ex10_5.htm


  

    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:


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    “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.


    
      
         


      

      
        2

        
          

        

      

      
         


      

    

    


    (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.  


    
      
         


      

      
        3

        
          

        

      

      
         


      

    

     

    (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

              	 


      

    

     

     

    
      
         


      

      
        4

        
          

        

      

      
         


      

    


    
       

      
        
          	 	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

                	 
	 	 	 
	 	 	 


        

      

       

    


    
      
         


      

      
        5

        
          

        

      

      
         


      

    


    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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