NOTE PURCHASE AGREEMENT
This Note Purchase Agreement (this
“Agreement”)
is made and entered into as of September 21, 2009 by and between Master Silicon Carbide Industries,
Inc. (formerly known as Paragon Semitech USA, Inc.), a Delaware
corporation with offices at 000 Xxxx Xxxx Xxxx Xxxxxxxxx, Xxxxxxxxxxx 00000 (the
“Company”)
and The China Hand Fund I, LLC
with an address at 000 Xxxxxxxxx Xxxxxx,
Xxxxx 000, Xxx Xxxx, XX 00000 and/or its successor and assigns (the “Investor”
and together with the Company, the “Parties”).
WHEREAS, the Company desires
to issue and sell to the Investor, and the Investor desires to purchase from the
Company the Note described below under Section 1.1 of this Agreement pursuant to
an exemption from registration under Section 4(2) and/or Regulation D under the
Securities Act of 1933, as amended (the “1933
Act”) or other applicable exemptions, on the terms and conditions set
forth in this Agreement.
NOW, THEREFORE, the parties
hereby agree as follows:
1. Note Sale
and Purchase. (a) The Company will issue and sell to the
Investor and the Investor agrees to purchase from the Company, pursuant to an
exemption from registration provided by Section 4(2) and/or Regulation D
promulgated under the 1933 Act or other applicable exemption, a convertible
promissory note in the principal amount of Ten Million (US$10,000,000), a copy
of which is attached hereto as Exhibit A (the “Note”),
for a purchase price of Ten Million (US$10,000,000) (the “Purchase
Price”). The Note is automatically convertible into 920,267
shares of the Company’s Series B Convertible Preferred Stock, par value $.001
per share (“Series B
Preferred Stock”), within three business day following the Change of
Domicile (as defined in the Note). The terms of the Series B
Preferred Stock are set forth in a Certificate of Designations, Preferences and
Rights of Series B Convertible Preferred Stock, a copy of which is attached
hereto as Exhibit
A (the “Certificate”).
Under the terms of the Certificate each share of Series B Preferred Stock shall
be initially convertible into ten (10) shares of the Company’s common stock, par
value US$.001 per share (“Common
Stock”), which rate is subject to adjustment upon the occurrence of
certain events.
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2.
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Closings
and Payment.
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2.1 The
Closings. The Company will issue and sell the Note to
the Investor and, subject to the terms and conditions hereof, and in reliance
upon the written representations and warranties of the Company, the Investor
will purchase the Note from the Company. The closing shall be held on
October 14, 2009, or such other date as the parties may agree upon (the “Closing”
and the “Closing
Date”) at the offices of Guzov Ofsink, LLC, 600 Madison Avenue, 00xx Xxxxx,
Xxx Xxxx, Xxx Xxxx 00000, X.X.X., at 10:00 a.m., or at such other location or by
such other means upon which the parties may agree.
2.2 Closing
Deliveries. At the Closing,
the Purchase Price shall be paid by wire transfer of immediately available funds
to the account designated by the Company in writing and the Company will deliver
to the Investor the Note. Further, at the Closing, the Company shall
deliver or cause to be delivered to the Investor each of the Transaction
Documents (as such term is hereinafter defined) to which the Company and/or its
Subsidiaries (as such term is hereinafter defined) is a party, duly executed by
the Company and/or such Subsidiaries; and (vi) such other documents, instruments
and certificates as shall be reasonably requested by the Investor.
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3.
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REPRESENTATIONS WARRANTIES AND
COVENANTS OF THE COMPANY.
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The
Company hereby represents, warrants, as of the date hereof and the Closing Date,
except as set forth on the schedule of exceptions attached hereto (the “Schedule
of Exceptions”) with each numbered item in the Schedule of Exceptions
corresponding to the section number herein, and covenants to the Investor as
follows:
3.1 Organization
and Qualification. Except as set forth
under Schedule 3.1, the Company and each
Subsidiary is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction, and has full corporate power and
authority to conduct its business as presently conducted, and to own, use or
lease assets and properties as presently owned, used or leased. The
Company and each Subsidiary are duly qualified to conduct its respective
businesses and is in good standing as a foreign corporation or other entity in
each jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the failure to be
so qualified or in good standing, as the case may be, could not, individually or
in the aggregate, have or reasonably be expected to result in (A) a material and
adverse effect on the results of operations, assets, properties, prospects,
business or condition (financial or otherwise) of the Company and its
Subsidiaries taken as a whole and/or (B) any condition, circumstance, or
situation that would prohibit or otherwise materially interfere with the ability
of the Company or any Subsidiary to perform any of its material obligations
under the Transaction Documents (as such term is hereinafter defined)
(collectively, “Material
Adverse Effect”). For purposes of this Agreement, the term “Subsidiary”
or “Subsidiaries” means any corporation(s) or
other entity(ies) of which at least a majority of the securities or other
ownership interest having ordinary voting power (absolutely or contingently) for
the election of directors or other persons performing similar functions are at
the time owned directly or indirectly by the Company and/or any of its other
subsidiaries.
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3.2 Authority;
Due Authorization. The Company has full corporate
power and authority to execute and deliver this Agreement, the Note, and the
certificates, documents and instruments related to or contemplated by each of
the foregoing agreements (each a “Transaction
Document” and collectively, the “Transaction
Documents”) to which it is or will be a party and to perform its
obligations hereunder and thereunder, and to consummate the transactions
contemplated hereby and thereby. The execution and delivery by
the Company of each of the Transaction Documents and the performance by the
Company of its obligations thereunder, have been duly and validly authorized by
the Board of Directors, no other corporate action on the part of the Company or
its stockholders being necessary. Each of the Transaction
Documents has been or will be duly and validly executed and delivered by the
Company, and constitutes, or will constitute a legal, valid and binding
obligation of the Company enforceable against the Company in accordance with
their respective terms except as enforceability may be limited by bankruptcy,
insolvency and other laws of general application affecting the enforcement of
creditors’ rights and except that any granting of equitable relief is in the
discretion of the court.
3.3 Capitalization. The
authorized and outstanding capital stock of the Company as of the date of this
Agreement and as adjusted to reflect the issuance and sale of the Securities
pursuant to this Agreement is set forth in Schedule
3.3. There are no outstanding options, warrants, rights to
subscribe for, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for, shares of any class
of capital stock of the Company or any of its subsidiaries, or agreements,
understandings or arrangements to which the Company or any of its subsidiaries
is a party, or by which the Company or any of its subsidiaries is or may be
bound, to issue additional shares of its capital stock or options, warrants,
scrip or rights to subscribe for, calls or commitment of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for, any shares of any class of its capital stock, except as set forth in
Schedule 3.3.
3.4 No
Conflicts. The execution and delivery by the Company and the
Subsidiaries of the Transaction Documents do not and will not, and the
performance by the Company and the Subsidiaries of their obligations under the
Transaction Documents and the consummation of the transactions contemplated
thereby will not (i) conflict with or result in a violation or breach of any of
the terms, conditions or provisions of the Company’s and its Subsidiaries’
certificates of incorporation or by-laws; (ii) conflict with or result in a
violation or breach of any term or provision of any law or order applicable to
the Company, its Subsidiaries, or any of their assets and properties; or
(iii)(a) conflict with or result in a violation or breach of, (b) constitute
(with or without notice or lapse of time or both) a default under, (c) require
the Company, its Subsidiaries, or any other person or entity to
obtain any consent, approval or action of, make any filing with or give any
notice to any person or entity as a result or under the terms of, or (d) result
in the creation or imposition of any charge, encumbrance, security interest,
pre-emptive right, right of first refusal, right of participation or any other
restrictions of any kind (“Liens”)
upon the Company, any of its Subsidiaries, or any of its assets or properties
under, any contract or license to which the Company or its Subsidiaries, is a
party or by which any of its assets and properties is bound (other than with
respect to clauses (i), (ii) and (iii) above, where such violations, conflicts,
breaches, defaults, or failure to obtain the consent, approval of or
make any filing with, or the creations of Liens, would not, in the aggregate,
have or reasonably be expected to result in a Material Adverse
Effect.
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3.5 Valid
Issuance of Note and Series B Preferred Stock. The
issuance of the Note has been duly authorized. The Series B Preferred
Stock issuable on conversion of the Note, when issued and paid for as provided
in this Note, will be duly authorized, validly issued, fully paid and
non-assessable. The shares of Common Stock issuable on conversion of the Series
B Preferred Stock (“Conversion
Shares”), when issued in accordance with their terms, will be duly
authorized, validly issued, fully paid and non-assessable.
3.6 Financial
Statements. The Company’s financial statements for the
fiscal year ended June 30, 2009 as set forth in the Annual Report of Form 10-K
filed by the Company on September 28, 2009 (the “Financial
Statements”) fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of operations
for the periods then ended.
3.7 Material
Changes. Since the date of the latest balance sheet included
in the Financial Statements and, except as set forth on Schedule 3.7 attached
hereto, (i) there has been no event, occurrence or development that has had or
that would reasonably be expected to result in a Material Adverse Effect, (ii)
neither the Company nor any Subsidiary has incurred any liabilities (contingent
or otherwise) other than (A) trade payables, accrued expenses and other
liabilities incurred in the ordinary course of business consistent with past
practice and (B) liabilities not required to be reflected in the Company’s or
its Subsidiaries’ financial statements pursuant to GAAP.
3.8 Governmental
Consents. To the best of the Company’s knowledge, no consent,
approval, order or authorization of, or registration, qualification,
designation, declaration or filing with any court, governmental agency,
regulatory authority or political subdivision thereof, or any other entity, is
required in connection with the execution, delivery and performance by the
Company and/or its Subsidiaries of this Agreement or any of the Transaction
Documents, other than a notice filing with an applicable state government or the
documents, approvals or certificates, as the case may be, as set forth in
Schedule 3.1 hereof.
3.9 Litigation. There is no
action, suit, proceeding, claim, arbitration or investigation pending (or, to
the best knowledge of the Company, currently threatened) against the Company or
any of its Subsidiaries, their respective activities, properties or assets or,
to the best of the Company’s knowledge, against any officer or director of the
Company or any of its Subsidiaries in connection with such officer’s or
director’s relationship with, or actions taken on behalf of, the Company or any
of its Subsidiaries. There is no pending or, to the knowledge or
belief of the Company, currently threatened, claim or litigation against the
Company or any of its Subsidiaries, contesting their right to produce,
manufacture or any goods sold, used or offered by the Company or any of its
Subsidiaries.
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3.10 Indebtedness;
Compliance. Except as disclosed on Schedule 3.10
attached hereto, neither the Company nor any Subsidiary is a party to any
indenture, debt, loan or credit agreement by which it or any of its properties
is bound. Neither the Company nor any Subsidiary is (i) in default
under or in violation of (and no event has occurred that has not been waived
that, with notice or lapse of time or both, would result in a default under),
nor has the Company nor any Subsidiary has received notice of a claim that it is
in default under or that it is in violation of, any indenture, loan or credit
agreement or any other agreement or instrument to which it is a party or by
which it or any of its properties is bound (whether or not such default or
violation has been waived), (ii) in violation of any court, arbitrator,
governmental or administrative agency, regulatory or self regulatory authority
(federal, state, county, local or foreign), stock market, stock exchange or
trading facility, or (iii) or has been in violation of any statute, rule or
regulation of any governmental authority, including without limitation all
foreign, federal, state and local laws relating to taxes, environmental
protection, occupational health and safety, product quality and safety and
employment and labor matters, except in each case as could not, individually or
in the aggregate, have or reasonably be expected to result in a Material Adverse
Effect.
3.11 Regulatory
Permits. The Company and its Subsidiaries possesses all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
businesses, except where the failure to possess such permits could not,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect, except as set forth in Schedule 3.1
hereof.
3.12 Title to
Assets. The Company and
each of its Subsidiaries have valid land use rights for all real property that
is material to their respective businesses and good and marketable title in all
personal property owned by them that is material to their respective businesses,
in each case, free and clear of all Liens, except for Liens as do not materially
affect the value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Company and each
Subsidiary. Any real property and facilities held under lease by the
Company and any of it Subsidiaries are held by them under valid, subsisting and
enforceable leases, except as could not, individually or in the aggregate, have
or reasonably be expected to result in a Material Adverse Effect.
3.13 Patents
and Trademarks. The Company and its Subsidiaries do not own or
have the rights to use any particular patents, patent applications, trademarks,
trademark applications, service marks, trade names, copyrights, licenses and
other similar rights (collectively, the “Intellectual
Property Rights”). Neither the
Company nor any Subsidiary has received written notice that the Intellectual
Property Rights used by any of them violates or infringes upon the rights of any
other person. To the knowledge of the Company there is no existing
infringement by another person of any of the Intellectual Property
Rights.
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3.14 Foreign
Corrupt Practices Act. Neither the Company or its
Subsidiaries, nor to the knowledge of the Company and its Subsidiaries, any
agent or other person acting on behalf of any of them, has, directly or
indirectly, (i) used any funds, or will use any proceeds from the sale of the
Securities, for unlawful contributions, gifts, entertainment or other unlawful
expenses related to foreign or domestic political activity, (ii) made any
unlawful payment to foreign or domestic government officials or employees or to
any foreign or domestic political parties or campaigns from corporate funds,
(iii) failed to disclose fully any contribution made by the Company or any
subsidiary (or made by any person acting on their behalf of which the Company is
aware) which is in violation of law, or (iv) has violated in any material
respect any provision of the Foreign Corrupt Practices Act of 1977, as amended,
and the rules and regulations thereunder (the “FCPA”).
3.15 OFAC. Neither the
Company nor any of its subsidiaries nor, to the knowledge of the Company, any
director, officer, agent, employee, affiliate or person acting on behalf of the
Company or any subsidiary, is currently subject to any U.S. sanctions
administered by the Office of Foreign Assets Control of the U.S. Treasury
Department (“OFAC”);
and the Company will not directly or indirectly use the proceeds of the sale of
the Securities, 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.
3.16 Money
Laundering Laws. The operations of the Company and each of its
Subsidiaries are and have been conducted 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 (collectively,
the “Money
Laundering Laws”) and no action, suit or proceeding by or before any
court or governmental agency, authority or body or any arbitrator involving the
Company and each of its Subsidiaries with respect to the Money Laundering Laws
is pending or, to the best knowledge of the Company, threatened.
3.17 Subsidiaries.
Schedule 3.17
hereto sets forth each Subsidiary of the Company, the jurisdiction of its
incorporation or organization and the name of each holder of equity securities
of the Subsidiary and the percentage of the equity owned by such person. The
Company represents that except as set forth on Schedule 3.17 hereto
(i) all of the outstanding shares of capital stock of each Subsidiary have been
duly authorized and validly issued, and are fully paid and nonassessable, (ii)
other than as contemplated by the Transaction Documents, there are no
outstanding preemptive, conversion or other rights, options, warrants or
agreements granted or issued by or binding upon any subsidiary for the purchase
or acquisition of any shares of capital stock of any Subsidiary or any other
securities convertible into, exchangeable for or evidencing the rights to
subscribe for any shares of such capital stock, (iii) other than as contemplated
by the Transaction Documents, neither the Company nor any Subsidiary is subject
to any obligation (contingent or otherwise) to repurchase or otherwise acquire
or retire any shares of the capital stock of any subsidiary or any convertible
securities, rights, warrants or options of the type described in the preceding
sentence, and (iv) other than as contemplated by the Transaction Documents, none
of the Subsidiaries of the Company is party to, nor has any knowledge of, any
agreement restricting the voting or transfer of any shares of the capital stock
of any Subsidiary.
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3.18 Other
Representations and Warranties Relating to Yili China
(a) Yili
China, the Company’s operating subsidiary, has completed the necessary
registrations and transactions, and has submitted the necessary application
documents for the approvals in the PRC to convert Yili China into a wholly
foreign owned enterprise wholly owned by the Company through its ownership of
Yili USA and C3 Capital Limited.
(b) The
constitutional documents and certificates and related material contracts of Yili
China are valid and have been duly approved or registered (as applicable) by
competent PRC governmental authorities.
(c) Yili
China is not in receipt of any letter or notice from any relevant PRC
governmental authority notifying it of revocation of any licenses or
qualifications issued to it or any subsidy, if any, granted to it by any PRC
governmental authority for non-compliance with the terms thereof or with
applicable PRC laws, or the need for compliance or remedial actions in respect
of the activities carried out by it, except such revocation does not, and could not, individually or in the aggregate, have or
result in a Material Adverse Effect.
(d) Yili
China has conducted its business activities within the permitted scope of
business or has otherwise operated its business in compliance with all relevant
legal requirements and with all requisite licenses and approvals granted by
competent PRC governmental authorities except where the failure to so comply
does not or could not, individually or in the
aggregate, have or result in a Material Adverse Effect.
3.19 Other
Representations and Warranties Relating to Ehe China and Quartz
China. The
Ehe Equity Transfer Agreement and the Quartz Mine MOU have been formed to
reflect the true intention of the parties. The Ehe Equity Transfer Agreement is
valid and enforceable as to the contractual obligations of each party thereto
upon its execution. Once the transaction contemplated by the Ehe Equity Transfer
Agreement is approved by the related government in PRC, the Purchase of Ehe
China shall be valid and enforceable under the PRC laws.
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4.
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REPRESENTATIONS, WARRANTIES AND
CERTAIN AGREEMENTS OF INVESTOR.
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The Investor
hereby represents and warrants to, and agrees with, the Company
that:
4.1 Authorization. This Agreement and each of
the other Transaction Documents to which the Investor is a party constitute
valid and legally binding obligations of the Investor, enforceable against the
Investor in accordance with their terms. The Investor represents that
the Investor has full power and authority to enter into and perform its
obligations under this Agreement.
4.2 Purchase
for Own Account. The Note to be purchased by the Investor
hereunder will be acquired for investment for Investor’s own account, not as a
nominee or agent. The Investor has not purchased the Note with a view to the
public resale or distribution thereof, and Investor has no present intention of
selling, granting any participation in, or otherwise distributing the
same.
4.3 Disclosure
of Information. The Investor is entering into this
Agreement in reliance solely on the representations and warranties set forth in
this Agreement and no reliance is being placed on oral or other representations,
if any, that may have been made prior to the execution and delivery of this
Agreement by the Company or any officer, director, employee or agent of the
Company. The Investor acknowledges that all documents, records, and
books pertaining to this investment that the Investor believes necessary for
consideration and evaluation of the investment have been made available for
inspection by the Investor, and the Investor’s attorney(ies), accountant(s), or
advisor(s). The Investor is not relying on the Company with respect to the tax
and other economic considerations of its investment.
4.4 Investment
Experience. The Investor understands that the purchase of the
Note involves substantial risk. The Investor (a) has
experience as an investor in securities of companies in the development stage
which seek to make investments in the PRC and acknowledges that the Investor can
bear the economic risk of the Investor’s investment in the Note and (b) has such
knowledge and experience in financial or business matters that Investor is
capable of evaluating the merits and risks of this investment in the Securities
and protecting Investor’s interests in connection with this
investment.
4.5 Accredited
Investor Status. The
Investor is an “accredited investor” within the meaning of Rule 502 of
Regulation D promulgated under the 0000 Xxx.
4.6 Restricted
Securities. The Investor understands that upon issuance and
sale to the Investor the Note will be characterized as a “restricted security”
under the 1933 Act inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under the 1933 Act, and
applicable regulations thereunder, such Note may be resold without registration
under the 1933 Act only in certain limited circumstances. In this
connection, the Investor represents that it is familiar with Rule 144,
Regulation D and Regulation S under the 1933 Act, as presently in effect, and
understands the resale limitations imposed thereby and by other provisions of
the 1933 Act.
4.7 Limitations
on Dispositions. The Investor acknowledges that if any
transfer of the Note is proposed to be made in reliance upon an exemption under
the 1933 Act, the Company may require an opinion of counsel satisfactory to the
Company that such transfer may be made pursuant to an applicable exemption under
the 1933 Act. The Investor acknowledges that, so long as required by
law, a legend similar to the following may appear on the certificates
representing the Series B Preferred Stock and the Conversion
Shares:
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THESE
SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED,
ASSIGNED OR TRANSFERRED EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT UNDER
THE SECURITIES ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO
THESE SECURITIES, (ii) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF
REGULATIONS UNDER THE SECURITIES ACT, OR (iii) PURSUANT TO A SPECIFIC EXEMPTION
FROM REGISTRATION UNDER THE SECURITIES ACT BUT ONLY UPON A HOLDER HEREOF FIRST
HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE
COMPANY THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE
PROVISIONS OF THE SECURITIES ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR
SECURITIES LAW.
4.8 Further
Limitations on Disposition. Without in any way limiting the
representations set forth above, the Investor further agrees not to make any
disposition of all or any portion of the Note, except pursuant to a registration
statement under the 1933 Act covering such disposition or pursuant to an
exemption from registration under the 1933 Act, including, without limitation,
Rule 144, Rule 144A or Regulation S thereunder.
4.9 No
General Solicitation. Investor has not received any general
solicitation or advertising regarding the offering of the Note or this
Agreement.
5. CONDITIONS TO INVESTOR’S OBLIGATIONS
AT CLOSING. The obligations of the Investor to purchase the
Note under this Agreement are subject to the fulfillment or waiver, on or before
the Closing, of each of the following conditions:
5.1 Representations
and Warranties True. Each of the representations and
warranties of the Company and each Subsidiary contained in Section 3 shall be
true and correct in all material respects as of the date when made and as of the
Closing as though made on and as of such date.
5.2 Performance. The Company and
each Subsidiary shall have performed and complied in all material respects with
all agreements, obligations and conditions contained in the Transaction
Documents that are required to be performed or complied with by it on or before
the Closing and shall have obtained all approvals, consents and qualifications
necessary to complete the purchase and sale described herein.
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5.3 Securities
Exemptions. The offer and sale of the Note to the Investor
pursuant to this Agreement shall be exempt from the registration requirements of
the 1933 Act.
5.4 Completion
of Due Diligence. Investor shall have completed its legal and financial
due diligence, the results of which shall be reasonably satisfactory to the
Investor, and the Company shall have reasonably cooperated with Investor in
connection therewith.
5.5 No
Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits the consummation of any of the transactions contemplated by the
Transaction Documents.
5.6. Adverse
Changes. Since the date of execution of this Agreement, no
event or series of events shall have occurred that reasonably could have or
result in a Material Adverse Effect with respect to the
Subsidiaries.
5.10 Company
Deliverables. The Company shall have delivered all of the
documents required to be delivered by the Company pursuant to Section
2.2.
6. COVENANTS
OF THE COMPANY
6.1 Filing of
Certificate of Designations of Series B Preferred Stock. Prior
to the Change of Domicile the Company shall cause its Nevada subsidiary into
which it shall be merged in connection with the Change of Domicile to have filed
with the Secretary of State of the State of Nevada a Certificate of
Designations, Preferences and Rights of Series B Convertible Preferred Stock
substantially in the form of Exhibit A attached
hereto. The Company shall reserve and keep available at all
times the maximum number of shares for the purpose of enabling the Company to
issue the Conversion Shares.
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6.2 Right of
First Refusal. If, at any time
and from time to time, within eighteen months after the Closing, the Company
seeks to raise additional financing through a private placement of its equity
securities (a “Proposed
Financing”) (other than certain exempt issuances described below as to
which this section does not apply), the Company shall first offer such equity
securities to the Investor. The Investor shall have the right to participate in
any Proposed Financing by the Company. This right is personal to the
Investor and is not transferable, whether in connection with the sale of stock
or otherwise, except for the immediate transferee of the
Investor. The terms on which the Investor shall purchase securities
pursuant to the Proposed Financing shall be the same as such securities are
offered for purchase by the Company to other potential investors (the "Proposed
Subscribers"). The Company shall give the Investor the
opportunity to participate in the Proposed Financing by giving the Investor not
less than ten (10) days notice setting forth the terms of the Proposed
Financing. In the event that the terms of the Proposed Financing are
changed in a manner which is more favorable to the Proposed Subscribers, the
Company shall provide the Investor, at the same time as the notice is provided
to the Proposed Subscribers, with a new ten (10) day notice setting forth the
revised terms that are provided to the Proposed Subscribers. In the
event that the Investor does not exercise its right to participate in the
Proposed Financing within the time limits set forth in this Section 6.2, the
Company may sell the securities in the Proposed Financing at a price and on
terms which are no more favorable to the Proposed Subscribers than the terms
provided to the Investor. If the Company subsequently changes the
price or terms so that the price is more favorable to the Proposed Subscribers
or so the terms are more favorable to the Proposed Subscribers, the Company
shall provide the Investor with the opportunity to purchase the securities on
the revised terms in the manner set forth in Section 6.2 of this
Agreement. The right of first refusal shall not apply
to:
(a) any
shares (or options, warrants or rights therefor) granted or issued hereafter to
employees, officers, directors, contractors, consultants or advisors to, the
Company, or any Subsidiary, pursuant to incentive agreements, share purchase or
share option plans, share bonuses or awards, warrants, contracts or other
arrangements that are approved by the Board of Directors;
(b) any
shares (and/or options or warrants therefor) issued or issuable to parties
providing the Company with equipment leases, real property leases, loans, credit
lines, guaranties of indebtedness, or similar financing, under arrangements
approved by the Board of Directors;
(c) any
shares (and/or options or warrants therefor) issued in connection with the
Company entering into a partnership with a strategic partner or any shares
issued pursuant to the acquisition of another corporation or entity by the
Company by consolidation, merger, purchase of all or substantially all of the
assets, or other reorganization in which the Company acquires, in a single
transaction or series of related transactions, all or substantially all of the
assets of such other corporation or entity or fifty percent (50%) or more of the
voting power of such other corporation or entity or fifty percent (50%) or more
of the equity ownership of such other entity;
(d) any
shares issued in connection with any share split or share dividend;
and
(f) any
securities offered by the Company to the public pursuant to a Registration
Statement filed under the 0000 Xxx.
6.3 [Reserved]
6.4
Use
of Proceeds. The Company will use the net proceeds from
the sale of the Note, after payment of legal fees and other costs, to fund
working capital expenses of the Company and its Subsidiaries.
11
6.5
Conduct
of Business. For so long as at
least 25% of the shares of the Series B Preferred Stock to be issued
on automatic conversion of the Note issued to the Investor pursuant to this
Agreement remain outstanding:
(a) the
Company shall and shall cause each of its Subsidiaries (i) to carry on its
businesses in the regular and ordinary course in substantially the same manner
as currently conducted and/or as currently plan to be conducted, (ii) to comply
in all material respects with all applicable laws (except where the failure to
so comply would not have a Material Adverse Effect), (iii) to use all reasonable
efforts to preserve its and its Subsidiaries businesses intact;
(b) the
Company shall not permit or effect the dissolution or winding up of the Company
or any of its Subsidiaries;
(c) the
Company shall, at all times, maintain directly or indirectly more
than a 50.1% controlling interest in Yili China; and
(d) the
Company shall provide the Investor and its representatives with copies of all
Board minutes, quarterly business reports, quarterly management account and
annual accounts of the Company and its Subsidiaries and shall allow reasonable
access during normal business hours to inspect the facilities, books and records
of the Company and its Subsidiaries.
7. CONDITIONS TO THE COMPANY’S
OBLIGATIONS AT CLOSING.
The
obligations of the Company to the Investor under this Agreement are subject to
the fulfillment or waiver on or before the Closing of each of the following
conditions by the Investor:
7.1 Representations
and Warranties. The representations and warranties of the Investor
contained in Section 4 shall be true and complete in all material respects on
the date of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.
7.2 Payment
of Purchase Price. The Investor shall have delivered to the Company
the Purchase Price in accordance with the provisions of Section 2.
7.3 Securities
Exemptions. The offer and
sale of the Note to the Investor pursuant to this Agreement shall be
exempt from the registration requirements of the 1933 Act.
12
8.
POST-CLOSING
COVENANTS OF INVESTOR.
8.1 Confidentiality. Each
party acknowledges that the other could be irreparably damaged if confidential
information concerning the business and affairs of the other was disclosed to or
utilized on behalf of any person. Each party covenants and agrees
with the other that, except as otherwise provided in this Agreement or the other
Transaction Documents, such party will not, at any time, directly or indirectly,
without the prior written consent of the other, divulge, or permit any of its
partners, employees, agents or affiliates to divulge to any person any
non–public information concerning the business or financial or other affairs, or
any of the methods of doing business used by the other, nor release any
information provided pursuant to or concerning this Agreement or the other
Transaction Documents or the transaction contemplated hereby or thereby if such
release is intended for, or may result in, its public dissemination. The
foregoing requirements of confidentiality shall not apply to
information: (i) that is now or in the future becomes freely
available to the public through no fault of or action by the using or disclosing
party; (ii) that is in the possession of, or was used by, the disclosing party
prior to the time such information was obtained from the Company or that is
independently acquired by the using or disclosing party without the aid,
application or use of such other information; (iii) that is obtained or used by
the disclosing party in good faith without knowledge of any breach of a secrecy
arrangement from a third party; (iv) that is required to be disclosed by
applicable law or order of government agency or self-regulatory body; or (v)
that is disclosed in connection with any bona-fide offer to purchase any shares
in the Company; provided that the proposed transferor obtains an undertaking
from the proposed transferee to keep such information confidential in accordance
with the provision of this Section 8.1 prior to such disclosure. The Investor
and the Company agree to consult with each other (and to take into consideration
any comments reasonably raised by any such party) prior to the dissemination of
any press release or public communication concerning this Agreement and the
other Transaction Documents or the transaction contemplated hereby or
thereby. Any such press release or public communication shall be
subject to the approval of both the Company and Investor. This Section 8.1 will
survive termination of this Agreement.
9. GENERAL
PROVISIONS.
9.1 Survival
of Warranties; Investigation. The representations, warranties and
covenants of the Company and Investor contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing. It shall be no defense to an action for breach of this
Agreement that Investor or its agents have (or have not) made investigations
into the affairs of the Company or that the Company could not have known of the
misrepresentation or breach of warranty. Damages for breach of a
representation or warranty or other provision of this Agreement shall not be
diminished by alleged tax savings resulting to the complaining party as a result
of the loss complained of.
9.2 Successors
and Assigns. The terms and conditions of this Agreement shall inure
to the benefit of and be binding upon the respective successors and assigns of
the parties, including without limitation. the Nevada subsidiary into
which the Company is proposing to merge in connection with the Change of
Domicile. The Company shall cause such Nevada subsidiary to expressly
assume all of its obligations hereunder. The Company acknowledges and
agrees that the Investor may assign all and any of its rights and obligations
under the Agreement without its consent.
13
9.3 Governing
Law; Jurisdiction. Any dispute, disagreement, conflict of
interpretation or claim arising out of or relating to this Agreement, or its
enforcement, shall be governed by the laws of the State of New
York. The Company and Investor hereby irrevocably and unconditionally
submit, for themselves and their property, to the nonexclusive jurisdiction of
the Supreme Court of the State of New York sitting in New York County and of the
United States District Court of the Southern District of New York, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement, or for recognition or enforcement of any judgment,
and each of the parties hereto hereby irrevocably and unconditionally agrees
that all claims in respect of any such action or proceeding may be heard and
determined in such New York State or, to the extent permitted by law, in such
Federal court. Each of the parties hereto agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Each party hereby irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection which it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement in any court
referred to above. Each party to this Agreement irrevocably consents
to service of process in the manner provided for notices
below. Nothing in this Agreement will affect the right of any party
to this Agreement to serve process in any other manner permitted by
law. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY
LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT,
TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
9.4 Counterparts. This
Agreement may be executed in two or more counterparts, each of which shall be
deemed as original, but all of which together shall constitute one and the same
agreement. A telefaxed copy of this Agreement shall be deemed an
original.
9.5 Headings. The
headings and captions used in this Agreement are used for convenience only and
are not to be considered in construing or interpreting this
Agreement. All references in this Agreement to sections, paragraphs,
exhibits and schedules shall, unless otherwise provided, refer to sections and
paragraphs hereof and exhibits and schedules attached hereto, all of which
exhibits and schedules are incorporated herein by this reference.
9.6 Notices. All notices and other
communications provided for herein shall be in writing and shall be delivered by
hand or overnight courier service, mailed by certified or registered mail or
sent by facsimile, to the addresses set forth below:
14
If to the
Company:
000 Xxxx
Xxxx Xxxx
Xxxxxxxxx,
Xxxxxxxxxxx 00000
Facsimile
No:
and
to:
Guzov
Ofsink, LLC
000
Xxxxxxx Xxxxxx, 00xx
Xxxxx
Xxx Xxxx,
XX 00000
Attention:
Xxxxxx X. Xxxxxx, Esq.
Facsimile
No: 212-688-7273
If to
Investor:
The China
Hand Fund I, LLC
000
Xxxxxxxxx Xxxxxx, Xxxxx 000, Xxx Xxxx, XX 00000
Facsimile:
(000) 000-0000
Except as
otherwise provided in this Agreement, all such communications shall be deemed to
have been duly given when transmitted by telecopier or personally delivered or,
in the case of a mailed notice, upon receipt, in each case given or addressed as
aforesaid. Any party hereto may change its address or facsimile
number for notices and other communications hereunder by notice to the other
parties hereto.
10.7 Costs,
Expenses.
Each party hereto shall bear their own costs in connection with the preparation,
execution and delivery of this Agreement.
10.8 Amendments
and Waivers. Any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the holders of at least a majority of Series
B Preferred Stock then outstanding. No delay or omission to exercise
any right, power, or remedy accruing to the Investor, upon any breach, default
or noncompliance of the Company under this Agreement shall impair any such
right, power, or remedy, nor shall it be construed to be a waiver of any such
breach, default or noncompliance, or any acquiescence therein, or of any similar
breach, default or noncompliance thereafter occurring. All remedies,
either under this Agreement, by law, or otherwise afforded to the Investor,
shall be cumulative and not alternative.
15
10.9 Severability. If one or more provisions of
this Agreement are held to be unenforceable under applicable law, such
provision(s) shall be excluded from this Agreement and the balance of the
Agreement shall be interpreted as if such provision(s) were so excluded and
shall be enforceable in accordance with its terms.
10.10 Entire
Agreement. This Agreement, together with all exhibits and schedules
hereto, each of the other Transaction Documents, and the other documents
delivered pursuant hereto and thereto constitute the entire agreement and
understanding of the parties with respect to the subject matter hereof and
supersedes any and all prior negotiations, correspondence, agreements,
understandings duties or obligations between the parties with respect to the
subject matter hereof.
10.11 Further
Assurances. From and after the date of this Agreement, upon the request
of the Investor or the Company, the Company and the Investor shall execute and
deliver such instruments, documents or other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement.
16
In Witness Whereof, the
parties hereto have executed this Agreement as of the date first written
above.
|
THE COMPANY:
|
|
|
By:
|
/s/
Xxxx X. Xxxxx
|
|
Print Name:
|
Xxxx
X. Xxxxx
|
|
Title:
|
CEO and President
|
|
INVESTOR
|
|
|
THE
CHINA HAND FUND I, LLC
|
|
|
By:
|
/s/
Xxxx X.
Xxxxx
|
|
Print Name:
|
Xxxx
X. Xxxxx
|
|
Title:
|
Member
and
Manager
|
17
Schedule
3.1
Organization and
Qualification
As of the
date of this Agreement, Ehe China has not obtained the following
approval/certificates for the purposes of operation of its contemplated
business:
|
|
1)
|
The
approval document issued by the statuary administration in charge of
project or “Backup Certificate of Enterprise Investment Project of
Xinjiang Uygur Autonomous Region”;
|
|
|
2)
|
Approval
from the Environmental Protection Bureau of Aletai area in Xinjiang
Province of the Environmental Impact
Report;
|
|
|
3)
|
Preliminary
Approval regarding the Use of Land for Construction Purposes from the
related National Land Resources Administrative Bureau in Xinjiang
Province, related zoning approval and go through the Land Grant
procedure;
|
As of the
date of this Agreement, Quartz Mine China has not been incorporated. The only
document it has is company name reservation.
18
Schedule
3.3
Capitalization of the
Company
Authorized
Capital
Common Stock:
100,000,000 shares, par value US$.001 per share.
Preferred Stock:
10,000,000 shares, par value US$.001 per share
Series A Preferred
Stock: 2,000,000 shares of Preferred Stock have been
designated as Series A Convertible Preferred Stock.
Issued
Capital
(a) Common
Stock
A total
of 2,522,050 shares of Common Stock were issued and outstanding as of September
30 2009.
(b) Series A Preferred
Stock: 996,186 shares of Series A Preferred Stock were
issued to the Investor pursuant to a Securities Purchase Agreement dated as of
September 2, 2009.
Each
share of Series A Preferred Stock is currently convertible into 10 shares of
Common Stock.
(c) Warrants.
996,186
warrants to purchase a total of 24,904,645 pre-split (or 2,490,465 post split)
shares of Common Stock were issued to the Investor pursuant to a Securities
Purchase Agreement dated as of September 2, 2009.
19
Schedule
3.7
Material
Changes
None.
Schedule
3.10
Indebtedness
As of the
date of this Agreement, Yili China owns RMB 2,666,537.23 (Approximately
US$389,847) to local electric power supplier, Yihe Hydro-electric Center of
Development and Administration Center of Yilihe Area of Xinjiang.
Schedule
3.12
Yili
China has entered the lease for the lease of an aggregate of 100 Mu
(approximately 717,594 square foot) land for the use of the new project (the
construction of 35,000 ton carborundum production lines) and such land has not
secured land use right; nevertheless, in the lease between Yili China and the
local government in Yili County at Xinjiang Province, the local government
agreed to cooperate with the application of the land use right by the Company
during the lease term.
Neither
Ehe China nor Quartz Mine China has secured any land use rights for any real
property as of the date of this Agreement.
Schedule
3.15
Subsidiaries
|
Name
|
Jurisdiction
|
Equity Owners and
Percentage of Equity
Securities Held
|
||
|
Yili
Carborundum USA, Inc.
|
Delaware,
U.S.A.
|
|||
|
C3
Capital Limited
|
British
Virgin Islands
|
100%
owned by Yili Carborundum USA,
Inc.
|
20
|
Yili
Master Carborundum Production Co., Ltd. (“Yili China”)
|
China
|
100%
owned by C3 Capital, Limited after giving effect to the Purchase of Yili
China
|
||
|
Xinjiang
Ehe Mining and Metallurgy Co., Ltd. (“Ehe China”)
|
China
|
90%
owned by C3 Capital, Limited after giving effect to the Purchase of Ehe
China
The
rest 10% is to be owned by the local electric power
supplier.
|
||
|
Xinjiang
Paragon Master Mining Co., Ltd. (“Quartz Mine China”)
|
China
|
100%
owned by C3 Capital, Limited after giving effect to the Purchase of Quartz
Mine China
|
21
Exhibit
A
CERTIFICATE
OF DESIGNATIONS
OF
SERIES
B CONVERTIBLE PREFERRED STOCK
22
