributions on, all capital securities of its Subsidiaries as owned by the Company or such Subsidiary.

 

(ff) Tax Status.  The Company and each of its Subsidiaries (i) has made or filed all foreign, federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and (iii) has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply.  There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.

 

3.2 Representations and Warranties of the Investors.  Each Investor hereby, as to itself only and for no other Investor, represents and warrants to the Company as follows:

 

(a) Organization; Authority.  Such Investor is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate, partnership or other power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder.  The purchase by such Investor of the Securities hereunder has been duly authorized by all necessary action on the part of such Investor.  This Agreement has been duly executed and delivered by such Investor and constitutes the valid and binding obligation of such Investor, enforceable against it in accordance with its terms, except as may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors rights generally, and (ii) the effect of rules of law governing the availability of specific performance and other equitable remedies.

 

  

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(b) No Public Sale or Distribution.  Such Investor is (i) acquiring the Common Shares and the Warrants and (ii) upon exercise of the Warrants will acquire the Warrant Shares issuable upon exercise thereof, in the ordinary course of business for its own account and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered under the 1933 Act or under an exemption from such registration and in compliance with applicable federal and state securities laws, and such Investor does not have a present arrangement to effect any distribution of the Securities to or through any person or entity; provided, however, that by making the representations herein, such Investor does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act.

 

(c) Investor Status.  At the time such Investor was offered the Securities, it was, and at the date hereof it is, an “accredited investor” as defined in Rule 501(a) under the 1933 Act or a “qualified institutional buyer” as defined in Rule 144A(a) under the 1933 Act.

 

(d) Experience of Such Investor.  Such Investor, either alone or together with its representatives has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment.  Such Investor understands that it must bear the economic risk of this investment in the Securities indefinitely, and is able to bear such risk and is able to afford a complete loss of such investment.

 

(e) Access to Information.  Such Investor acknowledges that it has reviewed the Disclosure Materials and has been afforded: (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information (other than material non-public information) about the Company and the Subsidiaries and their respective financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment.  Neither such inquiries nor any other investigation conducted by or on behalf of such Investor or its representatives or counsel shall modify, amend or affect such Investor’s right to rely on the truth, accuracy and completeness of the Disclosure Materials and the Company’s representations and warranties contained in the Transaction Documents.  Such Investor acknowledges receipt of copies of the SEC Reports.

 

(f) No Governmental Review.  Such Investor understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities.

 

  

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(g) No Conflicts.  The execution, delivery and performance by such Investor of this Agreement and the consummation by such Investor of the transactions contemplated hereby will not (i) result in a violation of the organizational documents of such Investor or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which such Investor is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to such Investor, except in the case of clauses (ii) and (iii) above, for such that are not material and do not otherwise affect the ability of such Investor to consummate the transactions contemplated hereby.

 

(h) Illegal Transactions.  No Investor, directly or indirectly, and no Person acting on behalf of or pursuant to any understanding with any Investor, has engaged in any purchases or sales of the securities of the Company (including, without limitation, any Short Sales involving any of the Company’s securities) since the time that such Investor was first contacted by the Company, the Agent or any other Person regarding this investment in the Company.  Such Investor covenants that neither it nor any Person acting on its behalf or pursuant to any understanding with such Investor will engage, directly or indirectly, in any transactions in the securities of the Company (including Short Sales) prior to the time the transactions contemplated by this Agreement are publicly disclosed.  “Short Sales” include, without limitation, all “short sales” as defined in Rule 200 promulgated under Regulation SHO under the 1933 Act and all types of direct and indirect stock pledges, forward sale contracts, options, puts, calls, short sales, swaps, derivatives and similar arrangements (including on a total return basis), and sales and other transactions through non-U.S. broker-dealers or foreign regulated brokers.

 

(i)  Restricted Securities.  The Investors understand that the Securities are characterized as “restricted securities” under the U.S. federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the 1933 Act only in certain limited circumstances.

 

(j)  Legends.  It is understood that, except as provided in Section 4.1(b) of this Agreement, certificates evidencing the Securities may bear the legend set forth in Section 4.1(b).

 

(k)  No Legal, Tax or Investment Advice.  Such Investor understands that nothing in this Agreement or any other materials presented by or on behalf of the Company to the Investor in connection with the purchase of the Securities constitutes legal, tax or investment advice.  Such Investor has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in con­nection with its purchase of the Securities.  Such Investor understands that the Agent has acted solely as the agent of the Company in this placement of the Securities, and that the Agent makes no representation or warranty with regard to the merits of this transaction or as to the accuracy of any information such Investor may have received in connection therewith.  Such Investor acknowledges that he has not relied on any information or advice furnished by or on behalf of the Agent.

 

  

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ARTICLE IV

OTHER AGREEMENTS OF THE PARTIES

 

4.1 Transfer Restrictions.

 

(a) The Investors covenant that the Securities will only be disposed of pursuant to an effective registration statement under, and in compliance with the requirements of, the 1933 Act or pursuant to an available exemption from the registration requirements of the 1933 Act, and in compliance with any applicable state securities laws.  In connection with any transfer of Securities other than pursuant to an effective registration statement or to the Company, the Company may require the transferor to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration under the 1933 Act.  Notwithstanding the foregoing, the Company hereby consents to and agrees to register on the books of the Company and with its transfer agent, without any such legal opinion, except to the extent that the transfer agent requests such legal opinion, any transfer of Securities by an Investor to an Affiliate of such Investor, provided that the transferee certifies to the Company that it is an “accredited investor” as defined in Rule 501(a) under the 1933 Act and provided that such Affiliate does not request any removal of any existing legends on any certificate evidencing the Securities.

 

(b) The Investors agree to the imprinting, so long as is required by this Section 4.1(b), of the following legend on any certificate evidencing any of the Securities:

 

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT 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 TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE TO BE 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.

 

(c) Certificates evidencing Securities shall not be required to contain the legend set forth in Section 4.1(b) above or any other legend (i) while a registration statement covering the resale of such Securities is effective under the 1933 Act, (ii) following any sale of such Securities pursuant to Rule 144 (assuming the transferor is not an affiliate of the Company), (iii) if such Securities (including the Securities underlying such Securities) are eligible to be sold, assigned or transferred without restriction (including, without limitation, volume limitations) pursuant to Rule 144 (taking account of any Staff position with respect to “affiliate” status) and without the need for current public information required by Rule 144(c)(1) (or Rule 144(i)(2), if applicable) (provided that an Investor provides the Company with reasonable assurances that such Securities are eligible for sale, assignment or transfer under Rule 144 which shall not include an opinion of counsel), (iv) in connection with a sale, assignment or other transfer (other than under Rule 144), provided that such Investor provides the Company with an opinion of counsel to such Investor, in a generally acceptable form, to the effect that such sale, assignment or transfer of the Securities may be made without registration under the applicable requirements of the 1933 Act or (v) if such legend is not required under applicable requirements of the 1933 Act (including, without limitation, controlling judicial interpretations and pronouncements issued by the SEC). If a legend is not required pursuant to the foregoing, the Company shall, at its own expense, no later than three (3) Trading Days following the delivery by an Investor to the Company or the Transfer Agent (with notice to the Company) of a legended certificate representing such Securities (endorsed or with stock powers attached, signatures guaranteed, and otherwise in form necessary to affect the reissuance and/or transfer, if applicable), together with any other deliveries from such Investor as may be required above in this Section 4.1(c), as directed by such Investor, either: (A) provided that the Company’s transfer agent is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program and such Securities are Warrant Shares, credit the aggregate number of shares of Common Stock to which such Investor shall be entitled to such Investor’s or its designee’s balance account with DTC through its Deposit Withdrawal at Custodian system or (B) if the Company’s transfer agent is not participating in the DTC Fast Automated Securities Transfer Program, issue and dispatch by overnight courier to such Investor, a certificate representing such Securities that is free from all restrictive and other legends, registered in the name of such Investor or its designee (the date by which such credit is so required to be made to the balance account of such Investor’s or such Investor’s nominee with DTC or such certificate is required to be delivered to such Investor pursuant to the foregoing is referred to herein as the “Required Delivery Date”).

 

 

  

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(d) If the Company fails to so properly deliver such unlegended certificates or so properly credit the balance account of such Investor’s or such Investor’s nominee with DTC by the Required Delivery Date, and if on or after the Required Delivery Date such Investor purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Investor of shares of Common Stock that such Investor anticipated receiving from the Company without any restrictive legend, then, in addition to all other remedies available to such Investor, the Company shall, within three (3) Trading Days after such Investor’s request and in such Investor’s sole discretion, either (i) pay cash to such Investor in an amount equal to such Investor’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased (the “Buy-In Price”), at which point the Company’s obligation to deliver such certificate or credit such Investor’s balance account shall terminate, or (ii) promptly honor its obligation to deliver to such Investor a certificate or certificates or credit such Investor’s DTC account representing such number of shares of Common Stock that would have been issued if the Company timely complied with its obligations hereunder and pay cash to such Investor in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of Shares or Warrant Shares (as the case may be) that the Company was required to deliver to such Investor by the Required Delivery Date times (B) the Closing Price of the Common Stock on the Required Delivery Date.

 

(e) The Company will not object to and shall permit (except as prohibited by law) an Investor to pledge or grant a security interest in some or all of the Securities in connection with a bona fide margin agreement or other loan or financing arrangement secured by the Securities, and if required under the terms of such agreement, loan or arrangement, the Company will not object to and shall permit (except as prohibited by law) such Investor to transfer pledged or secured Securities to the pledges or secured parties.  Except as required by law, such a pledge or transfer would not be subject to approval of the Company, no legal opinion of the pledgee, secured party or pledgor shall be required in connection therewith, and no notice shall be required of such pledge.  Each Investor acknowledges that the Company shall not be responsible for any pledges relating to, or the grant of any security interest in, any of the Securities or for any agreement, understanding or arrangement between any Investor and its pledgee or secured party.  At the appropriate Investor’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities, including the preparation and filing of any required prospectus supplement under Rule 424(b)(3) of the 1933 Act or other applicable provision of the 1933 Act to appropriately amend the list of Selling Stockholders thereunder. Provided that the Company is in compliance with the terms of this Section 4.1(e), the Company’s indemnification obligations pursuant to Section 6.4 shall not extend to any Proceeding or Losses arising out of or related to this Section 4.1(e).

 

4.2 Reporting Status.  Until the date on which the Investors shall have sold all of the Registrable Securities, the Company shall timely file all reports required to be filed with the SEC pursuant to the 1933 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1933 Act even if the 1933 Act or the rules and regulations thereunder would no longer require or otherwise permit such termination.  From the time Form S-3 is available to the Company for the registration of the Shares and the Warrant Shares, the Company shall take all actions necessary to maintain its eligibility to register the Shares and the Warrant Shares for resale by the Investors on Form S-3.

 

4.3 Integration.  The Company shall not, and shall use its commercially reasonably efforts to ensure that no Affiliate thereof shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the 1933 Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the 1933 Act of the sale of the Securities to the Investors or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market.  The Company further covenants that it shall not issue or register any additional shares of Common Stock until after effectiveness of the Registration Statement other than issuances and/or registrations in connection with (i) the exercise of outstanding options and/or warrants, (ii) stock based compensation plans on Form S-8, or (iii) acquisitions on Form S-4.

 

  

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4.4 Acknowledgement Regarding Investors’ Trading Activity.  Anything in this Agreement or elsewhere herein to the contrary notwithstanding, but subject to compliance by the Investors with applicable law, it is understood and acknowledged by the Company (i) that none of the Investors have been asked to agree, nor has any Investor agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or "derivative" securities based on securities issued by the Company or to hold the Securities for any specified term; (ii) that past or future open market or other transactions by any Investor, including, without limitation, short sales or “derivative” transactions, before or after the closing of this or future private placement transactions, may negatively impact the market price of the Company’s publicly-traded securities; (iii) that any Investor, and counter parties in “derivative” transactions to which any such Investor is a party, directly or indirectly, presently may have a "short" position in the Common Stock, and (iv) that each Investor shall not be deemed to have any affiliation with or control over any arm’s length counter-party in any “derivative” transaction.  The Company further understands and acknowledges that (a) one or more Investors may engage in hedging activities at various times during the period that the Securities are outstanding, (b) such hedging activities (if any) could reduce the value of the existing stockholders’ equity interests in the Company at and after the time that the hedging activities are being conducted and (c) nothing contained herein shall preclude any Investor from having taken or from taking any action in respect of the identification of the availability of, or securing of, available shares to borrow in order to effect short sales or similar transactions.

 

4.5 Reservation of Securities.  The Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents in such amount as may be required to fulfill its obligations to issue such Shares under the Transaction Documents.  In the event that at any time the then authorized shares of Common Stock are insufficient for the Company to satisfy its obligations to issue such Shares under the Transaction Documents, the Company shall promptly take such actions as may be required to increase the number of authorized shares.

 

4.6 Securities Laws Disclosure; Publicity.  The Company shall, on or before 8:30 a.m., New York time, on the first (1st) Business Day after the execution of this Agreement by all parties hereto, issue a press release (the “Press Release”) reasonably acceptable to the Investors disclosing all the material terms of the transactions contemplated by the Transaction Documents. On or before 8:30 a.m., New York time, on the first (1st) Business Day following the date of this Agreement, the Company shall file a Current Report on Form 8-K describing all the material terms of the transactions contemplated by the Transaction Documents in the form required by the 1933 Act and attaching all the material Transaction Documents (including, without limitation, this Agreement (and all schedules to this Agreement), the form of the Warrants and the form of the Registration Rights Agreement) (including all attachments, the “8-K Filing”).  From and after the issuance of the 8-K Filing, the Company shall have disclosed all material, non-public information (if any) delivered to any of the Investors by the Company or any of its Subsidiaries, or any of their respective officers, directors, employees or agents in connection with the transactions contemplated by the Transaction Documents. The Company shall not, and the Company shall cause each of its Subsidiaries and each of its and their respective officers, directors, employees and agents not to, provide any Investor with any material, non-public information regarding the Company or any of its Subsidiaries from and after the issuance of the Press Release without the express prior written consent of such Investor.  In the event of a breach of any of the foregoing covenants or any of the covenants or agreements contained in the Transaction Documents by the Company, any of its Subsidiaries, or any of its or their respective officers, directors, employees and agents (as determined in the reasonable good faith judgment of such Investor), in addition to any other remedy provided herein or in the Transaction Documents, such Investor shall have the right to make a public disclosure, in the form of a press release, public advertisement or otherwise, of such breach or such material, non-public information, as applicable, without the prior approval by the Company, any of its Subsidiaries, or any of its or their respective officers, directors, employees or agents.  No Investor shall have any liability to the Company, any of its Subsidiaries, or any of its or their respective officers, directors, employees, stockholders or agents, for any such disclosure. Subject to the foregoing, neither the Company, its Subsidiaries nor any Investor shall issue any press releases or any other public statements with respect to the transactions contemplated hereby; provided, however, the Company shall be entitled, without the prior approval of any Investor, to make any press release or other public disclosure with respect to such transactions (i) in substantial conformity with the 8-K Filing and contemporaneously therewith and (ii) as is required by applicable law and regulations (provided that in the case of clause (i) each Investor shall be consulted by the Company in connection with any such press release or other public disclosure prior to its release). Without the prior written consent of the applicable Investor, the Company shall not (and shall cause each of its Subsidiaries and Affiliates to not) disclose the name of such Investor in any filing, announcement, release or otherwise.

 

  

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4.7 Use of Proceeds.  The Company intends to use the net proceeds from the sale of the Securities for working capital and general corporate purposes.  The Company also may use a portion of the net proceeds, currently intended for general corporate purposes, to acquire or invest in technologies, products or services that complement its business.  Pending these uses, the Company intends to invest the net proceeds from this offering in short-term, interest-bearing, investment-grade securities, or as otherwise pursuant to the Company’s customary investment policies.

 

4.8 Additional Issuance of Securities.  During the period commencing on the date hereof and ending on the date that is thirty (30) days after date on which the initial registration statement filed pursuant to the Registration Rights Agreement has been declared effective by the SEC, the Company will not directly or indirectly issue, offer, sell, grant any option or right to purchase, or otherwise dispose of (or announce any issuance, offer, sale, grant of any option or right to purchase or other disposition of) any equity security or any equity-linked or related security (including, without limitation, any “equity security” (as that term is defined under Rule 405 promulgated under the 1933 Act), any Convertible Securities, any preferred stock or any purchase rights) (any such issuance, offer, sale, grant, disposition or announcement is referred to as a “Subsequent Placement”). Notwithstanding the foregoing, this Section 4.8 shall not apply in respect of any Excluded Securities.

 

4.9 Participation Right.  From April 7, 2012 until October 7, 2013, the Company shall not, directly or indirectly, effect any Subsequent Placement unless the Company shall have first complied with this Section 4.9. The Company acknowledges and agrees that the right set forth in this Section 4.9 is a right granted by the Company, separately, to each Investor.

 

(a) At least five (5) Trading Days prior to any proposed or intended Subsequent Placement, the Company shall deliver to each Investor a written notice (each such notice, a “Pre-Notice”), which Pre-Notice shall not contain any information (including, without limitation, material, non-public information) other than: either (x) (A) a statement that the Company proposes or intends to effect a Subsequent Placement, (B) a statement informing such Investor that it is entitled to receive an Offer Notice with respect to such Subsequent Placement upon its written request and (C) a statement that the statement in clause (A) above does not constitute material, non-public information or (y) a statement by the Company or an agent to the Company asking if such Investor is willing to receive material, non-public information with respect to the Company.  Upon the written request of a Investor within three (3) Trading Days after the Company’s delivery to such Investor of such Pre-Notice, and only upon a written request by such Investor, the Company shall promptly, but no later than one (1) Trading Day after such request, deliver to such Investor an irrevocable written notice (the “Offer Notice”) of any proposed or intended issuance or sale or exchange (the “Offer”) of the securities being offered (the “Offered Securities”) in a Subsequent Placement, which Offer Notice shall (w) identify and describe the Offered Securities, (x) describe the price and other terms upon which they are to be issued, sold or exchanged, and the number or amount of the Offered Securities to be issued, sold or exchanged, (y) identify the Persons (if known) to which or with which the Offered Securities are to be offered, issued, sold or exchanged and (z) offer to issue and sell to or exchange with such Investor in accordance with the terms of the Offer such Investor’s pro rata portion of 50% of the Offered Securities (a) based on such Investor’s pro rata portion of the aggregate original principal amount of the Common Shares purchased hereunder by all Investors (the “Basic Amount”), and (b) with respect to each Investor that elects to purchase its Basic Amount, any additional portion of the Offered Securities attributable to the Basic Amounts of other Investors as such Investor shall indicate it will purchase or acquire should the other Investors subscribe for less than their Basic Amounts (the “Undersubscription Amount”).

 

  

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(b) To accept an Offer, in whole or in part, such Investor must deliver a written notice to the Company prior to the end of the fifth (5th) Business Day after such Investor’s receipt of the Offer Notice (the “Offer Period”), setting forth the portion of such Investor’s Basic Amount that such Investor elects to purchase and, if such Investor shall elect to purchase all of its Basic Amount, the Undersubscription Amount, if any, that such Investor elects to purchase (in either case, the “Notice of Acceptance”). If the Basic Amounts subscribed for by all Investors are less than the total of all of the Basic Amounts, then such Investor who has set forth an Undersubscription Amount in its Notice of Acceptance shall be entitled to purchase, in addition to the Basic Amounts subscribed for, the Undersubscription Amount it has subscribed for; provided, however, if the Undersubscription Amounts subscribed for exceed the difference between the total of all the Basic Amounts and the Basic Amounts subscribed for (the “Available Undersubscription Amount”), such Investor who has subscribed for any Undersubscription Amount shall be entitled to purchase only that portion of the Available Undersubscription Amount as the Basic Amount of such Investor bears to the total Basic Amounts of all Investors that have subscribed for Undersubscription Amounts, subject to rounding by the Company to the extent it deems reasonably necessary. Notwithstanding the foregoing, if the Company desires to modify or amend the terms and conditions of the Offer prior to the expiration of the Offer Period, the Company may deliver to each Investor a new Offer Notice and the Offer Period shall expire on the fifth (5th) Business Day after such Investor’s receipt of such new Offer Notice.

 

(c) The Company shall have five (5) days from the expiration of the Offer Period above (i) to offer, issue, sell or exchange all or any part of such Offered Securities as to which a Notice of Acceptance has not been given by a Investor (the “Refused Securities”) pursuant to a definitive agreement(s) (the “Subsequent Placement Agreement”), but only to the offerees described in the Offer Notice (if so described therein) and only upon terms and conditions (including, without limitation, unit prices and interest rates) that are not more favorable to the acquiring Person or Persons or less favorable to the Company than those set forth in the Offer Notice and (ii) to publicly announce (a) the execution of such Subsequent Placement Agreement, and (b) either (x) the consummation of the transactions contemplated by such Subsequent Placement Agreement or (y) the termination of such Subsequent Placement Agreement, which shall be filed with the SEC on a Current Report on Form 8-K with such Subsequent Placement Agreement and any documents contemplated therein filed as exhibits thereto.

 

(d) In the event the Company shall propose to sell less than all the Refused Securities (any such sale to be in the manner and on the terms specified in Section 4.9(c) above), then such Investor may, at its sole option and in its sole discretion, reduce the number or amount of the Offered Securities specified in its Notice of Acceptance to an amount that shall be not less than the number or amount of the Offered Securities that such Investor elected to purchase pursuant to Section 4.9(b) above multiplied by a fraction, (i) the numerator of which shall be the number or amount of Offered Securities the Company actually proposes to issue, sell or exchange (including Offered Securities to be issued or sold to Investors pursuant to this Section 4.9 prior to such reduction) and (ii) the denominator of which shall be the original amount of the Offered Securities. In the event that any Investor so elects to reduce the number or amount of Offered Securities specified in its Notice of Acceptance, the Company may not issue, sell or exchange more than the reduced number or amount of the Offered Securities unless and until such securities have again been offered to the Investors in accordance with Section 4.9(a) above.

 

(e) Upon the closing of the issuance, sale or exchange of all or less than all of the Refused Securities, such Investor shall acquire from the Company, and the Company shall issue to such Investor, the number or amount of Offered Securities specified in its Notice of Acceptance. The purchase by such Investor of any Offered Securities is subject in all cases to the preparation, execution and delivery by the Company and such Investor of a separate purchase agreement relating to such Offered Securities reasonably satisfactory in form and substance to such Investor and its counsel.

 

(f) Any Offered Securities not acquired by a Investor or other Persons in accordance with this Section 4.9 may not be issued, sold or exchanged until they are again offered to such Investor under the procedures specified in this Agreement.

 

(g) The Company and each Investor agree that if any Investor elects to participate in the Offer, neither the Subsequent Placement Agreement with respect to such Offer nor any other transaction documents related thereto (collectively, the “Subsequent Placement Documents”) shall include any term or provision whereby such Investor shall be required to agree to any restrictions on trading as to any securities of the Company or be required to consent to any amendment to or termination of, or grant any waiver, release or the like under or in connection with, any agreement previously entered into with the Company or any instrument received from the Company.

 

  

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(h) Notwithstanding anything to the contrary in this Section 4.9 and unless otherwise agreed to by such Investor, the Company shall either confirm in writing to such Investor that the transaction with respect to the Subsequent Placement has been abandoned or shall publicly disclose its intention to issue the Offered Securities, in either case, in such a manner such that such Investor will not be in possession of any material, non-public information, by the fifth (5th) Business Day following delivery of the Offer Notice. If by such fifth (5th) Business Day, no public disclosure regarding a transaction with respect to the Offered Securities has been made, and no notice regarding the abandonment of such transaction has been received by such Investor, such transaction shall be deemed to have been abandoned and such Investor shall not be deemed to be in possession of any material, non-public information with respect to the Company or any of its Subsidiaries. Should the Company decide to pursue such transaction with respect to the Offered Securities, the Company shall provide such Investor with another Offer Notice and such Investor will again have the right of participation set forth in this Section 4.9.  The Company shall not be permitted to deliver more than one such Offer Notice to such Investor in any sixty (60) day period.

 

(i) The restrictions contained in this Section 4.9 shall not apply in connection with the issuance of any Excluded Securities.  The Company shall not circumvent the provisions of this Section 4.9 by providing terms or conditions to one Investor that are not provided to all.

 

4.10 Additional Registration Statements.  Subject to the filing of a registration statement pursuant to the Company’s obligations under the Lyles Registration Rights Agreement, during the period commencing on the date hereof and ending on the date that is thirty (30) days after the date on which the initial registration statement filed pursuant to the Registration Rights Agreement has been declared effective by the SEC, the Company shall not file a registration statement under the 1933 Act relating to securities that are not the Registrable Securities other than a registration statement on Form S-4 or Form S-8 (each as promulgated under the 1933 Act).

 

4.11 Variable Rate Transaction. During the period commencing on the date hereof and ending on the date that is thirty (30) days after date on which the initial registration statement filed pursuant to the Registration Rights Agreement has been declared effective by the SEC, the Company shall be prohibited from effecting or entering into an agreement to effect any Subsequent Placement involving a Variable Rate Transaction. Each Investor shall be entitled to obtain injunctive relief against the Company and its Subsidiaries to preclude any such issuance, which remedy shall be in addition to any right to collect damages.

 

ARTICLE V

CONDITIONS

 

5.1 Conditions Precedent to the Obligations of the Investors.  The obligation of each Investor to acquire Securities at the Closing is subject to the satisfaction or waiver by such Investor, at or before the Closing, of each of the following conditions:

 

(a) Representations and Warranties.  The representations and warranties of the Company contained herein shall be true and correct in all material respects as of the date when made and as of the Closing as though made on and as of such date.

 

  

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(b) Performance.  The Company and each other Investor shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by it at or prior to the Closing.

 

(c) Listing.  The Common Stock (i) shall be designated for quotation or listed on the Trading Market and (ii) shall not have been suspended, as of the Closing Date, by the SEC or the Trading Market from trading on the Trading Market nor shall suspension by the SEC or the Trading Market have been threatened, as of the Closing Date, either (a) in writing by the SEC or the Trading Market or (b) by falling below the minimum listing maintenance requirements of the Trading Market.

 

(d) Consents and Approvals.  The Company shall have obtained all governmental, regulatory or third party consents and approvals, if any, necessary for the sale of the Securities (including, without limitation, the approval of the Trading Market),

 

(e) No Material Adverse Effect. Between the execution of this Agreement and the Closing, no event or series of events (other than stock price fluctuations) shall have occurred which reasonably would be expected to have or result in a Material Adverse Effect.

 

5.2 Conditions Precedent to the Obligations of the Company.  The obligation of the Company to sell the Securities at the Closing is subject to the satisfaction or waiver by the Company, at or before the Closing, of each of the following conditions:

 

(a) Representations and Warranties.  The representations and warranties of the Investors contained herein shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made on and as of such date;

 

(b) Performance.  The Investors shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Investors at or prior to the Closing; and

 

(c) Consents and Approvals.  The Company shall have obtained all governmental, regulatory or third party consents and approvals, if any, necessary for the sale of the Securities (including, without limitation, the approval of the Trading Market).

 

ARTICLE VI

MISCELLANEOUS

 

6.1 Termination.  This Agreement may be terminated by the Company or any Investor, by written notice to the other parties, if the Closing has not been consummated by the tenth (10th) Business Day following the date of this Agreement; provided that no such termination will affect the right of any party to sue for any breach by the other party (or parties).

 

6.2 Fees and Expenses.  Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement.  The Company shall pay all Transfer Agent fees, stamp taxes and other taxes and duties levied in connection with the sale and issuance of their applicable Securities.

 

  

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6.3 Entire Agreement.  The Transaction Documents, together with the Exhibits and Schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.  At or after the Closing, and without further consideration, the Company will execute and deliver to the Investors such further documents as may be reasonably requested in order to give practical effect to the intention of the parties under the Transaction Documents.

 

6.4 Notices.  Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile or email at the facsimile number or email address specified in this Section  prior to 6:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile or email at the facsimile number or email address specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (c) the Trading Day following the date of deposit with a nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given.  The addresses, facsimile numbers and email addresses for such notices and communications are those set forth on the signature pages hereof, or such other address or facsimile number as may be designated in writing hereafter, in the same manner, by any such Person.

 

6.5 Amendments; Waivers.  No provision of this Agreement may be amended or waived other than by an instrument in writing signed by the Company and the holders of 66.66% of the Registrable Securities (excluding any Registrable Securities held by the Company or any of its Subsidiaries), provided that any party may give a waiver in writing as to itself. No consideration shall be offered or paid to any Investor to amend or consent to a waiver or modification of any provision of any of this Agreement unless the same consideration also is offered to all of the Investors.

 

6.6 Construction.  The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.  The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

 

6.7 Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns.  The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Investors.  Any Investor may assign its rights under this Agreement to any Person to whom such Investor assigns or transfers any Securities, provided (i) such transferor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company after such assignment, (ii) the Company is furnished with written notice of (x) the name and address of such transferee or assignee and (y) the Registrable Securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment, the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act and applicable state securities laws, (iv) such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions hereof that apply to the “Investors” and (v) such transfer shall have been made in accordance with the applicable requirements of this Agreement and with all laws applicable thereto.

 

  

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6.8 No Third-Party Beneficiaries.  This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except that each Indemnified Party is an intended third party beneficiary of Section 6.4 and (in each case) may enforce the provisions of such Sections directly against the parties with obligations thereunder.

 

6.9 Governing Law; Venue; Waiver of Jury Trial.  THE CORPORATE LAWS OF THE STATE OF DELAWARE SHALL GOVERN ALL ISSUES CONCERNING THE RELATIVE RIGHTS OF THE COMPANY AND ITS STOCKHOLDERS.  ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.  THE COMPANY AND INVESTORS HEREBY IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN FOR THE ADJUDICATION OF ANY DISPUTE BROUGHT BY THE COMPANY OR ANY INVESTOR HEREUNDER, IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVE, AND AGREE NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING BROUGHT BY THE COMPANY OR ANY INVESTOR, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, OR THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER.  EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF.  NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW.  THE COMPANY AND INVESTORS HEREBY WAIVE ALL RIGHTS TO A TRIAL BY JURY.

 

6.10 Survival.  The representations and warranties, agreements and covenants contained herein shall survive the Closing.

 

6.11 Execution.  This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart.  In the event that any signature is delivered by facsimile transmission or email attachment, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or email-attached signature page were an original thereof.

 

  

25

  

 

6.12 Severability.  If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

 

6.13 Rescission and Withdrawal Right.  Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever any Investor exercises a right, election, demand or option owed to such Investor by the Company under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then, prior to the performance by the Company of the Company’s related obligation, such Investor may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights.

 

6.14 Replacement of Securities.  If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and the execution by the holder thereof of a customary lost certificate affidavit of that fact and an agreement to indemnify and hold harmless the Company for any losses in connection therewith.  The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Securities.

 

6.15 Remedies.  In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Investors and the Company will be entitled to seek specific performance under the Transaction Documents.  The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation (other than in connection with any action for temporary restraining order) the defense that a remedy at law would be adequate.

 

6.16 Payment Set Aside.  To the extent that the Company makes a payment or payments to any Investor hereunder or any Investor enforces or exercises its rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company by a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

 

  

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6.17 Adjustments in Share Numbers and Prices.  In the event of any stock split, subdivision, dividend or distribution payable in shares of Common Stock (or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly shares of Common Stock), combination or other similar recapitalization or event occurring after the date hereof and prior to the Closing, each reference in any Transaction Document to a number of shares or a price per share shall be amended to appropriately account for such event.

 

6.18 Independent Nature of Investors’ Obligations and Rights.  The obligations of each Investor under the Transaction Documents are several and not joint with the obligations of any other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under any Transaction Document.  Nothing contained herein or in any other Transaction Document, and no action taken by any Investor pursuant hereto or thereto, shall be deemed to constitute the Investors as, and the Company acknowledges that the Investors do not so constitute, a partnership, an association, a joint venture or any other kind of group or entity, or create a presumption that the Investors are in any way acting in concert or as a group or entity with respect to such obligations or the transactions contemplated by the Transaction Documents or any matters, and the Company acknowledges that the Investors are not acting in concert or as a group, and the Company shall not assert any such claim, with respect to such obligations or the transactions contemplated by the Transaction Documents. The decision of each Investor to purchase Securities pursuant to the Transaction Documents has been made by such Investor independently of any other Investor. Each Investor acknowledges that no other Investor has acted as agent for such Investor in connection with such Investor making its investment hereunder and that no other Investor will be acting as agent of such Investor in connection with monitoring such Investor’s investment in the Securities or enforcing its rights under the Transaction Documents. The Company and each Investor confirms that each Investor has independently participated with the Company and its Subsidiaries in the negotiation of the transaction contemplated hereby with the advice of its own counsel and advisors. Each Investor shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of any other Transaction Documents, and it shall not be necessary for any other Investor to be joined as an additional party in any proceeding for such purpose.  The use of a single agreement to effectuate the purchase and sale of the Securities contemplated hereby was solely in the control of the Company, not the action or decision of any Investor, and was done solely for the convenience of the Company and its Subsidiaries and not because it was required or requested to do so by any Investor.  It is expressly understood and agreed that each provision contained in this Agreement and in each other Transaction Document is between the Company, each Subsidiary and a Investor, solely, and not between the Company, its Subsidiaries and the Investors collectively and not between and among the Investors.

 

[SIGNATURE PAGES TO FOLLOW]

  

27

  

 

IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

 

PACIFIC ETHANOL, INC.

 

 

By: /s/ Neil M. Koehler      

Neil M. Koehler, President and CEO

 

 

Address for Notice:

 

400 Capitol Mall, Suite 2060

Sacramento, CA  95814

Facsimile No.:  916-403-2785

Telephone No.: 916-403-2130

Attn:  Christopher W. Wright, Esq.

 

With a copy to:

 

Rutan & Tucker, LLP

611 Anton Blvd., 14th Floor

Costa Mesa, CA 92626

Facsimile: (714) 546-9035

Telephone: (714) 641-5100

Attn: Larry A. Cerutti, Esq.

  

28

  

 

Investor Signature Page

 

By its execution and delivery of this signature page, the undersigned Investor hereby joins in and agrees to be bound by the terms and conditions of the Securities Purchase Agreement dated as of December 8, 2011 (the “Purchase Agreement”) by and among Pacific Ethanol, Inc. and the Investors (as defined therein), as to the number of shares of Common Stock and Warrants set forth below, and authorizes this signature page to be attached to the Purchase Agreement or counterparts thereof.

 

 

 

Name of Investor:

___________________________________

 

 

By: ________________________________

Name: __________________________

Title: ___________________________

 

Address:

 

Telephone No.: _______________________

Facsimile No.: ________________________

Email Address: _______________________

Number of Shares:_____________________

Number of Warrants: ___________________

Aggregate Purchase Price: $ ______________

 

 

  

29

  

 

 

 

Exhibit B

 

Form of Warrant

 

[Filed as Exhibit 10.2]

 

 

  

B-1

  

 

Exhibit C

 

Form of Registration Rights Agreement

 

 

[Filed as Exhibit 10.3]

  

C-1

  

 

Exhibit D

 

Opinion of Company Counsel

 

Capitalized terms not defined herein shall have the meaning given them in the Agreement.

 

	
1.  

	
The Company is duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with all the requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted.

 

	
2.  

	
The Company has all requisite power and authority to execute, deliver, and perform its obligations under the Agreement.  The execution and delivery of the Agreement by the Company and the performance of each of its obligations thereunder have been duly and validly authorized by all necessary corporate action and no further consent or authorization of the Company, its Board of Directors or its stockholders is required.

 

	
3.  

	
Neither the execution, delivery or performance of the Agreement by the Company nor the consummation of the transactions contemplated thereby will (i) conflict with or violate the Company’s Certificate of Incorporation or Bylaws, as each are currently in effect, (ii) conflict with or violate any law applicable to the Company, or by which any property or asset of any of the Company is bound or affected or (iii) result in a default under the terms of any agreement to which the Company is a party and which the Company has attached as an exhibit to its reports filed with the SEC under the 1933 Act.

 

	
4.  

	
No approvals or authorizations by, or filings or qualifications with, any governmental authority or body are required in connection with the execution and delivery of the Agreement or any other agreements or documents executed and delivered pursuant thereto by the Company, except such as have been duly obtained or made.

 

	
5.  

	
The shares of Common Stock issued by the Company under the Agreement (the “Shares”) and the shares of Common Stock to be issued upon exercise of the Warrants issued under the Agreement (the “Warrant Shares”) shall, when issued pursuant to the terms and conditions specified in the Agreement, and when paid for in accordance with their terms, be duly authorized, validly issued, fully paid and non-assessable shares.  The Warrants shall, when issued pursuant to the terms and conditions specified in the Agreement, be duly authorized, validly issued and non-assessable and the Warrant Shares have been duly reserved for issuance by the Company.

 

	
6.  

	
The Agreement and the Warrant have been duly executed and delivered by the Company and each constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the enforcement of creditors’ rights generally and other general principles of equity and subject to other standard exceptions and qualifications.

 

	
7.  

	
To our knowledge, there is no action, suit, claim, investigation or proceeding pending or threatened against the Company which questions the validity of the Agreement or the transactions contemplated thereby or any action taken or to be taken pursuant thereto.

 

	
8.  

	
Subject to the accuracy of the representations and warranties of the parties to this Agreement and each of the Investors in the Offering and assuming that there has been no general solicitation or advertising of the Shares or Warrants to be sold under the Agreement, the offer, issuance and sale of the Shares, the Warrants and the Warrant Shares to the Investors pursuant to the Agreement, and in the case of the Warrant Shares, pursuant to the Warrants,   are exempt from the registration requirements of the 1933 Act.

 

 

  

D-1

  

 

Exhibit E

 

COMPANY TRANSFER AGENT INSTRUCTIONS

 

American Stock Transfer & Co., LLC

____________________________

____________________________

Attention:

 

Ladies and Gentlemen:

Reference is made to that certain Securities Purchase Agreement, dated as of December 8, 2011 (the “Agreement”), by and among Pacific Ethanol, Inc., a Delaware corporation (the “Company”), and the investors named on the Schedule of Investors attached thereto (collectively, the “Holders”), pursuant to which the Company is issuing to the Holders shares (the “Common Shares”) of Common Stock of the Company, par value $0.001 per share (the “Common Stock”), and Warrants (the “Warrants”), which are exercisable into shares of Common Stock.

 

This letter shall serve as our irrevocable authorization and direction to you (provided that you are the transfer agent of the Company at such time):

 

(i)  to issue shares of Common Stock upon transfer or resale of the Common Shares; and

 

(ii)  to issue shares of Common Stock upon the exercise of the Warrants (the “Warrant Shares”) to or upon the order of a Holder from time to time upon delivery to you of a properly completed and duly executed Exercise Notice, in the form attached hereto as Exhibit I, which has been acknowledged by the Company as indicated by the signature of a duly authorized officer of the Company thereon.

 

You acknowledge and agree that so long as you have previously received (a) written confirmation from the Company’s legal counsel that either (i) a registration statement covering resales of the Common Shares and the Warrant Shares has been declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”) and that resales of the Common Shares and the Warrant Shares may be made thereunder, or (ii) sales of the Common Shares and the Warrant Shares may be made in conformity with Rule 144 under the 1933 Act (“Rule 144”), (b) if applicable, a copy of such registration statement, and (c) notice from legal counsel to the Company or any Holder that a transfer of Common Shares and/or Warrant Shares has been effected either pursuant to the registration statement (and a prospectus delivered to the transferee) or pursuant to Rule 144, then, unless otherwise required by law, within three (3) business days of your receipt of the notice referred to in (c), you shall issue the certificates representing the Common Shares and the Warrant Shares so sold to the transferees registered in the names of such transferees, and such certificates shall not bear any legend restricting transfer of the Common Shares and the Warrant Shares thereby and should not be subject to any stop-transfer restriction.

 

A form of written confirmation (to be used in connection with any sale) from the Company’s outside legal counsel that a registration statement covering resales of the Common Shares and the Warrant Shares has been declared effective by the SEC under the 1933 Act is attached hereto as Exhibit II.

 

 

  

E-1

  

 

Please be advised that the Holders are relying upon this letter as an inducement to enter into the Agreement and, accordingly, each Holder is a third party beneficiary to these instructions.

 

Please execute this letter in the space indicated to acknowledge your agreement to act in accordance with these instructions.  Should you have any questions concerning this matter, please contact me at (916) 403-2130.

 

Very truly yours,

 

PACIFIC ETHANOL, INC.

 

 

By: _____________________________

Name: _______________________

Title: ________________________

 

THE FOREGOING INSTRUCTIONS ARE

ACKNOWLEDGED AND AGREED TO

this _____ day of December, 2011

 

AMERICAN STOCK TRANSFER & CO., INC.

 

By: ____________________________

Name: ______________________

Title: _______________________

 

 

 

E-2

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