EXECUTION
COPY
INVESTOR RIGHTS
AGREEMENT
THIS INVESTOR RIGHTS AGREEMENT (this “
Agreement ”) is made and entered into
as of February 16, 2007, by and among (i) (a) China Security &
Surveillance Technology, Inc., a Delaware corporation (the “
Company ”), (b) China Safetech
Holdings Limited, a wholly-owned subsidiary of the Company,
incorporated under the laws of British Virgin Islands (“
Safetech ”) and China Security &
Surveillance Technology (HK) Ltd., a wholly-owned subsidiary of
Safetech, incorporated under the laws of Hong Kong (“
CSST HK ”), (c) Golden Group
Corporation (Shenzhen) Limited, a limited liability company
organized and existing under the laws of the People’s
Republic of China (the “ PRC ”)
and a wholly-owned subsidiary of Safetech (“
Golden ”), Shanghai Cheng Feng
Digital Technology Co., Ltd., a limited liability company organized
and existing under the laws of the PRC and a wholly-owned
subsidiary of CSST HK (“ Cheng Feng
”) and China Security & Surveillance Technology
(PRC), Inc., a limited liability company organized and existing
under the laws of the PRC and a wholly-owned subsidiary of the
Company (“ CSST PRC ”, and
collectively with the Company, Safetech, CSST HK, Golden and Cheng
Feng, the “ Group Companies ”),
(d) Mr. Tu Guo Shen (“ Mr. Tu
”), a resident of the City of Hangzhou in the PRC, Ms. Li Zhi
Qun (“ Ms. Li ”), a resident of
the City of Shenzhen in the PRC and Whitehorse Technology Limited,
a British Virgin Islands company wholly owned by Mr. Tu and the
registered owner of Mr. Tu’s equity interest in the Company
(“ Whitehorse ”, and
collectively with Mr. Tu and Ms. Li, the “
Controlling Shareholders ”) and (ii)
Citadel Equity Fund Ltd. (“
Citadel ”). Capitalized terms used
herein but not otherwise defined herein shall have the respective
meanings set forth in the Notes Purchase Agreement (as defined
below).
WITNESSETH:
WHEREAS, the Company, Safetech, CSST HK, Golden,
Cheng Feng, CSST PRC and Citadel have entered into that certain
Notes Purchase Agreement dated as of February 16, 2007 (the “
Notes Purchase Agreement ”), pursuant
to which the Company has agreed to issue to Citadel, and Citadel
has agreed to purchase from the Company, US$60,000,000 1%
Guaranteed Senior Unsecured Convertible Notes due 2012 (the “
Notes ”), which are convertible into
the Company’s common stock, par value $.0001 (the “
Common Stock ”), which are being
issued pursuant to that certain Indenture dated as of the date
hereof by and among the Company, the other Group Companies and The
Bank of New York, as trustee (the “
Indenture ”);
WHEREAS, in consideration of Citadel entering
into the Notes Purchase Agreement, the Company has agreed to
provide certain rights set forth in this Agreement; and
WHEREAS, it is a condition to the Closing under
the Notes Purchase Agreement that the parties hereto shall have
executed this Agreement.
NOW, THEREFORE, in consideration of the premises
and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound by this agreement, agree as
follows:
1. Representations and Warranties of the Group
Companies . Each of the
Group Companies, jointly and severally, represents and warrants
that:
1.1 Each of the Group Companies has full power and
authority to make, enter into and carry out the terms of this
Agreement. This Agreement has been duly executed and delivered by
each Group Company and constitutes the legal, valid and binding
obligations of such Group Company enforceable against such Group
Company in accordance with its terms.
1.2 The execution and delivery of this Agreement by
each Group Company do not, and the performance of this Agreement by
such Group Company will not: (i) conflict with or violate any law,
rule, regulation, order, decree or judgment applicable to any Group
Company or by which any Group Company or any of the properties of
any Group Company is or may be bound or affected, or the Charter
Documents of any Group Company; (ii) result in or constitute (with
or without notice or lapse of time) any breach of or default under
any contract to which any Group Company is a party or by which any
Group Company or any of the affiliates or properties of any Group
Company is or may be bound or affected, or (iii) result in the
creation of any encumbrance or restriction on any of the shares of
Common Stock or equity interests in any other Group Company or
properties of any Group Company. The execution and delivery of this
Agreement by each Group Company do not, and the performance of this
Agreement by each Group Company will not, require any consent or
approval of any Person.
1.3 Each of the Group Companies (i) has been duly
organized, is validly existing and is in good standing under the
laws of its jurisdiction of organization, (ii) has all requisite
power (corporate and other) and authority to carry on its business
and to own, lease and operate its properties and assets, and (iii)
is duly qualified or licensed to do business and is in good
standing as a foreign corporation or limited liability company, as
the case may be, authorized to do business in each jurisdiction in
which the nature of such business or the ownership or leasing of
such properties requires such qualification, except where the
failure to be so qualified would not, individually or in the
aggregate, have a material adverse effect on (A) the properties,
business, operations, earnings, assets, liabilities or condition
(financial or otherwise) of the Group Companies, taken as a whole,
(B) the ability of the Group Companies to perform their respective
obligations under any Transaction Document or (C) the validity of
any of the Transaction Documents or the consummation of any of the
transactions contemplated therein (each, a “
Material Adverse Effect
”).
1.4 Except as set forth on Schedule 1.4 of
the Disclosure Schedule, there are no outstanding (A) options,
warrants or other rights to purchase from any Group Company, (B)
agreements, contracts, arrangements or other obligations of any
Group Company to issue, or (C) other rights to convert any
obligation into or exchange any securities for, in the case of each
of clauses (A) through (C), shares of capital stock of, or other
ownership or equity interests in, any Group Company. Except as
otherwise contemplated in this Agreement, the Company is not a
party or subject to any agreement or understanding, and there is no
agreement or understanding with any Person that affects or relates
to (i) the voting or giving of written consents with respect to any
security of the Company (including, without limitation, any voting
agreements, voting trust agreements, shareholder agreements or
similar agreements) or the voting by a director of the Company or
(ii) the sale, transfer or other disposition with respect to any
security of the Company.
1.5 Each of the Notes, when issued, sold and
delivered in accordance with the terms thereof and for the
consideration set forth herein, will be free of restrictions on
transfer, other than restrictions on transfer under applicable
state and federal securities laws. Assuming the accuracy of
Citadel’s representations in Section 8 of the Notes Purchase
Agreement, the Notes will be issued in compliance with applicable
state and federal securities laws. The Notes, when issued, will be
in the form contemplated by the Indenture. The Notes have been duly
authorized by the Company and, when executed and delivered by the
Company, authenticated by the Trustee and delivered to the
Purchaser in accordance with the terms of the Notes Purchase
Agreement and the Indenture, the Notes will have been duly
executed, issued and delivered by the Company and will constitute
legal, valid and binding obligations of the Company, entitled to
the benefits of the Indenture, and enforceable against the Company
in accordance with their terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws
of general application affecting enforcement of creditors’
rights generally. The Guarantees have been duly authorized, and,
when the Notes have been duly executed, authenticated and issued in
accordance with the provisions of the Indenture and delivered to
and paid for by Citadel with the Guarantees endorsed thereon by the
Guarantors, will constitute the legal, valid and binding
obligations of each of the Guarantors entitled to the benefits of
such Indenture.
1.6 The Conversion Shares have been duly and
validly authorized for issuance by the Company, and when issued
pursuant to the terms of the Indenture, will be validly issued,
fully paid and non-assessable, not subject to any preemptive or
similar rights, free from all taxes, Liens, charges and security
interests with respect to the issuance thereof and free of
restrictions on transfer other than as expressly contemplated by
the Transaction Documents.
1.7 Except as disclosed in the SEC Reports, there
is no action, claim, suit, demand, hearing, notice of violation or
deficiency, or proceeding, domestic or foreign (collectively,
“ Proceedings ”), pending or,
to the knowledge of the Company, threatened, that seeks to
restrain, enjoin, prevent the consummation of, or otherwise
challenges any of the Transaction Documents, any agreements
relating to the Acquisitions or any of the transactions
contemplated therein. Except as disclosed in the SEC Reports, none
of the Group Companies is subject to any judgment, order or decree
of which the Company has knowledge.
1.8 Each of the Group Companies has good and
marketable title to all real property and personal property owned
by it, in each case free and clear of any Liens as of the Closing
Date, except such Liens as permitted under the Transaction
Documents. For the real property not owned by any of the Group
Companies and currently used or planned to be used for the business
operations of the Group Companies, each of such Group Companies has
good and marketable title to all leasehold estates in real and
personal property being leased by it and, in each case free and
clear of all Liens as of the Closing Date.
1.9 All Debt (as defined in the Indenture)
represented by the Notes and the Guarantees is being incurred for
proper purposes and in good faith. Based on the financial condition
of the Company as of the Closing Date after giving effect to the
receipt by the Company of the proceeds from the sale of the Notes,
(i) the fair saleable value of the Group Companies’ assets
exceeds the amount that will be required to be paid on or in
respect of the Group Companies’ existing debts and other
liabilities (including contingent liabilities) as they mature; (ii)
the present fair saleable value of the assets of the Group
Companies is greater than the amount that will be required to pay
the probable liabilities of the Group Companies on their respective
debt as they become absolute and mature, and (iii) the Group
Companies are able to realize upon their assets and pay their debt
and other liabilities (including contingent obligations) as they
mature; (iv) the Group Companies’ assets do not constitute
unreasonably small capital to carry on their respective businesses
as now conducted and as proposed to be conducted including their
respective capital needs taking into account the particular capital
requirements of the business conducted by the Group Companies, and
projected capital requirements and capital availability thereof;
and (v) the current cash flow of each of the Group Companies,
together with the proceeds the Company would receive, were it to
liquidate all of its assets, after taking into account all
anticipated uses of the cash, would be sufficient to pay all
amounts on or in respect of its liabilities when such amounts are
required to be paid. None of the Group Companies intends to incur
Debts beyond its ability to pay such Debts as they mature (taking
into account the timing and amounts of cash to be payable on or in
respect of its Debt). The Company has no knowledge of any facts or
circumstances which lead it to believe that it or any other Group
Company will file for reorganization or liquidation under the
bankruptcy or reorganization laws of any jurisdiction within one
year from the Closing Date. None of the Group Companies is, or is
reasonably likely to be, in default with respect to any Debt and no
waiver of default is currently in effect. None of the Group
Companies has agreed or consented to cause or permit in the future
(upon the happening of a contingency or otherwise) any of its
property, whether now owned or hereafter acquired, to be subject to
a Lien. None of the Group Companies is a party to, or otherwise
subject to any provision contained in, any instrument evidencing
Debt of any of the Group Companies, any agreement relating thereto
or any other agreement (including, but not limited to, its Charter
Document) which limits the amount of, or otherwise imposes
restrictions on the incurring of, Debt of the Company.
2. Representations and Warranties of the
Controlling Shareholders . Each of the Controlling Shareholders, jointly
and severally, represents and warrants that:
2.1 (i) Whitehorse is the direct owner of record,
free and clear of all Liens, of 11,000,000 shares of Common Stock,
which constitutes 33.04% of the outstanding voting power of the
Company’s capital stock, (ii) Ms. Li is the direct owner of
record, free and clear of all Liens (except for the Lien already
provided to a third party by Ms. Li on 2,044,126 shares of Common
Stock (the “ Encumbered Securities
”)), of 2,627,500 shares of Common Stock, which constitutes
7.89% of the outstanding voting power of the Company’s
capital stock, and (iii) Mr. Tu is the beneficial owner, free and
clear of all Liens (except for the Lien on the Encumbered
Securities), of 13,627,500 shares of Common Stock (through the
ownership by Whitehorse and Mr. Li), which constitutes 40.93% of
the outstanding voting power of the Company’s capital stock.
Each of the Controlling Shareholders has full power and authority
to make, enter into and carry out the terms of this Agreement. This
Agreement has been duly executed and delivered by each Controlling
Shareholder and constitutes the legal, valid and binding
obligations of such Controlling Shareholder enforceable against
such Controlling Shareholder in accordance with its terms.
2.2
The execution and delivery of this Agreement by
each Controlling Shareholder do not, and the performance of this
Agreement by such Controlling Shareholder will not: (i) conflict
with or violate any law, rule, regulation, order, decree or
judgment applicable to any Controlling Shareholder or by which any
Controlling Shareholder or any of the properties of any Controlling
Shareholder is or may be bound or affected, or the Charter
Documents of Whitehorse; (ii) result in or constitute (with or
without notice or lapse of time) any breach of or default under any
contract to which any Controlling Shareholder is a party or by
which any Controlling Shareholder or any of the affiliates or
properties of any Controlling Shareholder is or may be bound or
affected, or (iii) result in the creation of any encumbrance or
restriction on any of the shares of Common Stock or equity
interests in Whitehorse or properties of any Controlling
Shareholder. The execution and delivery of this Agreement by each
Controlling Shareholder do not, and the performance of this
Agreement by each Controlling Shareholder will not, require any
consent or approval of any Person.
3.
Covenants and Agreements
.
Unless the
context requires otherwise, each Group Company hereby, jointly and
severally, covenants and agrees, and Mr. Tu (with respect to
Sections 3.2 , 3.3 and 3.4 only) covenants and
agrees to cause each Group Company to do, as
follows:
3.1
Inspection . As long as
Citadel holds Convertible Notes then outstanding (including the
principal amount of the Convertible Notes converted into Conversion
Shares as if such conversion had not taken place and to the extent
such Conversion Shares are held by Citadel at the time of
calculating such percentage), the principal amount of which is at
least 25% of the principal amount of the Convertible Notes then
outstanding (including the principal amount of the Convertible
Notes converted into Conversion Shares as if such conversion had
not taken place and to the extent such Conversion Shares are held
by Citadel at the time of calculating such percentage) (the “
Minimum Holdings ”), each Group
Company shall permit Citadel and any authorized representative
thereof, to visit and inspect the properties of such Group Company,
including its corporate and financial records, to examine its
records and make copies thereof and to discuss its affairs,
finances and accounts with its officers, at all such reasonable
times and as often as may be reasonably requested upon
reasonable notice, provided that such visits and
inspections shall not unduly interrupt the daily operation of such
Group Company. Citadel and its participating agents and
representatives, in exercising its rights of inspection hereunder,
agrees to maintain the confidentiality of all financial and other
confidential information of such Group Company acquired by them. If
requested by such Group Company, Citadel, in exercising its rights
under this Section 3.1 shall execute a confidentiality
agreement with such Group Company in such reasonable form and
substance as agreed between Citadel and such Group
Company.
3.2
FCPA . Each of the
Group Companies and Mr. Tu (during the term while he serves as the
Company’s director, Chief Executive Officer or President)
shall, and shall cause each Group Company, any of the
Company’s Subsidiaries and their respective management to,
(i) comply with the U.S. Foreign Corrupt Practices Act of 1977, as
amended, and the rules and regulations thereunder (the “
FCPA ”), including, without
limitation, not making use of the mails or any means or
instrumentality of interstate commerce corruptly in furtherance of
an offer, payment, promise to pay or authorization of the payment
of any money, or other property, gift, promise to give, or
authorization of the giving of value to any “foreign
official” (as the term is defined in the FCPA) or any foreign
political party or official thereof or any candidate for foreign
political office, in contravention of the FCPA, (ii) conduct each
such company’s respective business in compliance with the
FCPA, and (iii) institute and maintain policies and procedures
designed to ensure, and which are reasonably expected to continue
to ensure, continued compliance therewith.
3.3
PFIC . No Group
Company shall become a “passive foreign investment
company” within the meaning of Section 1297 of the U.S.
Internal Revenue Code of 1986.
3.4
OFAC . Neither any Group Company
nor, to the knowledge of any Group Company, any director, officer,
agent, employee, Affiliate or Person acting on behalf of any Group
Company is currently subject to any U.S. sanctions administered by
the Office of Foreign Assets Control of the U.S. Treasury
Department (“ OFAC ”); and no
Group Company shall, and Mr. Tu (during the term while he serves as
the Company’s director, Chief Executive Officer or President)
shall cause each Group Company not to, directly or indirectly use
the proceeds of the sale of the Notes, or lend, contribute or
otherwise make available such proceeds to any Subsidiary, joint
venture partner or other Person or entity, towards any sales or
operations in Cuba, Iran, Syria, Sudan, Myanmar or any
other country sanctioned by OFAC or for the purpose of financing
the activities of any Person currently subject to any U.S.
sanctions administered by OFAC.
3.5
Money Laundering Laws
.
Each of the Group Companies shall, and Mr. Tu (during the term
while he serves as the Company’s director, Chief Executive
Officer or President) shall cause each Group Company to, conduct
its operations at all times in compliance with the money laundering
statutes of applicable jurisdictions, the rules and regulations
thereunder and any related or similar rules, regulations or
guidelines, issued, administered or enforced by any applicable
governmental agency.
3.6
Potential Acquisitions
.
Subject to Citadel entering into a confidentiality agreement with
the Company on terms reasonably acceptable to Citadel and the
Company, the Company shall notify Citadel of any plan of all or a
material portion of the acquisition of assets or securities of
another Person if such Person’s assets or operations are
primarily in the PRC, including the Acquisition (each such
acquisition, a “ Potential
Acquisition ”), and provide Citadel with all
material documents pertaining to each Potential Acquisition,
including but not limited to, any and all agreements, memorandums
of understanding, term sheets or letters of intent, whether in
draft or executed form, together with any and all applications,
forms or similar documents (including exhibits, schedules and
annexures thereto) prepared for the purpose of filing or
registrations with, or obtaining consents, approvals,
authorizations, licenses or orders of, any Governmental Authority
under all Applicable Laws (the “ Acquisition
Documents ”) and all other material documents
reasonably requested by Citadel, reasonably in advance of the
consummation of such Potential Acquisition, for Citadel and its
counsels to review, and provide comments and suggestions on, the
legal structure contemplated by the Acquisition Documents. Citadel
shall provide any such comments to the Company as promptly as
possible and, in any event, no later than three (3) business days
from the receipt of all Acquisition Documents provided that the
Acquisition Documents are timely delivered by the Company to
Citadel. The Company covenants that it shall reflect, and cause to
be reflected, in such Acquisition Documents and the legal structure
contemplated thereby, any comments and suggestions provided by
Citadel and its counsels, that, in the opinion of such counsel, are
required or necessary to comply with all Applicable Laws and all
conditions and requirements under any filings, registrations,
consents, approvals, authorizations, licenses or orders of any
Governmental Authority relating to such Potential Acquisition;
provided, that, for the avoidance of doubt, the Company
shall, at all times, comply with all Applicable Laws and all
conditions and requirements under any filings, registrations,
consents, approvals, authorizations, licenses or orders of any
Governmental Authority relating to any Potential Acquisition. All
legal fees incurred by Citadel in connection with such review and
comment shall be borne by Citadel.
3.7
Trading Restrictions
.
Each of the Company, the Controlling Shareholders, Citadel and
their respective Affiliates shall not directly or indirectly
transact, or induce or procure any other Person to transact, any
purchase or sale in any shares of Common Stock during the
forty-five (45) Trading Days preceding the determination of any
Trading Reference VWAP.
In this
Agreement,
“
Trading Day ” means (x) if the
applicable security is quoted on the Nasdaq National Market, a day
on which trades may be made thereon, (y) if the applicable security
is listed or admitted for trading on the American Stock Exchange,
New York Stock Exchange or another national securities exchange, a
day on which the American Stock Exchange, New York Stock Exchange
or another national securities exchange is open for business, or
(z) if the applicable security is not so listed, admitted for
trading or quoted, any day other than a Saturday or Sunday or a day
on which banking institutions in the State of New York are
authorized or obligated by law or executive order to
close;
“
Trading Market ” means the following
markets or exchanges on which the Common Stock is listed or quoted
for trading on the date in question: the Nasdaq
Capital
