Exhibit 10.5
OPTION AGREEMENT

 
This Option Agreement (this “Agreement”) is entered into as of February 28,
2008, by and between CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED, a Nevada
corporation (the “Grantor”), and LOTUSBOX INVESTMENTS LIMITED, a British Virgin
Island company  (the “Option Holder”).
 
In consideration of the sum of One Dollar ($1.00) and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the Grantor, the Grantor desires to grant Option Holder, and Option Holder
desires to accept from the Grantor, an option to purchase up to 24% of the
registered capital (whether represented by actual share certificates or not)
(for reference purposes referred to as the “Option Shares”) of the registered
capital of Song Yuan North East Petroleum Technical Service Co. Ltd., a Sino
Foreign entity established under the laws of the People’s Republic of China (the
“Company”), at the Option Exercise Price (as hereinafter defined) and upon the
terms and subject to the conditions hereinafter contained.
 
1.               Grant of Option.   Grantor hereby grants to Option Holder an
option (the “Option”) to purchase the Option Shares, free and clear of any and
all charges, liens or encumbrances. This Option Agreement has been entered into,
and the Option granted herein, in order to induce the Option Holder to make the
loan to the Grantor in the principal amount of U.S. $15,000,000 upon the terms
and conditions in the Debentures (as defined below) and the Securities Purchase
Agreement as defined below.
 
2.               Vesting; Time of Exercise.   The Option shall automatically
vest in its entirety on the date which is immediately after the occurrence of an
“Event of Default” (as hereinafter defined) which results in the acceleration of
the Debentures (as defined below).   The right to purchase the Option Shares
pursuant to the Option shall be exercisable, in whole, at any time following the
vesting thereof.

3.               Method of Exercise. The Option shall be exercised by written
notice, in the form of Exhibit A attached hereto, from the Option Holder to
Grantor specifying whether the Option Shares are to be issued in the name of the
Option Holder or transferee(s) designated by Option Holder and accompanied by a
copy of the written offer or purchase agreement evidencing the determination of
the Fair Market Value of the Option Shares and payment in full of the Option
Exercise Price.   Notwithstanding the foregoing, the Option Exercise Price may
be paid, at the election of the Option Holder, by reduction and offset from the
principal and interest due under the Debentures (as hereinafter defined) without
being required to make any actual cash payment for the Option Exercise Price.

4.              Certain Definitions.  For the purposes herein:

 
 

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“Debentures” shall mean Grantor’s 8% Secured Debentures due February 27, 2012
and issued on February 28, 2008, in the original aggregate principal amount of
U.S. $15,000,000, to Option Holder.

“Event of Default” shall have the meaning ascribed thereto in the Debentures.

“Fair Market Value” shall mean the purchase price that a willing buyer would be
willing to pay and a willing seller would be willing to accept in an arm’s
length transaction, provided that neither party is under any compulsion to buy
or sell, as the case may be, which purchase price shall be evidenced by a
written offer or purchase agreement between such buyer and seller.

“Option Exercise Price” shall mean the Fair Market Value of the Option Shares.

“Securities Purchase Agreement” means the Securities Purchase Agreement dated as
of the date hereof between the Grantor and the Option Holder.

5.              Transferability.   The Option and the Option Holder’s rights
hereunder shall be fully transferable and assignable by the Option Holder and
the Option may be exercised by the Option Holder or its transferee(s) upon an
Event of Default resulting in the acceleration of the Debentures.

6.              Representations and Warranties of the Grantor.   The Grantor
hereby represents and warrants to Option Holder as follows:

(a)     The Company is a corporation duly organized, validly existing and in
good standing under the laws of the People’s Republic of China and has full
power to own its properties and to conduct its business as presently
conducted.   

(b)   Grantor has all requisite corporate power and authority to execute,
deliver and perform this Agreement and the other agreements, certificates and
instruments to be executed by Grantor in connection with or pursuant to this
Agreement. The execution, delivery and performance by Grantor of this Agreement
have been duly authorized by all necessary corporate action on the part of
Grantor.  This Agreement constitutes the legal, valid and binding agreement of
Grantor, enforceable against Grantor in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
fraudulent conveyance or similar laws affecting the enforcement of creditors’
rights generally and subject to general principles of equity (regardless of
whether enforcement is sought in a proceeding at law or in equity).
 
(c)     The authorized capital stock of the Company consists of registered
capital shares, of US$1,121,000 shares issued and outstanding as of the date
hereof, of which US$610,000 has been paid as of the date hereof, of which
Grantor legally and beneficially owns 90%.  As of the date hereof, there are no
outstanding commitments, options, warrants, calls, rights or agreements of any
character to issue any capital shares of the Company and no capital shares are
held in treasury or reserved for issuance.   As of the date hereof, the Option
Shares represent Twenty-Four Percent (24%) of all of the outstanding capital
shares of the Company, on a fully-diluted basis.  The Option Holder is the
Pledgee of the 66% of the registered share capital of the Company pursuant to
the terms of a Onshore Share Pledge Agreement of even date herewith (“Onshore
Pledge Agreement”) between the Grantor and the Option Holder.

 
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(d)           Grantor is the record and beneficial owner of all of the Option
Shares, free and clear of all liens, security interests, claims, charges and
encumbrances of any nature whatsoever.   None of the Option Shares are subject
to any restrictions, directly or indirectly, with respect to their
transferability or any other restrictions.  Upon transfer and delivery of the
Option Shares to the Option Holder or its transferee(s) pursuant to the exercise
of the Option, the Option Holder (or its transferee(s)) will have good and
marketable right, title and interest in and to the Option Shares, free and clear
of all liens, security interests, claims, charges and encumbrances of any nature
whatsoever.
 
7.              Covenants of the Grantor.   Grantor hereby agrees and covenants
that:

(a)           Grantor shall, and shall cause the Company to, take all steps
necessary or desirable in connection with the rights granted to Option Holder
hereunder, the exercise of the Option, and the transfer and delivery of the
Option Shares to Option Holder or its transferee(s) in an expeditious manner,
including, without limitation, the registration of the sale and transfer of the
Option Shares with any governmental authorities in the People’s Republic of
China.  On the date of this Option Agreement, Grantor shall further execute or
procure the execution of the documents as listed on Schedule 7(a) hereto, such
documents which shall be held by the Option Holder.

(b)           Grantor shall not, and shall cause the Company to not, take any
action, whether through a judicial process or otherwise, which would have the
effect of impeding or delaying the due exercise of the Option by Option Holder
(or its transferee(s)) and/or the transfer and delivery of the Option Shares to
Option Holder (or its transferee(s)).

8.              Remedies upon Default.

(a)           Upon an Event of Default, (as defined in the Debentures) Option
Holder shall have the right, at its option, to acquire, or have a third party
acquire, the remaining registered capital of Company owned by the Grantor,
which, as of the date hereof, represents 24% of the outstanding registered
capital the Company (at the “Option Price”) at Fair Market Value.  In addition,
Option Holder may assign its rights under this Option Agreement. .  The purchase
price of the Option Shares shall be the Fair Market Value.  The phrase “Fair
Market Value” shall mean the purchase price that a willing buyer would be
willing to pay and a willing seller would be willing to accept in an arm's
length transaction, provided that neither party is under any compulsion to buy
or sell, as the case may be.  The FMV shall be evidenced by a written offer or
purchase agreement, a copy of which shall be made available to the Grantor.  In
the event of the sale of the Option Shares in accordance with this Section 8,
the sale of such Option Shares and be deemed commercially reasonable.  

 
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(b)           Grantor acknowledges that time is of the essence in the completion
of its obligations created under this Agreements and specifically pursuant to
the exercise of the Option. Grantor hereby undertakes to take all steps
necessary in connection with the rights granted to Option Holder hereunder to
effect the transfer of the Option Shares to Option Holder in an expeditious
manner, including the registration of the grant of this Option and the sale and
transfer of the Option Shares with any government authorities in the People’s
Republic of China.  It further undertakes not to take any action, whether
through a judicial process or otherwise, which would have the effect of delaying
the due exercise of the Option by Option Holder and/ or the transfer and
delivery of the Option Shares to Option Holder or ant transferee.  Grantor
hereby agrees that it shall cooperate in good faith with Option Holder in
connection with the rights granted to Option Holder hereunder. In the event that
the Option Holder determines to purchase the Option Shares itself (or through
any affiliated entity), the outstanding amount of the Debenture shall be subject
to reduction and offset by the amount of the Option Price and the Option Holder
shall not be required to make any actual cash payment to the Grantor.

9.              Failure to Enforce Not a Waiver.   The failure of Option Holder
to enforce at any time any provision of this Agreement shall in no way be
construed to be a waiver of such provision or of any other provision hereof.
 
       10.            Governing Law.   This Agreement shall be governed by and
construed in accordance with the laws of New York, without regard to the
conflicts of laws provisions thereof. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be determined
in accordance with the provisions of the Purchase Agreement.
 
11.            Counterparts.   This Agreement may be executed in two or more
counterparts, each of which shall be an original but all of which together shall
represent one and the same agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and
year first set forth above.
 
 

  China North East Petroleum Holdings Limited                     By:  /s/ Wang
Hongjun     Name: Wang Hongjun    
Title: Chairman and President
 

 
 
 
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  Lotusbox Investments Limited                     By:  /s/ Diana The Hui Ling  
  Name: Diana The Hui Ling    
Title: General Counsel, signing authority pursuant to
 Lotusbox Investments Limited’s Board of Directors’
Resolutions dated 25 February 2008
 

 
 
 
 

  Acknowledged:                
Song Yuan North East Petroleum Technical Service Co. Ltd.
                    By:  /s/ Wang Hongjun       Name: Wang Hongjun      
Title: President
             

 

 
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Exhibit A
 
NOTICE OF EXERCISE
 
1.  Exercise of Option: Check Applicable Box
 
[         ]   The undersigned Option Holder hereby elects to purchase the Option
Shares at the Option Exercise Price of $__________.  Attached is a copy of the
written offer or purchase agreement evidencing the determination of the Option
Exercise Price.  Please reduce and offset the amount due under the Debentures by
the amount of the Option Exercise Price.
 
[            ]    The undersigned Option Holder hereby transfer its rights to
exercise the Option to the undersigned Transferee.   Transferee hereby elects to
purchase the Option Shares at the Option Exercise Price of
$_____________.  Attached is a copy of the written offer or purchase agreement
evidencing the determination of the Option Exercise Price and a check in the
amount $_________________ made payable to Grantor as full payment of the Option
Exercise Price.
 
2.           Please issue a certificate or certificates representing Option
Shares in the name(s) specified below:
 

             Names  Number of Option Shares    
             _____________________________
____________
   
             _____________________________
____________

 
Dated:____________________   
Option Holder:                
Lotusbox Investments Limited
                    By:          Name:      
Title:
                 
Transferee (if applicable):
         
_______________________________[insert full name]
            By:          Name:      
Title:
       

 
 
 
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