SETTLEMENT AGREEMENT
 
THIS SETTLEMENT AGREEMENT (the “Settlement Agreement”) is entered into by and
between Chinamerica Fund, LP (“Chinamerica”) and China BAK Battery, Inc. (the
“Company”) and its subsidiary BAK International, Ltd. (“BAK International” and,
together with the Company, “CBAK”). Chinamerica and CBAK are also each referred
to separately as a “Party” and together as the “Parties.” The Parties, in order
to resolve disputed and contested issues and to limit the hazards, uncertainties
and inconvenience of potential litigation, enter into this Settlement Agreement.
 
1. Escrow Agreement. On January 20, 2005, BAK International consummated a
private placement of its common stock with unrelated investors whereby it issued
an aggregate of 8,600,433 shares of common stock for gross proceeds of
US$17,000,000 (the “Private Placement”). Immediately thereafter, the shares of
BAK International were exchanged for shares of the Company. Chinamerica was an
investor in the Private Placement and entered into a subscription agreement (the
“Subscription Agreement”) in connection therewith. In conjunction with the
Private Placement, pursuant to an Escrow Agreement dated January 20, 2005, Mr.
Li Xiangqian, the Chairman and Chief Executive Officer of the Company, placed
2,179,550 shares of the Company’s common stock owned by him (the “Make Good
Shares”) into an escrow account. The terms and conditions regarding release of
the Make Good Shares from escrow was set forth in the Escrow Agreement. A
dispute has arisen between Chinamerica and CBAK regarding 1,089,775 Make Good
Shares (herein referred to as the “Released Shares”) released from the escrow
account to Mr. Li and subsequently delivered by Mr. Li to BAK International,
which then delivered the shares to the Company.

The Parties have agreed, without any admission of liability, that it is in the
interests of all of the Parties and their respective Affiliates and investors to
resolve the issues relating to the Released Shares amicably.

2. Definitions. Capitalized terms not otherwise defined herein shall have the
following meanings:
 

 
a.
Affiliates means all persons and entities controlling, controlled by or under
common control with a Party. Investors in Chinamerica shall not be deemed
Affiliates of Chinamerica for purposes of this Settlement Agreement, except to
the extent of any rights that they may derive as an investor in Chinamerica.

 

 
b.
Claims means any and all claims, demands, causes of actions, or liabilities, of
any and every character, kind and nature whatsoever, in law or in equity,
whether known or unknown, foreseen or unforeseen, past, present, or future,
accrued or unaccrued, contingent or fixed, arising out of or related to any or
all of the Subscription Agreement, the Escrow Agreement, the Make Good Shares
(including the Released Shares), and the Private Placement, including any
registration rights (other than the registration rights granted pursuant to
Section 3.b. of this Settlement Agreement) related thereto.

SETTLEMENT AGREEMENT
 
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c.
Release Date means the earliest of (x) such time as all of the Chinamerica
Shares have been sold by Chinamerica; (y) such time as all of the Chinamerica
Shares may be sold by Chinamerica without volume limitations pursuant to Rule
144 under the Securities Act, as determined by the counsel to the Company
pursuant to a written opinion letter to such effect, addressed and acceptable to
the Company’s transfer agent; and (z) the date a Registration Statement on Form
S-3 (or other appropriate form) covering the resale by Chinamerica of the
Chinamerica Shares is declared effective by the SEC as set forth in Section 3.b.

 

 
d.
SEC means the U.S. Securities and Exchange Commission.

 

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

 
3. Settlement Terms.
 

 
a.
Delivery of Shares. Upon execution of this Settlement Agreement by the Company
and Chinamerica, the Company shall promptly, and no later than ten days after
the date this Settlement Agreement is executed by the Parties, deliver to
Chinamerica at the address set out below a certificate or certificates
registered in the name of Chinamerica Fund, LP for 32,050 of the Released Shares
(the “Chinamerica Shares”).

 

 
b.
Registration. On or prior to the date (the “Filing Date”) that is one month
after the date that the Company’s Registration Statement on Form S-3
(Registration No. 333-148253) is declared effective by the SEC (or, if the
Filing Date is not a business day, the first business day after the Filing
Date), and provided that Chinamerica has provided the Company with a completed
questionnaire in the form attached as Exhibit A hereto, the Company shall
prepare and file with the SEC a Registration Statement on Form S-3 (or such
other appropriate form for such purpose) covering the resale by Chinamerica of
the Chinamerica Shares in an offering to be made on a continuous basis pursuant
to Rule 415 under the Securities Act. Such Registration Statement may also
include such other selling holders as the Company shall deem appropriate. The
Company shall cause such Registration Statement to be declared effective under
the Securities Act as soon as possible, and shall use its reasonable best
efforts to keep such Registration Statement continuously effective under the
Securities Act until the date which is the earliest of (i) two years after its
effective date; (ii) such time as all of the Chinamerica Shares covered by such
Registration Statement have been sold by Chinamerica; and (iii) such time as all
of the Chinamerica Shares covered by such Registration Statement may be sold by
Chinamerica without volume limitations pursuant to Rule 144, as determined by
counsel to the Company pursuant to a written opinion letter to such effect,
addressed and acceptable to the Company’s transfer agent. No later than 5:00
p.m. Eastern time on the day following the date the Registration Statement is
declared effective, the Company shall file with the SEC in accordance with Rule
424 under the Securities Act the final prospectus to be used in connection with
sales pursuant to such Registration Statement (whether or not such filing is
technically required under such Rule).

SETTLEMENT AGREEMENT
 
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c.
Ability to Disclose Information. The Company agrees that Chinamerica may inform
other investors in the Private Placement of the terms of this Settlement
Agreement. The Company agrees that it will promptly furnish or file a report on
Form 8-K regarding this Settlement Agreement, or otherwise make information
regarding this Settlement Agreement available in accordance with Regulation FD.

 

 
d.
Relief. The Company acknowledges that in the event it fails to deliver a
certificate or certificates representing the Chinamerica Shares as provided in
Section 3.a, any remedy at law may prove to be inadequate relief to Chinamerica.
The Company agrees that Chinamerica may require specific performance of this
Settlement Agreement by insisting upon delivery of the Chinamerica Shares, and
shall be entitled to seek temporary and permanent injunctive relief without the
necessity of proving actual damages and without posting a bond or other
security.

 
4 Interpretation. The Parties have participated jointly in the negotiation and
drafting of this Settlement Agreement. If an ambiguity or question of intent or
interpretation arises, this Settlement Agreement will be construed as if drafted
jointly by the Parties, and no presumption or burden of proof will arise
favoring or disfavoring any Party because of the authorship of any provision of
this Settlement Agreement.
 
5. No Admission. By entering into this Settlement Agreement, no Party is in any
way admitting any liability to any other Party on account of any matter covered
by this Settlement Agreement. Rather, this Settlement Agreement is entered into
solely for the purpose of compromise and settlement of doubtful and contested
claims and issues, to buy peace, and to avoid the hazards, delays, and
uncertainties of litigation.
 
6. Mutual Releases. Effective on the Release Date, Chinamerica, on behalf of
itself and its Affiliates, releases, acquits, and forever discharges CBAK, its
predecessors and successors in interest, its parent and subsidiary
organizations, and its Affiliates, all of their respective officers, directors,
employees, managers, shareholders, partners, attorneys, accountants, advisors,
representatives, agents, insurers, heirs, executors and assigns (collectively,
the “CBAK Releasees”) of and from any and all Claims; and Chinamerica covenants
never to sue any of the CBAK Releasees upon any of the Claims hereby released.
Effective on the Release Date, CBAK, on behalf of itself and its Affiliates,
releases, acquits, and forever discharges Chinamerica and its Affiliates, and
all of their respective officers, directors, employees, managers, shareholders,
partners, attorneys, accountants, advisors, representatives, agents, insurers,
heirs, executors, and assigns (collectively, the “Chinamerica Releasees”) of and
from any and all Claims; and CBAK covenants never to sue any of the Chinamerica
Releasees upon any of the Claims hereby released. For purposes of this
paragraph, the Affiliates of Chinamerica and the Chinamerica Releases shall not
include Taylor Investment Group, LLC (“TIG”) or Stephen Taylor (“Taylor”) as to
any Claims other than Claims that TIG or Taylor derived from any investment by
them, or either of them, directly in Chinamerica or any participation by them,
or either of them, in the management of Chinamerica or Chinamerica Partners,
L.P.

SETTLEMENT AGREEMENT
 
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7. Indemnification. In the event that any of Chinamerica, its general partner
Chinamerica Partners, L.P., or Chinamerica Holdings, LLC institutes any
proceedings or asserts any Claim against any of the CBAK Releasees, Chinamerica,
to the fullest extent permitted under the law, shall hold harmless, defend and
indemnify such CBAK Releasees with respect to such proceedings and asserted
Claims.
 
8. Choice of Law. This Settlement Agreement shall be interpreted and construed
according to the internal laws of the State of New York (without giving effect
to any choice of law or conflict of law provisions of any jurisdiction), and
applicable laws of the United States of America.
 
9. Entire Agreement. This Settlement Agreement supersedes all other prior oral
or written agreements between the Parties with respect to the matters set forth
herein and contains the entire agreement of the Parties with respect to the
matters set forth herein. If any provision of this Agreement shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Settlement Agreement in that jurisdiction or the validity or
enforceability of that or any other provision of this Settlement Agreement in
any other jurisdiction.
 
10. Amendments. This Settlement Agreement may be modified or amended only in
writing, signed by each of the Parties to this Settlement Agreement prior to the
effective date of any such modification or amendment. Any waiver must be in
writing and signed by each Party whose interests are adversely affected by such
waiver. No waiver granted in any one instance shall be construed as a continuing
waiver or as a waiver applicable to any other provision. No exercise or failure
to exercise any right shall preclude any other or further exercise of that right
or any other right.
 
11. Representations. The Parties acknowledge that this Settlement Agreement is
executed after substantial, long-term negotiations between and among
representatives of the Parties. Each Party represents that: (a) such Party and
its attorneys have conducted their own investigation concerning the facts
surrounding the matters covered by this Settlement Agreement and in voluntarily
choosing to execute this Settlement Agreement, have relied upon their own
analysis of such facts and not on any information furnished by any other Party
or its representatives; (b) there are no oral or other written agreements
concerning the subject matter of this Settlement Agreement; (c) the right to
rely on any oral or written statement of any Party or any failure of any Party
to state any fact is expressly waived and released; (d) it owns and has the
right to release any Claims released herein; (e) such Party has the requisite
corporate power and authority to enter into and to perform this Settlement
Agreement; and (f) the person signing the Settlement Agreement on behalf of such
Party has been authorized to execute and deliver this Settlement Agreement on
behalf of such Party. In addition, Chinamerica represents that it (i) is
acquiring the Chinamerica Shares in the ordinary course of business for its own
account and not with a view towards, or for resale in connection with, the sale
or distribution thereof, except pursuant to sales registered or exempted under
the Securities Act, (ii) does not have a present arrangement to effect any
distribution of the Chinamerica Shares to or through any person or entity, (iii)
does not presently have any agreement or understanding, directly or indirectly,
with any person to distribute any of the Chinamerica Shares, (iv) is an
“accredited investor” as that term is defined in Rule 501(a) of Regulation D
under the Securities Act and (v) is not a registered broker-dealer under Section
15 of the Securities Exchange Act of 1934, as amended. Chinamerica understands
that the Company is relying on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and Chinamerica’s
compliance with, its representations, warranties, agreements, acknowledgments
and understandings set forth herein in order to determine the availability of
such exemptions. When executed by all Parties and delivered by each Party to the
other Parties, this Settlement Agreement will constitute the legal, valid and
binding obligation of each Party. This Settlement Agreement shall be binding
upon the assignees and successors of the Parties. This Settlement Agreement is
personal to the Parties and is not intended to create any right in any third
person who is not a Party or is not identified as a CBAK Releasee or a
Chinamerica Releasee in Section 6 of this Settlement Agreement.

SETTLEMENT AGREEMENT
 
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12. Notice. All notices, demands, waivers or other communications required or
permitted under this Settlement Agreement must be in writing and will be deemed
to have been delivered: (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile evidenced by confirmation of transmission
(provided a copy of such facsimile is also sent by one of the methods provided
in (i), (iii) or (iv) of this Section 12 within 24 hours of transmission); (iii)
two calendar days after deposit with a courier service that regularly conducts
deliveries in the recipient’s jurisdiction; or (iv) if the recipient is located
in the United States, five calendar days after deposit in the United States
mail, postage prepaid, return receipt requested, in each case addressed to the
addressees shown below:
 
If to Chinamerica:
 
If to CBAK:
Joan C. Waller
Secore & Waller, L.L.P.
Four Forest Plaza
12222 Merit Drive, Ste. 1350
Dallas, TX 75251
Tel: (972) 776-0200
Fax: (972) 776-0240
Email: jo@secorewaller.com
 
Louis Bevilacqua
Thelen Reid Brown Raysman &
Steiner LLP
701 Eighth Street, NW
Washington, DC 20001-3721
Tel: (202) 508-4281
Fax: (202) 654-1804
E-mail: lbevilacqua@thelen.com

Any Party may change such Party’s address for the purpose of notices, demands
and requests required or permitted under this Settlement Agreement by providing
written notice of such change of address to the other Party, which change of
address shall only be effective when notice of the change is actually received
by the Party who thereafter sends any notice, demand, or request.
 
13. Counterparts. This Settlement Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument. A facsimile or electronically reproduced
signature shall constitute due execution, shall be admissible as evidence of
execution, and shall be binding upon the signatory with the same force and
effect as if the signature were an original.
 
[Signature Page Follows]

SETTLEMENT AGREEMENT
 
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IN WITNESS WHEREOF, the Parties have executed and delivered this Settlement
Agreement.
 
CHINAMERICA FUND, LP
 
By Chinamerica Partners, LP
Its General Partner
     
By Chinamerica Holdings, LLC
 
Its General Partner
   
By:
 
Name:  
Beau Johnson
Title:
Its Manager
   
CHINA BAK BATTERY, INC.
   
By:
 
Name:
Tony Shen
Title:
Chief Financial Officer
   
BAK International, Inc.
   
By:
 
Name:
 
Title:
 

SETTLEMENT AGREEMENT

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Exhibit A
 
CHINA BAK BATTERY, INC.

SELLING STOCKHOLDER QUESTIONNAIRE

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