ACQUISITION AGREEMENT

EXHIBIT 2.1

 

ACQUISITION AGREEMENT

by and among

Private Media Group, Inc., a Nevada corporation,

-and-

2220445 Ontario Inc., a corporation organized under the laws of the Province of Ontario,

-and-

Entruphema Inc., a corporation organized under the laws of the Province of Ontario,

-and-

2062249 Ontario Inc., a corporation organized under the laws of the Province of Ontario,

-and-

Eric Johnson, Erik Schannen and Michel Lozier

-and-

Eric Johnson, in his capacity as Sellers Representative

As of October 9, 2009

 

TABLE OF CONTENTS

 

 

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TABLE OF CONTENTS

( Continued )

 

 

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TABLE OF CONTENTS

( Continued )

 

 

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LIST OF EXHIBITS

 

 

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ACQUISITION AGREEMENT

THIS ACQUISITION AGREEMENT (“ Agreement ”) is made and entered into as of October 9, 2009, by and among PRIVATE MEDIA GROUP, INC ., a Nevada corporation (“ Private ” or “ Buyer ”), 2220445 ONTARIO INC ., a corporation organized under the laws of the Province of Ontario (“ Sub ”), ENTRUPHEMA INC ., a corporation organized under the laws of the Province of Ontario (the “ Company ”), 2062249 ONTARIO INC ., a corporation organized under the laws of the Province of Ontario (“ Holdco ”), ERIC JOHNSON, ERIK SCHANNEN and MICHEL LOZIER (each of Messrs. Johnson, Schannen and Lozier sometimes individually referred to as a “ Seller ” and together, the “ Sellers ”) and Eric Johnson in his capacity as Sellers Representative. Buyer, Sub, the Company, Holdco and each of the Sellers are sometimes referred to individually as a “ Party ” and collectively as the “ Parties ”.

Recitals

A. The Company owns 100% of the issued and outstanding shares of Sureflix Digital Distribution Inc., a Delaware corporation, and Sureflix Digital Logistics Inc., a corporation organized under the laws of Saint Christopher and Nevis (each, a “ Company Subsidiary ” and, together, the “ Company Subsidiaries ”). Sellers and Holdco own 100% of the issued and outstanding shares in the capital of the Company (the “ Company Shares ”). Sellers own 100% of the issued and outstanding shares in the capital of Holdco.

B. Prior to the consummation of the Transaction (as defined below), (i) Holdco and the Company will amalgamate (the “ Holdco Amalgamation ”), such that the issued and outstanding shares in the capital of the Company following the Holdco Amalgamation will be held as follows: Eric Johnson (31,017 Company Shares), Erik Schannen (162,840 Company Shares), and Michel Lozier (116,315 Company Shares), and (ii) Sub will have amended its articles of incorporation (the “ Amendment ”) to authorize Class A Preference Shares (the “ Sub Preference Shares ” and, together with the Sub Common Shares, the “ Sub Shares ”) which will be exchangeable into shares of Common Stock of Buyer, par value $0.001 per share (“ Private Shares ”). Such Sub Preference Shares and the Amalco Preference Shares (as defined below) are referred to herein as the “ Exchangeable Shares .” The terms and provisions of the Exchangeable Shares, including the basis on which the shareholders shall have the right to exchange Exchangeable Shares for Private Shares, shall be as set forth in the provisions attaching to the Exchangeable Shares in the form attached hereto as Exhibit A (the “ Exchangeable Share Provisions ”).

C. The parties intend that, subject to the terms and conditions set forth in this Agreement, Buyer will acquire the business and operations of the Company through the acquisition by Sub of all of the Company Shares in exchange for Sub Preference Shares (as contemplated in greater detail in Section 2.1(a) below, the “ Share Purchase ”) followed by an amalgamation of Sub and the Company (as contemplated in greater detail in Section 2.1(b) below, the “ Amalgamation ” and, together with the Share Purchase, the “ Transaction ”), all pursuant to the terms and conditions of this Agreement and in accordance with the Business Corporations Act (Ontario) (as from time to time amended or re-enacted, the “ Act ”).

 

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D. The respective Boards of Directors of Buyer, Sub and the Company have determined that this Agreement and the transactions contemplated thereby, including the Transaction, are in the best interest of their respective shareholders, and have approved the Transaction. Buyer, as the sole shareholder of Sub, has approved this Agreement and the transactions contemplated hereby, including the Transaction. Sellers and Holdco, as the holders of 100% of the Company Shares, have approved this Agreement and the transactions contemplated hereby, including the Transactions.

Agreement

NOW, THEREFORE , in consideration of the representations, warranties, covenants, and agreements contained herein, and for other good and valuable consideration, the receipt and adequacy of which are conclusively acknowledged, the Parties, intending to become legally bound, agree as follows:

1. DEFINITIONS

1.1 Certain Defined Terms . Certain terms used in this Agreement are defined in later sections. In addition to those defined terms, the following terms have the following meanings:

“ Adverse Consequences ” means any damages, penalties, fines, costs, reasonable amounts paid in settlement, liabilities (including, without limitation, any liability which may arise under an alter ego , de facto control, de facto merger, successor, transferee or other similar theory or ground for liability), obligations, Taxes, liens, losses, expenses, fees and court costs and reasonable attorneys’ fees and expenses incurred in connection with any action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, injunction, judgment, order decree or ruling, with appropriate adjustment for insurance proceeds which are actually received by the affected Party. Adverse Consequences shall not include exemplary or punitive damages unless such damages are imposed by a third party judgment.

“ Actual EBITDA ” means the EBITDA for the applicable Earnout Period.

“ Affiliate ” means (a) with respect to any Person, any Person controlling, controlled by, not at arm’s length or under common control with such Person (or an Affiliate of such Person), where “ control ” means the possession, directly or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities, by contract, or otherwise, and (b) in addition, (i) if such Person is a partnership, any partner thereof, (ii) if such Person is a limited liability company, any member thereof, and (c) any officer or director of such Person.

“ Amalco ” means the continuing corporation constituted upon the amalgamation of the Amalgamating Corporations pursuant to the Amalgamation.

“ Amalco Common Share ” means a common share in the capital of Amalco.

“ Amalco Preference Shares ” means the Class A Preference Shares in the capital of Amalco.

 

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“ Amalco Shares ” means the Amalco Common Shares and Amalco Preference Shares.

“ Amalgamation Agreement ” means the amalgamation agreement in the form attached hereto as Exhibit C.

“ Business Day ” means a day other than a Saturday, Sunday or other day on which commercial banks in New York, New York or Toronto, Ontario are authorized or required by law to close.

“ Buyer ” is defined in the preamble to this Agreement and includes Buyer’s successors and assigns as contemplated under Section 13.4 and for purposes of Section 10.2(c), those Persons named in the last sentence of Section 10.2(c).

“ Canadian GAAP ” means accounting principles generally accepted in Canada as recommended in the Handbook of the Canadian Institute of Chartered Accountants, at the relevant time applied on a consistent basis.

“ Client ” means any Person to whom or which the Company or either of the Company Subsidiaries has provided any services that constitute any part of the Company’s Business, at any time within the twelve (12) months preceding the Closing Date, including without limitation any participants in any affiliate program of the Company or either Company Subsidiary or any private label theatre affiliate of the Company or either Company Subsidiary. Provided, however , that for purposes of Section 9.3(c) only, the term “Client” means any Person to whom or which Buyer or any of its subsidiaries (including Amalco) has provided any services that constitute: (i) any part of the Company’s Business at any time within the twelve (12) months preceding the Closing Date; or (ii) any part of the Online Media Business at any time between the Closing Date and the date of the activity otherwise restricted by Section 9.3(c); including without limitation any participants in any affiliate program of Buyer or any of its subsidiaries (including Amalco) or any private label theatre affiliate of Buyer or any of its subsidiaries (including Amalco).

“ Company Shares ” has the meaning given to it in Recital B hereto. For greater certainty, depending on the context, as used herein Company Shares refers to either (a) shares in the capital of the Company or (b) shares in the capital of the company to be formed by the Holdco Amalgamation.

“ Company’s Business ” means any business activity carried on by the Company or either of the Company Subsidiaries during the twenty-four (24) month period preceding the Closing Date, and shall include the business of licensing content to broadcasters, websites and other content providers and distributors (including providing pay-per-view and video on demand and other eCommerce products and services), principally in the adult entertainment products market, and related services.

“ Confidential Information ” means any proprietary information of a specified Person, that is not generally available to the public (unless such information has entered the public domain and become available to the public through fault on the part of the Party to be charged hereunder), all of which the Parties agree constitute trade secrets under the governing trade secrets law, relating to:

(i) the identity of any Client or Supplier;

 

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(ii) the identity, authority and responsibilities of key contacts at each such Client or Supplier;

(iii) the service cost burden with respect to each such Client or Supplier;

(iv) the specific types of services provided or to be provided to any such Client;

(v) the specific types of goods (including media content) or services provided or to be provided by any Supplier;

(vi) the terms of agreements with of a Client or Supplier;

(vii) the nature of specific programs and plans, including their design, funding and administration, and any other information supplied by, or developed for, such Clients or Suppliers;

(viii) the operations manuals, prospecting manuals and guidelines, pricing policies and related information, marketing manuals and plans, and business strategies, techniques and methodologies of such specified Person;

(ix) the financial information and compensation data, including information set forth in internal records, files and ledgers, or incorporated in profit and loss statements, fiscal reports and business plans, of such specified Person;

(x) the inventions, discoveries, devices, algorithms, computer hardware and computer software (including any source code, object code, documentation, diagrams, flow charts, know-how, methods or techniques associated with the development or use of the foregoing computer software) of such specified Person;

(xi) the internal memoranda and other office records, including electronic and data processing files and records of such specified Person; and

(xii) any other information constituting a trade secret of such specified Person under the governing trade secrets law.

“ Confidentiality Agreement ” means the Non-Disclosure Agreement dated October 7, 2009 by and between the Company and Buyer.

“ Copyright ” means all copyrights, copyrightable works, mask work rights, rights in databases, data collections, copyright registrations and applications for copyright registration and equivalents and counterparts of the foregoing in any jurisdiction.

“ Dollar ” or “ $ ” means the United States Dollar unless otherwise specified herein.

“ Domain Name ” means all Internet electronic addresses, uniform resource locators and alphanumeric designations associated therewith and all registrations for any of the foregoing.

 

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“ Earnout Schedule ” means the schedule attached hereto as Exhibit D.

“ Earnout Shares ” means Amalco Preference Shares issuable to Sellers pursuant to the provisions of Section 2.7 of this Agreement.

“ EBITDA ” (earnings before interest, taxes, depreciation and amortization) is a non-GAAP financial measure and for the purpose of this Agreement it is defined as GAAP net income plus interest, income taxes, depreciation and amortization, related to the Online Media Business.

“ Effective Time ” means the date and time specified in the Articles of Amalgamation, which, for greater certainty, shall be the same date as the Closing Date.

“ Employee Benefit Plan ” means all employment, consulting, retirement, pension, supplemental pension, savings, retirement savings, bonus, profit sharing, stock purchase, stock option, phantom stock, share appreciation rights, deferred compensation, commission, severance, notice or termination pay, change of control, life insurance, medical, hospital, dental care, vision care, drug, sick leave, short-term or long-term disability, salary continuation, unemployment benefits, vacation, incentive, compensation or other employee benefits, agreement (including, as applicable, any material contracts), plan, program, arrangement, policy, practice or undertaking whether written or oral, formal or informal, funded or unfunded, registered or unregistered, qualified or non-qualified, insured, self-insured or uninsured, that is maintained, contributed to, or required to be contributed to, for the benefit of the employees, consultants, former employees or consultants, or their spouses, dependants, survivors or beneficiaries, or which the Company or any Company Subsidiary is a party to or bound by or under which the Company or any Company Subsidiary has any liability (whether present or future, absolute or contingent), whether or not subject to any Laws, except that the term “Employee Benefit Plans” will not include any statutory plans which the Company or any Company Subsidiary is required to participate in or comply with, including any government-sponsored pension, employment insurance, parental insurance, prescription drugs, workers’ compensation and health insurance plans.

“ Employment Agreements ” means the agreements between the Company and each of the Sellers, the form of which is attached hereto as Exhibit F.

“ Environmental Law ” means all Laws, any of which govern or relate to pollution, protection of the environment, natural resources, safety and health Releases or threatened Releases of Hazardous Substances, solid or hazardous waste, as any of these terms are or may be defined in such Laws or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, Release, transport or handling of Hazardous Substances and all Laws with regard to record keeping, notification, disclosure and reporting requirements respecting Hazardous Substances.

“ Exchange Act ” means the U.S. Securities Exchange Act of 1934, as amended.

“ Family Affiliate ” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, including adoptive relationships, of any Person.

 

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“ Governmental Authority ” means any government or any agency, district, bureau, board, commission, court, department, official, office, political subdivision, court, tribunal or other instrumentality of any government, whether federal, state, provincial or local, domestic or foreign.

“ Hazardous Substance ” means petroleum, petroleum by-products, polychlorinated biphenyls, friable asbestos and any other chemicals, materials, substances or wastes which are defined or regulated as “hazardous substances,” “hazardous materials,” “hazardous wastes,” “extremely hazardous wastes,” “restricted hazardous wastes,” “toxic substances,” “toxic pollutants,” “toxic air pollutants,” “hazardous air pollutants,” “pollutants,” or “contaminants” under any Environmental Law.

“ Indebtedness ” of any Person means: either (a) any liability of any Person (i) for borrowed money (including the current portion thereof), or (ii) under any reimbursement obligation relating to a letter of credit, bankers’ acceptance or note purchase facility, or (iii) evidenced by a bond, note, debenture or similar instrument (including a purchase money obligation), or (iv) for the payment of money relating to leases that are required to be classified as capitalized lease obligations in accordance with GAAP (or, where applicable, Canadian GAAP), or (v) for all or any part of the deferred purchase price of property or services, including any “earnout” or similar payments or any non-compete payments, or (vi) under interest rate swap, hedging or similar agreements, or (b) any liability of others described in the preceding clause (a) that such Person has guaranteed, that is recourse to such Person or any of its assets or that is otherwise its legal liability or that is secured in whole or in part by the assets of such Person. For purposes of this Agreement, Indebtedness includes (A) any and all accrued interest, success fees, prepayment premiums, make-whole premiums or penalties and fees or expenses actually incurred (including attorneys’ fees) associated with the prepayment of any Indebtedness, (B) any and all amounts owed by the Company or any Company Subsidiary to any of their Affiliates, including, without limitation, the Sellers, and (C) any and all bonuses or incentive payments owed by the Company or any Company Subsidiary to any of their employees.

“ Independent Accountant ” means Buyer’s independent accountant for the applicable fiscal year or Earnout Period, as the case may be.

“ Indemnification Threshold ” means (a) with respect to inaccuracy in or breach of the Tax Representations or a claim under Section 10.2(a)(iii), the amount of $100,000 and (b) with respect to any other inaccuracy in or breach of representations and warranties in Articles 5 and 6 (other than the Surviving Representations), the amount of $200,000.

“ Intellectual Property ” means Copyrights, Domain Names, Patents, Software, Trademarks and Trade Secrets.

“ Knowledge ” means actual knowledge or such knowledge as would have been obtained by making a reasonable investigation in light of the facts and circumstances, taking into consideration the capacity (as an employee, officer, director or shareholder of another Person) of the Person being charged with such knowledge.

 

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“ Laws ” means all federal, state, provincial, local, municipal, foreign or other laws, including all statutes, codes, ordinances, decrees, rules, regulations, ruling or requirement, municipal by-laws, judicial or arbitral or administrative or ministerial or departmental or regulatory judgments, orders, decisions, ruling or awards, policies, guidelines, whether temporary, preliminary or permanent, issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Authority and general principles of common and civil law and equity.

“ Legal Requirement ” means any act or omission mandated by any constitution, law, ordinance, rule, regulation, injunction, judgment, ruling, charge, decree, statute, or similar enactment or promulgation by any government, governmental entity, regulatory body, stock market or exchange (including, without limitation, a Trading Market), court, or other similar body.

“ Material Adverse Effect ” means, with respect to any event or circumstance, an effect caused thereby or resulting therefrom that would, or would be reasonably likely to, be materially adverse as to, or in respect of, the condition (financial or otherwise), business, results of operation or prospects of a specified Person or Persons, when taken as a whole.

“ Nasdaq ” means the Nasdaq Stock Market, Inc.

“ Online Media Business ” shall mean the combined Internet and Internet-related business conducted by Private and its subsidiaries from time to time following the Closing Date, including the business activity carried out by the Company.

“ Ordinary Course of Business ” means the lawful ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency).

“ Organizational Documents ” means, with respect to a specified entity, the certificate or articles of incorporation (including certificates of designations), articles of amalgamation, bylaws, constating documents, operating agreement and other organizational documents, as may be applicable to such entity.

“ Patents ” means all patents, industrial and utility models, industrial designs, certificates of invention and other indicia of invention ownership issued or granted by any Governmental Authority, and all applications, provisionals, reissues, re-examinations, extensions, divisions, continuations (in whole or in part) and equivalents and counterparts of the foregoing in any jurisdiction.

“ Person ” means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unlimited liability company, an unincorporated organization, a limited liability company, or a governmental entity (or any department, agency, or political subdivision thereof).

“ Pre-Closing Taxes ” means Taxes of the Company or any Company Subsidiary for all taxable periods ending on or before the Closing Date or commencing prior to and ending after the Closing Date to the extent allocable to the pre-closing portion of such tax period; all Taxes of any member of an affiliated, consolidated, combined or unitary group of which the Company (or any predecessor

 

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of any of the foregoing) is or was a member on or prior to the Closing Date, including pursuant to Treasury Regulation §1.1502-6 or any analogous or similar federal, state, provincial, local, or foreign law or regulation; and any and all Taxes of any other Person imposed on the Company as a transferee or successor, by contract or pursuant to any law, rule, or regulation, which Taxes relate to an event or transaction occurring before the Closing Date.

“ Pro Rata ” means the percentage obtained by dividing one Company Share by the number of outstanding Company Shares immediately prior to the Closing.

“ Prospective Client or Supplier ” means (a) any Person with whom the Company and/or Buyer or either of the Company Subsidiaries negotiated at any time during the twelve (12) months preceding the date of any activity prohibited by Section 9.3(c) for the provision of any goods (including media content) or services to be used in the operation of the Company’s Business or the Online Media Business at any time and (b) any Person with whom the Company or either of the Company Subsidiaries negotiated at any time during the twelve (12) months preceding the date of any activity prohibited by Section 9.3(c) to provide any services that constitute any part of the Company’s Business or the Online Media Business, including without limitation any participants in any affiliate program of the Company or either Company Subsidiary or any private label theater affiliate of the Company or either Company Subsidiary.

“ Release ” means any release, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, migrating, dumping or disposing of a Hazardous Substance on, above, under, onto, in or into the environment.

“ Restricted Territory ” means the city of Toronto, each of the counties of the Province of Ontario, the ten provinces of Canada, the 50 states of the United States, the European Union and any European Union member state and each and every other geographic area outside Canada, the United States and the European Union where the Company or any Company Subsidiary conducts business as of the Closing Date.

“ Securities Act ” means the U.S. Securities Act of 1933, as amended.

“ Security Interest ” means any mortgage, pledge, lien, hypothecation, charge, Bank Act (Canada) security or other security interest, other than (a) construction, mechanic’s, materialman’s, and similar liens, (b) liens for Taxes not yet due and payable, (c) liens securing rental payments under capital lease arrangements, (d) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money, (e) encumbrances securing payment of Taxes which are not in arrears, (f) pledges or deposits made in the Ordinary Course of Business in connection with workers’ compensation, unemployment insurance or other similar social security legislation; and (g) encumbrances, security deposits or reserves required by law or regulation or by any Governmental Authority or regulatory agency.

“ Settlement Price ” means the average volume-weighted average price at which the Private Shares are traded on Nasdaq over the fifteen (15) consecutive Trading Days immediately prior to the Closing Date.

 

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“ Software ” means all computer software and code, including assemblers, applets, compilers, source code, object code, development tools, design tools, user interfaces and data, in any form or format, however fixed.

“ Sub Common Shares ” means a common share in the capital of Sub.

“ Supplier ” means any Person which has provided the Company or either of the Company Subsidiaries with any goods (including media content) or services used in the operation of the Company’s Business, at any time within the twenty-four (24) months preceding the Closing Date. Provided, however , that for purposes of Section 9.3(c) only, the term “Supplier” means any Person which has provided Buyer or any of its subsidiaries (including Amalco) with any goods (including media content) or services used in the operation of the Company’s Business at any time: (i) within the twenty four (24) months preceding the Closing Date; or (ii) in the operation of the Online Media Business at any time between the Closing Date and the date of the activity otherwise restricted by Section 9.3(c).

“ Target EBITDA ” shall mean, with respect to an Earnout Period, the EBITDA amount for each Earnout Period as provided in the Earnout Schedule, adjusted as provided therein for foreign currency translation.

“ Tax ” means (i) any federal, state, provincial, local or foreign income, gross receipts, payroll, employment, occupation, reemployment, excise, duties, capital, premium, franchise, environmental, withholding, deductions at source, social security (or similar tax), unemployment, real property, personal property, sales, goods and services, use, transfer, stamp, registration, alternative or add-on minimum, ad valorem, value added, profits, accumulated earnings, estimated or other tax, fees, assessments or governmental charges of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not and (ii) any liability arising under any agreements or arrangements with any Person with respect to the liability for, or sharing of the payment of any amounts of the type described in the immediately preceding clause (i) (including pursuant to provisions of any applicable Laws, and including any liability for Taxes as a transferee or successor, by contract or otherwise).

“ Tax Returns ” means any return (including estimates and extensions), election, declaration, report, document, claim for refund, or information return or statement relating to Taxes required to be filed with a taxing authority, including any schedule or attachment thereto, and including any amendment thereof.

“ Trademarks ” means all trademarks, trade names, fictitious business names, service marks, certification marks, collective marks and other proprietary rights to words, names, slogans, symbols, logos, devices, sounds, other things or combination thereof used to identify, distinguish and indicate the source or origin of goods or services, and all registrations, renewals and applications for registration, equivalents and counterparts of the foregoing in any jurisdiction, and the goodwill associated with each of the foregoing.

“ Trade Secrets ” means all inventions, discoveries, ideas, processes, designs, models, formulae, patterns, compilations, programs, devices, methods, techniques, processes, know-how, proprietary information, customer lists, software code, technical information, data and databases, drawings and blueprints, and all other information and materials that would constitute a trade secret under applicable law in any jurisdiction.

 

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“ Trading Day ” means a day on which the principal Trading Market is open for business.

“ Trading Market ” means the following exchanges or markets on which the Private Shares are listed or quoted for trading on the date in question: The Nasdaq Capital Market; The Nasdaq Global Market; the Nasdaq Global Select Market; the American Stock Exchange; the New York Stock Exchange; or the OTC Bulletin Board.

“ Treasury Regulations ” means the United States Treasury Regulations promulgated under the Code, as amended from time to time.

“ U.S. Person ” means (a) any natural person resident in the United States; (b) any partnership or corporation organized or incorporated under the laws of the United States; (c) any estate of which any executor or administrator is a U.S. person; (d) any trust of which any trustee is a U.S. person; (e) any agency or branch of a foreign entity located in the United States; (f) any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; (g) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary, organized, incorporated, or (if an individual) resident in the United States; and (h) any partnership or corporation, in each case (A) organized or incorporated under the laws of any foreign jurisdiction; and (B) formed by a U.S. person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a)) who are not natural persons, estates or trusts. The following are not “U.S. Persons”: (a) any discretionary account or similar account (other than an estate or trust) held for the benefit or account of a non-U.S. person by a dealer or other professional fiduciary organized, incorporated, or (if an individual) resident in the United States; (b) any estate of which any professional fiduciary acting as executor or administrator is a U.S. person if (A) an executor or administrator of the estate who is not a U.S. person has sole or shared investment discretion with respect to the assets of the estate; and (B) the estate is governed by foreign law; (c) any trust of which any professional fiduciary acting as trustee is a U.S. person, if a trustee who is not a U.S. person has sole or shared investment discretion with respect to the trust assets, and no beneficiary of the trust (and no settlor if the trust is revocable) is a U.S. person; (d) an employee benefit plan established and administered in accordance with the law of a country other than the United States and customary practices and documentation of such country; (e) any agency or branch of a U.S. person located outside the United States if: (A) the agency or branch operates for valid business reasons; and (B) the agency or branch is engaged in the business of insurance or banking and is subject to substantive insurance or banking regulation, respectively, in the jurisdiction where located; and (f) the International Monetary Fund, the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the United Nations, and their agencies, affiliates and pension plans, and any other similar international organizations, their agencies, affiliates and pension plans.

 

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1.2 Other Defined Terms . The following terms are defined in the Sections of this Agreement indicated below:

 

 

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1.3 Interpretation . In this Agreement, unless a clear contrary intention appears,

(a) the singular number includes the plural number and vice versa;

(b) reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are not prohibited by this Agreement; and reference to a Person in a particular capacity excludes such Person in any other capacity or individually;

 

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(c) reference to any gender includes each other gender;

(d) reference to any agreement, document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof;

(e) reference to any Legal Requirement means such Legal Requirement as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder, and reference to any section or other provision of any Legal Requirement means that provision of such Legal Requirement from time to time in effect and constituting the substantive amendment, modification, codification, replacement or reenactment of such section or other provision;

(f) “hereunder,” “hereof,” “hereto,” and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Article, Section or other provision hereof;

(g) “including” (and with correlative meaning “include”) means including without limiting the generality of any description preceding such term;

(h) “or” is used in the inclusive sense of “and/or”;

(i) with respect to the determination of any period of time, “from” means “from and including” and “to” means “to but excluding”

(j) references to the term “federal law” shall mean the federal laws of Canada and the federal laws of the United States unless otherwise expressly provided; and

(k) references to documents, instruments or agreements shall be deemed to refer as well to all addenda, exhibits, schedules or amendments thereto.

1.4 Accounting Terms and Determinations . Unless otherwise specified herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with United States Generally Accepted Accounting Principles (“ GAAP ”).

1.5 Legal Representation of the Parties . This Agreement was negotiated by the Parties with the benefit of legal representation, and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any Party shall not apply to any construction or interpretation hereof.

2. THE TRANSACTION; CLOSING

2.1 The Transaction

(a) The Share Purchase . At the Closing, subject to the terms and conditions of this Agreement, Sellers and Sub shall effect the Share Purchase; for greater certainty, Sellers shall sell, transfer and assign to Sub, and Sub shall purchase from Sellers, good and marketable title to all of the Company Shares held by Sellers, free and clear of all Security Interests, restrictions and claims or rights of another in exchange for the issuance by Sub of the Sub Preference Shares pursuant to the remainder of this Article 2.

 

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(b) The Amalgamation . At the Closing and immediately following the Share Purchase, subject to the terms and conditions of this Agreement and the Amalgamation Agreement, and in accordance with the Act, Sub and the Company shall effect the Amalgamation by way of statutory amalgamation under the Act.

2.2 Closings; Effective Time .

(a) The closing of the Transaction (the “ Closing ”) shall take place at the offices of Davis LLP, 1 First Canadian Place, Suite 5600, PO Box 367, 100 King Street West, Toronto, ON M5X 1E2 at 10:00 a.m. (local time) on the first Business Day after the satisfaction or waiver of each of the conditions set forth in this Agreement, or at such other time, date and location as the Company and Buyer agree (the date on which the Closing occurs being the “ Closing Date ”).

(b) At the Closing, Sub and the Sellers will consummate the Share Purchase in accordance with the terms and conditions of this Agreement. Immediately following the consummation of the Share Purchase, upon and subject to the terms and conditions of this Agreement and the Act, the Articles of Amalgamation and any other filings required by the Act (the “ Amalgamation Documents ”) shall be filed to effect the Amalgamation, under which Sub and the Company will amalgamate and continue as Amalco.

(c) Private, in its capacity as the sole shareholder of Sub, hereby approves the Share Purchase and the Amalgamation. Each of the Sellers and Holdco, in their capacity as the owners of 100% of the outstanding shares of the Company, hereby approves the Share Purchase and the Amalgamation.

2.3 Effect of the Amalgamation . At the Effective Time:

(a) the amalgamation of the Company and Sub (the “ Amalgamating Corporations ”) and their continuance as one corporation, Amalco, under the terms and conditions prescribed in the Amalgamation Agreement shall be effective,

(b) the property of each of the Amalgamating Corporations shall continue to be the property of Amalco,

(c) Amalco shall continue to be liable for the obligations or each of the Amalgamating Corporations,

(d) any existing cause of action, claim or liability to prosecution with respect to either or both of the Amalgamating Corporations shall be unaffected,

(e) any civil, criminal or administrative action or proceeding pending by or against either of the Amalgamating Corporations may be continued to be prosecuted by or against Amalco,

 

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(f) any conviction against, or ruling, order or judgment in favor of or against, either of the Amalgamating Corporations may be enforced by or against Amalco,

(g) the Articles of Amalgamation of Amalco shall be deemed to be the articles of incorporation of Amalco and the Certificate of Amalgamation shall be deemed to be the certificate of incorporation of Amalco,

(h) the by-laws of Sub shall be the by-laws of Amalco until repealed or amended in the normal manner provided for in the Act,

(i) the board of directors of Amalco shall consist of those individuals listed as such in the Amalgamation Agreement, and

(j) the officers of Amalco shall consist of those individuals listed as such in the Amalgamation Agreement.

2.4 Conversion of Shares .

(a) Amalgamation Consideration; Adjustments .

(i) The “ Amalgamation Consideration ” shall be an aggregate of 6,000,000 Amalco Preference Shares (subject to adjustment as set forth in Section 2.4(a)(ii) below), consisting of the following:

(A) an aggregate of 3,300,000 Amalco Preference Shares (or, if the Amalgamation Consideration is adjusted pursuant to Section 2.4(a)(ii), 55% of the adjusted Amalgamation Consideration), to be issued pursuant to Section 2.4(c)(i) and Section 2.5 of this Agreement, subject to adjustment as provided in this Agreement (the “ Closing Shares ”);

(B) an aggregate of 600,000 Amalco Preference Shares (or, if the Amalgamation Consideration is adjusted pursuant to Section 2.4(a)(ii), 10% of the adjusted Amalgamation Consideration), to be issued pursuant to Section 2.4(c)(ii) and Section 2.6 of this Agreement, subject to adjustment as provided in this Agreement (the “ Initial Deferred Shares ”); and

(C) an aggregate of 2,100,000 Amalco Preference Shares (or, if the Amalgamation Consideration is adjusted pursuant to Section 2.4(a)(ii), 35% of the adjusted Amalgamation Consideration), to be issued pursuant to Section 2.4(c)(ii) and Section 2.7 of this Agreement, subject to adjustment as provided in this Agreement (the “ Total Earnout Shares ”).

The Closing Shares, the Initial Deferred Shares and the Total Earnout Shares shall be referred to herein collectively as the “ Amalgamation Consideration Shares .”

(ii) The aggregate Amalgamation Consideration shall be subject to adjustment as follows:

(A) if the Settlement Price exceeds $1.25 (as adjusted for stock dividends, stock splits, combinations of shares, reorganizations, recapitalizations, reclassifications or other similar events with respect to the Private Shares), the Amalgamation Consideration shall be reduced to a number of Amalco Preference Shares equal to $7,500,000 divided by the Settlement Price;

 

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(B) if the Settlement Price is less than $0.60 (as adjusted for stock dividends, stock splits, combinations of shares, reorganizations, recapitalizations, reclassifications or other similar events with respect to the Private Shares), the Amalgamation Consideration shall be adjusted as is mutually agreed upon in writing by Buyer and the Company; and

(C) if the Company’s trailing 12 month revenue as of June 30, 2009 as reflected in or derived from the Financial Statements is less than $7,250,000, the Amalgamation Consideration shall be reduced by 0.8 Amalco Preference Shares for each $1.00 of shortfall in addition to any adjustments referenced in clauses (A) and (B) above.

(b) Share Purchase . At the Closing of the Share Purchase, each issued and outstanding Company Share will be purchased by Sub from the Sellers in exchange for the right to receive the following, subject to the adjustments and payable in the manner set forth in this Agreement (the “ Share Purchase Consideration ”):

(i) Closing Shares . The number of Sub Preference Shares equal to the Pro Rata multiplied by 3,300,000 Sub Preference Shares (or, if the Amalgamation Consideration is adjusted pursuant to Section 2.4(a)(ii), a number of Sub Preference Shares equal to the number of adjusted Closing Shares), which Sub Preference Shares shall be issued and delivered at Closing;

(ii) Initial Deferred Shares .

(A) That number of Sub Preference Shares equal to the Pro Rata multiplied by 300,000 Sub Preference Shares (or, if the Amalgamation Consideration is adjusted pursuant to Section 2.4(a)(ii), a number of Sub Preference Shares equal to one half of the number of adjusted Initial Deferred Shares), which shall be issued by Sub to the Sellers on the first anniversary of the Closing Date in accordance with Section 2.6 below; and

(B) That number of Sub Preference Shares equal to the Pro Rata multiplied by 300,000 Sub Preference Shares (or, if the Amalgamation Consideration is adjusted pursuant to Section 2.4(a)(ii), a number of Sub Preference Shares equal to one half of the number of adjusted Initial Deferred Shares), which shall be issued by Sub to the Sellers on the second anniversary of the Closing Date in accordance with Section 2.6 below; and

(iii) Total Earnout Shares . That number of Sub Preference Shares equal to the Pro Rata multiplied by 2,100,000 Sub Preference Shares (or, if the Amalgamation Consideration is adjusted pursuant to Section 2.4(a)(ii), a number of Sub Preference Shares equal to the number of adjusted Total Earnout Shares), payable following Closing on the terms and subject to the conditions contained in Section 2.7 below and the Earnout Schedule.

(c) Amalgamation . At the Effective Time, without any further action on the part of the Company, Sub or Amalco, the outstanding Sub Shares shall be cancelled and replaced with the right to receive the following, subject to the adjustments and payable in the manner set forth in this Agreement:

(i) each outstanding Sub Preference Share shall be cancelled and replaced by one Amalco Preference Share;

 

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(ii) each right to receive a Sub Preference Share (whether in respect of an Initial Deferred Share or an Earnout Share) shall be cancelled and replaced by the right to receive one Amalco Preference Share; and

(iii) each outstanding Sub Common Share will be cancelled and replaced by one Amalco Common Share.

(d) No Further Rights . All Sub Shares, when cancelled in accordance with this Section 2.4, shall no longer be outstanding and shall automatically be canceled and retired, and each holder thereof shall cease to have any rights with respect thereto, except, with respect to the Sub Preference Shares, the right to receive a portion of the Amalgamation Consideration in accordance with the terms hereof. At the Effective Time, the share transfer books of the Company shall be closed, and no transfer of Sub Shares shall be made thereafter, except to reflect the transactions contemplated by this Agreement. If, after the Effective Time share certificates are presented to Amalco or Buyer, they shall be canceled and exchanged as provided for in this Agreement.

2.5 Delivery of Closing Shares . At and after the Effective Time, Amalco will make available, and Sellers shall be entitled to receive, the Closing Shares. Neither the Closing Shares nor the Private Shares issuable upon exchange thereof shall be transferred to any third party by the Sellers or otherwise mortgaged, charged, pledged or encumbered until the first anniversary of the Closing Date (the “ Restriction Period ”), subject to the provisions of Section 10.7. Certificates evidencing the Closing Shares and/or the Private Shares issuable upon exchange thereof shall bear an appropriate legend to reflect these restrictions, including the provisions of Section 10.7, during the time these restrictions are in effect. Upon the expiration of the Restriction Period Sellers shall promptly submit certificates containing such legends to Buyer or Amalco, as applicable, and, subject to the provisions of Section 10.7, including provisions entitling Buyer to hold back Amalgamation Consideration Shares, Buyer or Amalco, as applicable, shall promptly send by overnight courier replacement certificates free of such legends.

2.6 Delivery of Initial Deferred Shares . One half of the Initial Deferred Shares shall be issued by Amalco to the Sellers on the first anniversary of the Closing Date and one half the Initial Deferred Shares shall be issued by Amalco to the Sellers on the second anniversary of the Closing Date (each of such dates, a “ Release Date ”), provided, however that if, as of the applicable Release Date, an Indemnification Event in excess of the applicable Indemnification Threshold has occurred in respect of such Seller, then the number of Initial Deferred Shares to be so delivered shall be reduced in accordance with the provisions of Section 10.7.

 

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2.7 Determination and Payment of Earnout Shares .

(a) Number of Earnout Shares .

(i) The Earnout Shares shall be payable to the Sellers based upon their aggregate Pro Rata interest in the Company Shares as of the Closing, when, as and in the amounts provided in this Section 2.7, not to exceed the Total Earnout Shares, in the aggregate.

(ii) For the fiscal quarter of Private ended December 31, 2009, the fiscal years of Private ended December 31, 2010 and 2011 and the first three fiscal quarters of Private for the fiscal year of Private ended December 31, 2012 (each, an “ Earnout Period ”, and together the “ Earnout Periods ”) in which the Actual EBITDA of the Online Media Business for such Earnout Period equals or exceeds the Target EBITDA for such Earnout Period, Sellers, subject to subsection (iv) below, shall be entitled to receive a portion of the Total Earnout Shares equal to the Annual Maximum Earnout Shares for such Earnout Period. The Annual Maximum Earnout Shares shall consist solely of:

(A) for the 2009 Earnout Period: 175,000 Amalco Preference Shares (or, if the Amalgamation Consideration is adjusted pursuant to Section 2.4(a)(ii), 8.33% of the Total Earnout Shares) (the “ 2009 Maximum Earnout Shares ”);

(B) for the 2010 Earnout Period: 700,000 Amalco Preference Shares (or, if the Amalgamation Consideration is adjusted pursuant to Section 2.4(a)(ii), 33.33% of the Total Earnout Shares) (the “ 2010 Maximum Earnout Shares ”);

(C) for the 2011 Earnout Period: 700,000 Amalco Preference Shares (or, if the Amalgamation Consideration is adjusted pursuant to Section 2.4(a)(ii), 33.33% of the Total Earnout Shares) (the “ 2011 Maximum Earnout Shares ”); and

(D) for the 2012 Earnout Period: 525,000 Amalco Preference Shares (or, if the Amalgamation Consideration is adjusted pursuant to Section 2.4(a)(ii), 25% of the Total Earnout Shares) (the “ 2012 Maximum Earnout Shares ”).

(iii) In any Earnout Period in which the Actual EBITDA is less than the Target EBITDA, Sellers shall be entitled to receive in such Earnout Period a number of Earnout Shares determined by dividing the Actual EBITDA for such Earnout Period by the Target EBITDA for such Earnout Period (the “ Earnout Share Ratio ”) and multiplying such Earnout Share Ratio for such Earnout Period by the Annual Maximum Earnout Shares for such Earnout Period.

(iv) If in the 2009, 2010, 2011 or 2012 Earnout Periods the Actual EBITDA is less than the Target EBITDA, then for purposes of determining the number of Earnout Shares available for distribution in the subsequent Earnout Period(s), and notwithstanding the provisions of Section 2.7(a)(ii) above, if and to the extent that Actual EBITDA exceeds the Target EBITDA in a subsequent Earnout Period, the Sellers shall be entitled to receive in respect of such subsequent Earnout Period, Earnout Shares as follows:

(A) For the 2010 Earnout Period: The lesser of (1) the number of Earnout Shares determined by multiplying the Earnout Share Ratio for the 2010 Earnout Period by the 2010 Maximum Earnout Shares, and (2) the sum of the 2009 Maximum Earnout Shares and the 2010 Maximum Earnout Shares less the number of Earnout Shares paid in respect of the 2009 Earnout Period, and

 

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(B) For the 2011 Earnout Period: The lesser of (1) the number of Earnout Shares determined by multiplying the Earnout Share Ratio for the 2011 Earnout Period by the 2011 Maximum Earnout Shares, and (2) the sum of the 2009 Maximum Earnout Shares, 2010 Maximum Earnout Shares and 2011 Maximum Earnout Shares less the number of Earnout Shares paid in respect of the 2009 and 2010 Earnout Periods.

(C) For the 2012 Earnout Period: The lesser of (1) the number of Earnout Shares determined by multiplying the Earnout Share Ratio for the 2012 Earnout Period by the 2012 Maximum Earnout Shares, and (2) the Total Earnout Shares less the number of Earnout Shares paid in respect of the 2009, 2010 and 2011 Earnout Periods.

(b) Earnout Determination Procedure .

(i) Within ninety (90) days after the end of each Earnout Period, Buyer shall deliver to Sellers Representative a schedule setting forth in reasonable detail its calculation of the Actual EBITDA for such Earnout Period. The Sellers Representative shall have a thirty (30) day period to review the Buyer’s calculation of the Actual EBITDA. If Sellers Representative disputes Buyer’s calculation of the Actual EBITDA, Sellers Representative shall deliver a written notice (“ EBITDA Dispute Notice ”) to Buyer within such thirty (30) day period. Sellers Representative shall set forth in detail in the EBITDA Dispute Notice the basis for its disagreement with the Buyer’s calculation of the Actual EBITDA. If Sellers Representative fails to deliver the EBITDA Dispute Notice within the thirty (30) day period, Sellers Representative shall be deemed to have agreed to the given calculation delivered by Buyer, which calculation shall be final, conclusive and binding upon all of the parties hereto. If Sellers Representative disputes the calculation of the Actual EBITDA within the thirty (30) day period, the parties will in good faith attempt to jointly resolve any dispute during the thirty (30) day period following the delivery of the EBITDA Dispute Notice. If Buyer and Sellers Representative can resolve their dispute and agree upon the calculation of the Actual EBITDA, they shall memorialize their agreement in writing and such mutually agreed upon figure shall be final, conclusive and binding upon all of the parties. If Buyer and Sellers Representative cannot resolve the dispute to their mutual satisfaction, Buyer and Sellers Representative shall engage the Independent Accountant to determine the appropriate amount of Actual EBITDA consistent with this Agreement. Each of Buyer and Sellers shall provide the Independent Accountant such of their respective work papers as may be requested by the Independent Accountant. The Independent Accountant shall be requested to complete its engagement within forty-five (45) days of being retained by Buyer and Sellers. The determination of the Independent Accountant shall be final, binding and conclusive upon the parties. All expenses relating to the engagement of the Independent Accountant shall be borne by (1) the Buyer if the Actual EBITDA contained in the final determination of the Independent Accountant is closer to the Actual EBITDA contained in the EBITDA Dispute Notice than the Actual EBITDA contained in the Earnout Schedule, (2) the Sellers if the Actual EBITDA contained in the final determination of the Independent Accountant is closer to the Actual EBITDA contained in the Earnout Schedule than the Actual EBITDA contained in the EBITDA Dispute Notice, and (c) equally by the Buyer, on one hand, and the Sellers, on the other hand, if the Actual EBITDA contained in the EBITDA Dispute Notice and the Actual EBITDA contained in the Earnout Schedule are equally close to the Actual EBITDA contained in the final determination of the Independent Accountant.

 

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(ii) Buyer shall afford Sellers Representative and his advisers and representatives, upon request, reasonable access to its reasonably available books and records and appropriate financial personnel for purposes relating to the determination of Actual EBITDA, provided that such access shall be limited to that portion of the books and records that relate to the calculation of Actual EBITDA and provided further that prior to granting such access, Sellers Representative shall have entered into a confidentiality agreement on terms and conditions reasonably satisfactory to Buyer.

(iii) Upon the final, conclusive and binding determination of the Actual EBITDA in accordance with this Section 2.7(b), Buyer shall promptly (and no later than five (5) Business Days thereafter) cause to be delivered to Sellers Representative certificates evidencing the appropriate number of Earnout Shares, registered in the names of the Sellers, subject to the provisions of Section 10.7.

(c) Covenant of Buyer re Online Media Business . Following the Closing and throughout the Earnout Periods, Buyer will provide commercially reasonable levels of sales, technical, administrative and marketing resources and support for the Online Media Business in light of market demand, customer requirements, product sales, product margins, competitive concerns and other relevant considerations, as determined by Buyer from time to time in the good faith discretion of Buyer. Nothing in this Agreement shall prohibit Buyer nor any of its subsidiaries from taking any actions with respect to the business of the Online Media Business in good faith and which are commercially reasonable, including adjusting or deferring sales, marketing, new product or new business development efforts, adjusting the number of personnel, deferring the execution or implementation of agreements, or reallocating funds from the Online Media Business to other areas of Buyer’s business. For the avoidance of doubt, Buyer shall be entitled to take into account the goals and objectives of Private and its subsidiaries as a whole in determining commercially reasonable levels of support for the Online Media Business. Notwithstanding anything to the contrary in this Agreement, if, prior to the last day of any Earnout Period, Buyer and/or its subsidiaries sells to a third party all or a substantial portion of Buyer’s business or there is otherwise a Change in Control Event, in either case which results in a material change of operation of the Online Media Business, the remaining unearned amount of the Total Earnout Shares shall be deemed earned and shall be immediately payable to the Sellers without regard to the Target EBITDA, subject to the provisions of Section 10.7. For purposes of this Section 2.7, “Change in Control Event” means Berth Milton shall cease to own, directly or indirectly, at least 30% of the outstanding Private Shares.

2.8 Tax Election . The Parties hereby agree to jointly elect under the Subsection 85(1) of the Income Tax Act (Canada) (the “ ITA ”) that the Sellers’ proceeds of disposition of the Company Shares and the cost to Sub of the Company Shares shall be equal to an amount agreed upon by the Parties within the limits of Subsection 85(1) of the ITA. Any penalty attributable to the late filing of such elections shall be payable by the Sellers.

2.9 No Fractional Shares . No certificate or scrip representing fractional Amalco Preference Shares shall be issued upon the surrender of share certificates for exchange, and such fractional share interests will not entitle the owner thereof to vote or to any other rights of a shareholder of Amalco. The holder of Sub Preference Shares exchanged pursuant to the Amalgamation who would otherwise be entitled to receive a fraction of an Amalco Preference Share (after taking into account all certificates evidencing Sub Preference Shares delivered by such holder) shall not receive any additional consideration therefor and any such fractional share interest shall be cancelled and extinguished at the Closing.

 

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2.10 Lost, Stolen or Destroyed Certificates . In the event any share certificates for Company Shares are lost, stolen or destroyed, Sub or Amalco will issue in exchange for such lost, stolen or destroyed share certificates, upon the making of an affidavit of that fact by the holder thereof and the other deliveries required above, the applicable Amalgamation Consideration; provided, however, that Sub or Amalco may, in their sole discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed share certificate to deliver an indemnity in such sum as it may reasonably direct as indemnity against any claim that may be made against it with respect to the share certificates alleged to have been lost, stolen or destroyed.

2.11 Taking of Necessary Action; Further Action . Each of Private, Sub, Amalco and the Company will take all such reasonable lawful action as may be necessary or appropriate in order to effect the Share Purchase and the Amalgamation in accordance with this Agreement as promptly as practicable. If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to vest Amalco with full right, title and possession to all the property, rights, privileges, power and franchises of the Company or Sub, the officers and directors of the Company and Sub immediately prior to the Effective Time are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action.

3. REPRESENTATIONS AND WARRANTIES – GENERAL

Each of the Parties represents and warrants that the respective statements made by such Party in Sections 4, 5 and 6 are correct and complete as of the date of this Agreement, except as expressly limited by a particular representation or warranty or as set forth in the disclosure schedule accompanying this Agreement (the “ Disclosure Schedule ”). Nothing in the Disclosure Schedule shall be deemed adequate to disclose an exception to a representation or warranty unless the Disclosure Schedule identifies the exception with reasonable particularity and describes the relevant facts in reasonable detail. Without limiting the generality of the foregoing, the mere listing (or inclusion of a copy) of a document or other item shall not be deemed adequate to disclose an exception to a representation or warranty (unless the representation or warranty has to do with the existence of the document or other item itself ) and, further, the disclosure of an item in one section of the Disclosure Schedule shall not be deemed a disclosure of such item in any other section of the Disclosure Schedule unless either referred to specifically in such other section or such cross reference can reasonably be inferred when taking into consideration the item being disclosed, the content of such disclosure and the representation and warranty to which such disclosure relates. The Disclosure Schedule will be arranged in sections (and paragraphs) corresponding to the numbered and lettered sections (and paragraphs) of this Agreement. Notwithstanding anything to the contrary contained herein, the disclosure of an exception by one Party shall mean that the disclosing Party has been relieved from its obligations described in Article 10 hereof with respect to such disclosure, unless the Parties specify otherwise in the Disclosure Schedule or in Article 10 hereof.

 

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4. REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB

Buyer and Sub, jointly and severally, represent and warrant to the Company and the Sellers as follows:

4.1 Organization and Good Standing .

(a) Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. Buyer has delivered to the Sellers copies of its Organizational Documents, and all such copies are true and correct copies of such documents. Buyer has full corporate power and authority to carry on its business as presently conducted, and to own and use the properties owned and used by it. Buyer is duly authorized to conduct business and is in good standing under the laws of each jurisdiction where such qualification is required, except where the failure to qualify would not have a Material Adverse Effect.

(b) Sub is a corporation duly organized, validly existing and in good standing under the laws of Canada. Buyer has delivered to the Sellers copies of Sub’s Organizational Documents, and all such copies are true and correct copies of such documents. Sub has full corporate power and authority to carry on its business as presently conducted, and to own and use the properties owned and used by it. Sub is duly authorized to conduct business and is in good standing under the laws of each jurisdiction where such qualification is required, except where the failure to qualify would not have a Material Adverse Effect.

4.2 Authorizations . Each of Buyer and Sub has full corporate power and authority to execute and deliver this Agreement and all other documents and agreements to be executed by it as contemplated hereunder, and to perform its obligations hereunder and thereunder. The execution and delivery by Buyer and Sub of this Agreement and all other documents and agreements to be executed by it as contemplated hereunder, and the performance of their obligations hereunder and thereunder have been duly and validly authorized, and no other proceedings on the part of Buyer or Sub are necessary for the execution and delivery of this Agreement and all other documents and agreements to be executed by it as contemplated hereunder, and, except for filings required to effect the Amalgamation under the Act, the performance of their obligations hereunder and thereunder. This Agreement and all other documents and agreements to be executed by Buyer and/or Sub as contemplated hereunder constitute the valid and legally binding obligations of such Party enforceable against it in accordance with their terms and conditions, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar law now or hereafter in effect relating to creditors’ rights generally and subject to general principles of equity.

4.3 Noncontravention . The execution and delivery of this Agreement by Buyer and Sub, and all other documents and agreements to be executed by it as contemplated hereunder, and the consummation of the transactions contemplated hereby and thereby, will not (a) violate any Legal Requirement to which Buyer or Sub is subject, (b) violate any provision of any of Buyer’s or Sub’s Organizational Documents or any resolution adopted by their governing body, or (c) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any Party the right to accelerate, terminate, modify, or cancel, or require any notice or consent under, any material agreement, contract, lease, license, instrument, or other arrangement to which Buyer

 

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or Sub is a party, or by which it is bound, or to which any of its assets are subject (or result in the imposition of any Security Interest upon any such assets). Except for filings required to effect the Amalgamation under the Act or as described in this Agreement, neither Buyer nor Sub is required to give any notice to, make any filing with, or obtain any authorization, consent, or approval of, any government or governmental agency or other third party in order for the Parties to consummate the transactions contemplated by this Agreement.

4.4 Share Purchase Consideration/Amalgamation Consideration Shares .

(a) The Sub Preference Shares to be issued to Sellers as the Share Purchase Consideration pursuant to this Agreement are duly authorized and, when issued, shall be validly issued, fully paid and non-assessable. Sub has sufficient authorized but unissued Sub Preference Shares to issue the Sub Preference Shares constituting the Share Purchase Consideration.

(b) The Amalgamation Consideration Shares to be issued to Sellers by Amalco are duly authorized and, when issued, shall be validly issued, fully paid and non-assessable. Amalco will have sufficient authorized but unissued Amalco Preference Shares to issue the Amalgamation Consideration Shares.

(c) The Private Shares to be issued to Sellers by Buyer upon exchange of the Amalgamation Consideration Shares have been duly approved by all necessary corporate action of Private and upon such issuance, the Private Shares will be validly issued, fully paid and non-assessable.

(d) Buyer:

(i) has sufficient authorized but unissued Private Shares to issue the Private Shares issuable upon exchange of the Amalgamation Consideration Shares;

(ii) will, following the Release Dates, have sufficient authorized but unissued Private Shares to issue the shares (if any) issuable upon exchange of the Initial Deferred Shares or any portion thereof; and

(iii) will, following each of the Earnout Periods, have sufficient authorized but unissued Private Shares to issue the Earnout Shares (if any) to be issued to Sellers during each Earnout Period.

(e) The form and terms of the certificates representing the Amalgamation Consideration Shares will be approved and adopted by the directors of Amalco, and will conform with all Legal Requirements relating thereto. The form and terms of the certificates representing the Private Shares has been approved and adopted by the directors of Private and conforms with all Legal Requirements relating thereto.

(f) Subject in part to the truth and accuracy of each Seller’s representations set forth in Section 5.5 of this Agreement, the offer, sale and issuance to Sellers:

(i) by Sub of the Sub Preference Shares to Sellers;

 

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(ii) by Amalco of the Amalgamation Consideration Shares; and

(iii) by Private of the Private Shares upon exchange of the Amalgamation Consideration Shares,

in each case as contemplated by this Agreement, will be made in compliance with all Legal Requirements relating thereto and are exempt from the registration requirements of the Securities Act, and from the prospectus and registration requirements of the securities laws of the Province of Ontario.

4.5 Investment Intent . Buyer is acquiring the Company Shares for its own account, for investment purposes only and not with a view to the distribution (as such term is used in Section 2(11) of the Securities Act) of such Company Shares. Buyer has sufficient knowledge and experience in financial and business matters and investing in companies similar to the Company so as to be able to evaluate the risks and merits of its investment in the Company and it is able financially to bear the risks thereof. Buyer has performed its own due diligence and is not relying on any representation or warranty other than as made in this Agreement.

4.6 SEC Documents; Parent Financial Statements . A true and complete copy of each annual, quarterly and other report, proxy statement and registration statement filed by Buyer with the Securities and Exchange Commission (the “ SEC ”) since January 1, 2008 (the “ SEC Documents ”) is available on the website maintained by the SEC at www.sec.gov. Since January 1, 2008, Buyer has in all material respects filed with the SEC all reports and proxy statements required to be filed by it pursuant to the Securities Act and the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder. As of their respective filing dates, (and if amended or superseded by a filing prior to the date of this Agreement, the date of such filing) the SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such SEC Documents, and none of the SEC Documents contained on their filing dates any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except to the extent superseded by a subsequently filed SEC Document filed prior to the date of this Agreement. The consolidated financial statements of Buyer included in the SEC Documents complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with GAAP applied on a consistent basis throughout the periods indicated and consistent with each other (except as may be indicated in the notes thereto, except in the case of pro forma statements, or, in the case of unaudited financial statements, except as permitted under Form 10-Q under the Exchange Act) and fairly presented the consolidated financial position of the Buyer and its consolidated subsidiaries as of the respective dates thereof and the consolidated results of the Buyer’s operations and cash flows for the periods indicated (subject to, in the case of unaudited statements, normal and recurring year end audit adjustments). Buyer does not intend to correct or restate any aspect of, nor is there any basis for any correction or restatement of in any material respect the consolidated financial statements of Buyer included in the SEC Documents.

 

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4.7 Litigation . Other than as disclosed in the SEC Documents, there is no action pending or, to the Knowledge of Buyer, threatened against Buyer or any of its subsidiaries, or, to the Knowledge of Buyer, any investigation by any governmental entity or other third party, against Buyer or any of its subsidiaries, in each case, other than those that are not reasonably expected to have a Material Adverse Effect on Buyer.

5. CERTAIN REPRESENTATIONS AND WARRANTIES OF THE SELLERS

Each Seller, for himself and for no other Seller, represents and warrants to Buyer and Sub as follows:

5.1 Ownership of Company Shares . Such Seller holds of record and owns legally and beneficially the number of Company Shares set forth next to such Seller’s name on the signature page hereof, such Company Shares are free and clear of any restrictions on transfer, Taxes, Security Interests, options, warrants, purchase rights, contracts, commitments, equities, liens, claims and demands, and such Seller is the sole legal and beneficial owners of such Company Shares. Such Seller is not a party to any option, warrant, purchase right or other contract or commitment that could require such Seller to sell, transfer or otherwise dispose of Company Shares. Such Seller is not a party to any voting trust, proxy, or other agreement or understanding with respect to the voting of any Company Shares. At the Closing, Sub shall acquire good and marketable title to the Company Shares, free and clear of any restrictions on transfer, Taxes, Security Interests, options, warrants, purchase rights, contracts, commitments, equities, liens, claims and demands.

5.2 Authorization of Transaction . Such Seller has full power and authority to execute and deliver this Agreement and all other documents and agreements to be executed by such Seller as contemplated hereunder, and to perform such Seller’s obligations hereunder and thereunder. This Agreement and all other documents and agreements to be executed by such Seller as contemplated hereunder constitute valid and legally binding obligations of such Seller enforceable against such Seller in accordance with their terms and conditions, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar law now or hereafter in effect relating to creditors’ rights generally and subject to general principles of equity.

5.3 Noncontravention . The execution and delivery of this Agreement and all other documents and agreements to be executed by such Seller as contemplated hereunder, and the consummation of the transactions contemplated hereby and thereby, will not (a) violate any Legal Requirement to which such Seller is subject, or (b) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any Party the right to accelerate, terminate, modify or cancel, or require any notice or consent under, any material agreement, contract, lease, license, instrum