Exhibit 10.3


Capital Increase Agreement


For


Hengyang Valin MPM Steel Tube Co., Ltd.


Among


Hunan
Valin Steel Tube & Wire Co., Ltd.


And


Hengyang
Valin Steel Tube Co., Ltd.


And


Star China Ltd.


And


Hengyang
Valin MPM Steel Tube Co., Ltd.


AUGUST 15, 2006


 















 


TABLE OF CONTENTS


	
  

  	
   

  	
   

  	
   

  	
  PAGE NO.

  	
   

  
	
  1.

  	
   

  	
  DEFINITIONS

  	
   

  	
  2

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
   

  	
  CAPITAL INCREASE

  	
   

  	
  7

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
   

  	
  AGREEMENT SIGNING AND
  APPLICATIONS FOR APPROVAL AND REGISTRATION

  	
   

  	
  10

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
   

  	
  REPRESENTATIONS AND
  WARRANTIES OF THE PARTIES

  	
   

  	
  10

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
   

  	
  RESPONSIBILITIES OF THE
  PARTIES

  	
   

  	
  22

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
   

  	
  PRE-COMPLETION CONDUCT

  	
   

  	
  23

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.

  	
   

  	
  ARRANGEMENT FOR
  EMPLOYEES OF VALIN MPM

  	
   

  	
  25

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
   

  	
  TAX OF VALIN MPM

  	
   

  	
  26

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
   

  	
  ASSETS AND DEBTS OF
  VALIN MPM

  	
   

  	
  27

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.

  	
   

  	
  NO SHOP

  	
   

  	
  27

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  11.

  	
   

  	
  CONDITIONS PRECEDENT

  	
   

  	
  27

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12.

  	
   

  	
  PERFECTION OF THE ERP
  SYSTEM

  	
   

  	
  29

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  13.

  	
   

  	
  ADJUTTMENT TO DIVIDENDS
  PAYABLE TO VALIN MPM’S SHAREHOLDERS

  	
   

  	
  29

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14.

  	
   

  	
  LIABILITIES FOR BREACH
  OF THIS AGREEMENT

  	
   

  	
  29

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  15.

  	
   

  	
  TERMINATION

  	
   

  	
  32

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  16.

  	
   

  	
  COSTS AND TAXES

  	
   

  	
  33

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  17.

  	
   

  	
  CONFIDENTIALITY

  	
   

  	
  33

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  18.

  	
   

  	
  GOVERNING LAW AND
  DISPUTE SETTLEMENT

  	
   

  	
  34

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.

  	
   

  	
  NOTICES

  	
   

  	
  35

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  20.

  	
   

  	
  MISCELLANEOUS

  	
   

  	
  37

  	
   

  



 















 


 


CAPITAL INCREASE AGREEMENT


THIS AGREEMENT (this “Agreement”) is made in Changsha City, Hunan Province, China (as defined
below) on this 15th day of August 2006 by and among the following Parties:


Hunan Valin Steel Tube & Wire
Co., Ltd. (hereinafter referred to as “Valin TW”), a legally established
and lawfully existing joint stock company of
China, with its legal address at Valin Plaza, No. 111 Second Section of Fu
Rong Zhong Lu, Changsha, Hunan, China, and Mr. Li Xiao Wei as its legal
representative;


Hengyang Valin Steel Tube Co.
Ltd. (hereinafter
referred to as “Valin ST”), a legally established
and lawfully existing limited liability company of
China, with its legal address at No. 10 Dali New Village, Zhengxiang District,
Hengyang, Hunan, China, and Mr. Zhao Jianhui as its legal representative;


Star China Ltd. (hereinafter referred to as “Star China”), a legally
established and lawfully existing corporation under the Laws of Cayman Islands, with its legal
address at: c/o
Lone Star Technologies, Inc., 15660 N. Dallas Pkwy., Ste. 500, Dallas, TX
75248, United States of America, and Mr. Rhys Best as its
representative; and


Hengyang Valin MPM Steel Tube Co. Ltd. (hereinafter referred to as
“Valin MPM”), a legally established and lawfully existing limited
liability company of China, with its legal address at No. 10 Dali New Village, Zhengxiang District, Hengyang, Hunan, China, and Mr. Zhao Jianhui as its legal
representative.


Valin TW and Valin ST are hereinafter
collectively referred to as the “Chinese Parties”, and individually as a
“Chinese Party”.  Valin TW shall
be jointly and severally liable for the performance or fulfilment of any and
all of the obligations of Valin ST and Valin MPM under this Agreement, whereas
each of Valin ST and Valin MPM shall only be liable for the performance or
fulfilment of its own obligations under this Agreement.


WHEREAS,


1.                         Valin MPM is a limited liability company duly
organized and validly existing under PRC Law.  As
at the date of this Agreement, the registered capital of Valin MPM (rounded
down to the nearest RMB1,000) is RMB973,725,000, of which 68.52% was
contributed by Valin TW and 31.48% was contributed by Valin ST.


2.                         On December 27, 2005, Hengyang Steel
Tube Co. Ltd., a limited liability company organized under PRC Law (hereinafter
referred to as “Hengyang Steel Tube”), merged by absorption into Valin MPM (the “Merger”), and
ownership of all of Hengyang Steel 



 1
 






 



 


                                  Tube’s assets immediately prior to the Merger
was assumed by Valin MPM upon such Merger.


3.                         Star China has agreed to contribute to Valin
MPM, on and subject to the terms and conditions of this Agreement, and to
convert Valin MPM into a Sino-foreign enterprise, such that upon the
establishment of the JV Company, Star China will hold 40% of the equity interest
in the JV Company.


NOW THEREFORE, THE PARTIES HAVE AGREED AS
FOLLOWS:


1.                                       DEFINITIONS


1.1                                 In
this Agreement, the following expressions shall have the following meanings:


“Affiliate” means any Person which is
directly or indirectly controlled by, under common control with or controlling
a Party, and its officers, directors, managers, and employees.  The terms “controlled”, “control”
or “controlling” shall mean the holding of more than fifty percent (50%)
equity interests or of the power to appoint the majority of directors.


“Articles
of Association” mean the
Articles of Association of the JV Company, dated on or
about the date hereof, as the same may be revised, supplemented or restated from
time to time in accordance with its terms.


“Base Date of Valuation” means December 31,
2005.


“Billet
Supply Agreement” means the agreement entered into on August 15, 2006 between
Valin MPM and Valin ST pursuant to which Valin MPM will supply steel billets to
Valin ST, as the same may be revised, supplemented or restated from time to
time in accordance with its terms.


“Business
Day” means any day on which the banking institutions in
Dallas, Texas USA and those in Hengyang, PRC are generally open for business
to the public. 


“Business
License” means the business licence of the JV
Company issued by the Registration
Authority, as the same may be amended from time to time.


“Capital Increase”
means the aggregate amount of registered capital to be contributed to the JV
Company by Star China in accordance with the terms of this Agreement and the
approval documents from the Examination and Approval Authorities, which will
convert Valin MPM into a Sino-foreign joint venture enterprise and will result
in Star China holding 40% of the equity interest in the JV Company.



 2
 






 



 


“Capital Increase
Registration Date” means the
date on which the Business License reflecting the
Capital Increase is issued.


“China” or “PRC”
means the People’s Republic of China, for purpose of this Agreement only
excluding Hong Kong Special
Administrative Region, Macao Special
Administrative Region and Taiwan.


“Confidential
Information”
shall mean technology and know-how as well as trade secrets, strategic business
or marketing information, business projections, secret processes and other
processes, data, formulae, programs, manuals, designs, sketches, photographs,
plans, drawings, specifications, reports, studies, findings, non-patented
inventions and ideas, and other information relating to the production,
packaging, use, pricing, or sales and distribution, whether of a technical,
engineering, operational, business or economic nature, no matter whether it is
designated as “Confidential” by the Parties or their Affiliates, or provided by
the Parties or their Affiliates in connection with the JV Company and any
matters related thereto, or the implementation of and/or the conduct of the
business contemplated by this Agreement and the other contracts contemplated
herein.  Confidential Information,
however, shall not include (i) information which is now or hereafter becomes
part of the public domain through no fault of the receiving Party, (ii)
information that the receiving Party can demonstrate was already in its
possession at the time of receipt from a disclosing Party, and (iii)
information which hereafter comes into the possession of the receiving Party
and was or is not acquired by the receiving Party from a Person directly or
indirectly under an obligation of secrecy to the original providing Party.


“Effective Date” means the date
this Agreement takes effect, i.e. the date on which the
Examination and Approval Authorities issue their approval for the transaction
contemplated under this Agreement.


“Examination and Approval Authorities” means the Ministry
of Commerce of China or its authorized local governmental authorities.


“Event of Force Majeure” means any objective event which is beyond
the control of the Parties, and which is unforeseen, unavoidable and
unconquerable, and which prevents any of the Parties from performing all or a
material part of its obligations.  Such
event includes any natural disaster, strike, riot, war and act of terrorism.


“Financial Statements” means the financial statements of Valin
MPM or the JV Company (as the case may be) and its subsidiaries on a
consolidated basis audited by the Auditors (as defined in the JV Contracts) as
of and for the year ended on the Base Date of Valuation and as of and for the
period ended on the Funding Valuation Date.



 3
 






 



 


“Funding Date” means
a Business Day no later than fifteen (15) Business Days after the issuance of a
business license to the JV Company, on which Star China pays the amount of the
Capital Increase to the JV Company in accordance with the terms of this
Agreement.


“Funding Valuation Date”
means (a) in the case where the Effective Date occurs on or prior to the 15th
day of a calendar month, the last day of the preceding calendar month, and (b)
in the case where the Effective Date occurs after the 15th day of a calendar
month, the last day of the same calendar month.


“Governmental
Body” means any government or governmental or regulatory body thereof, or
political subdivision thereof, whether national, state, local or foreign, or
any agency, instrumentality or authority thereof, or any court or arbitrator
(public or private).


“HYST
Group” means Hunan Hengyang Steel Tube (Group) Co., Ltd., a state-owned
enterprise group company established and existing under the PRC laws with its
registered address at No. 10 Dali New Village, Zhengxiang District, Hengyang, Hunan, China.


“Intellectual
Property Rights” mean patents, trade marks, service marks, trade names,
internet domain names, rights in designs, copyright (including rights in
computer software and databases), rights in know-how and other
intellectual property rights, in each case whether registered or unregistered
and including applications for the grant of any such rights and all rights or
forms of protection having equivalent or similar effect anywhere in China.


“JV
Company” means a Sino-foreign equity joint venture to be formed by the
conversion of Valin MPM from a domestic enterprise pursuant to the terms of
this Agreement and the JV Contract, to be named Hengyang Valin MPM Steel Tube
Co., Ltd. or otherwise as the Parties may agree.


“JV Contract” means
the joint venture contract in relation to the establishment of the JV Company to
be signed by the Chinese Parties and Star China
on or about the date of this Agreement, as the same
may be revised, supplemented or restated from time to time in accordance with
its terms.


“Knowledge” is
deemed to include knowledge, information and belief which a Party would have if
the Party had made all reasonable enquiries and, without limitation, includes
the knowledge, information and belief of its directors, officers and employees.



 4
 






 



 


“Law” or “Laws”
means any national, state, provincial or local law, statute, rule, regulation
or ordinance of any Governmental Body.


“Legal
Proceeding” means any judicial, administrative or arbitral actions, suits,
mediation, investigation, inquiry, proceedings or claims (including counterclaims)
by or before a Governmental Body.


“Liability”
or, collectively, “Liabilities” means any debt, loss, damage, adverse
claim, fines, penalties, liability or obligation (whether direct or indirect,
known or unknown, asserted or unasserted, absolute or contingent, accrued or
unaccrued, matured or unmatured, determined or determinable, liquidated or
unliquidated, or due or to become due, and whether in contract, tort, strict
liability or as a result of Law, statute or regulation, or otherwise), and including
all costs and expenses relating thereto including all fees, disbursements and
expenses of legal counsel, experts, engineers and consultants and costs of
investigation).


“Lien”
means any lien, pledge, collateral, deed of trust, lease, option, mortgage, right of first refusal, or transfer restriction under any shareholder or similar agreement,
encumbrance or any other restriction or limitation whatsoever.


“Order”
means any order, administrative decision, administrative penalty, injunction, judgment, or ruling of a Governmental Body, or arbitration award.


“Parties”
means the Chinese Parties, Star China and Valin MPM.


“Person”
means any individual, corporation, limited liability company, partnership,
firm, joint venture, association, joint-stock company, trust, unincorporated
organization, Governmental Body or other entity.


“PRC GAAP”
means generally accepted accounting principles promulgated
by Ministry of Finance, in the PRC,
applied on a consistent basis throughout the periods presented.


“PRC Law” mean the laws, regulations and enactments
promulgated by various levels of Chinese legislatures, judicial and administrative
authorities that are available to the public.


“Registration
Authority” means the State Administration for Industry and Commerce or its local
counterpart.


“Renminbi” or
“RMB” means legal currency in China.


“Sale, Marketing and Supply Agreement” means the sale, marketing
and supply agreement entered or to be entered into by and between the JV
Company, the trading company described in Section 8.21 of the JV Contract,




 5
 






 



Lone Star Technologies Inc. and Valin TW in respect of the sale,
marketing and supply of Tubular Products (as defined therein) in the Territory
(as defined therein), as the same may be revised, supplemented or restated from
time to time in accordance with its terms.


“Senior Management Personnel” shall mean the General Manager,
Deputy General Managers, Chief Financial Officer and Chief Operating Officer of the Valin MPM.


“Taxing
Authority” means any Governmental Body responsible for the administration
of any tax.


“Technology
Cross License Agreement” means the agreement to be entered into between the
JV Company and Lone Star Technologies for the license by Lone Star Technologies
or such Affiliate(s) of certain technology and know-how to the JV Company,
which may be revised, supplemented and restated in accordance with its terms.


“Trademark
License Agreement” means the agreement to be entered into between the JV
Company and Lone Star Steel Company for the license by Lone Star
Steel Company or such Affiliate(s) of
certain trademarks to the JV Company, which may be revised, supplemented and
restated in accordance with its terms.


“Trading
Company Shareholder Agreement” means the shareholder agreement between Star
China and VTW in respect of the establishment of the trading company as
described in Section 8.21 under the JV Contract.


“Transaction
Documents” means this Agreement, the JV Contract, Sales, Marketing and
Supply Agreement, Technology Cross License Agreement, Trademark License
Agreement, Billet Supply Agreement, Trading Company Shareholder Agreement and
Valin ST Sales, Marketing and Supply Agreement.


“US
Dollars” or “US$” means legal currency in the United States of
America.


“Valin ST
Sales, Marketing and Supply Agreement” means the sales, marketing and
supply agreement of the date of or about the date of this Agreement by and
between Valin ST, the trading company described in Section 8.21 of
the JV Contract, Lone Star Technologies Inc.
and Valin TW in respect of the sale, marketing and supply of Tubular Products
(as defined therein) in the Territory (as defined therein), as the same may be
revised, supplemented or restated from time to time in accordance with its
terms.


“Working
Personnel” shall mean all employees and staff of the JV Company other than
Senior Management Personnel and members of the Board, and including 



 6
 






 



 


employees
and/or staff who are legally employed by an affiliate of the JV Company but who
are principally engaged in the business of the JV Company.


1.2                                 For
purposes of this Agreement, the following terms have the meanings set forth in
the Articles indicated:




	
  Term

  	
   

  	
  Article

  
	
  “Agreement”

  	
   

  	
  Recitals

  
	
  “Base Rate”

  	
   

  	
  2.1(b)

  
	
  “Chinese
  Parties”

  	
   

  	
  Recitals

  
	
  “Chinese Party”

  	
   

  	
  Recitals

  
	
  “Chinese Parties
  Indemnified Parties”

  	
   

  	
  14.3

  
	
  “Claim Period”

  	
   

  	
  14.1

  
	
  “Dispute”

  	
   

  	
  18.2

  
	
  “Hengyang Steel
  Tube”

  	
   

  	
  Recitals

  
	
  “ICC Rules”

  	
   

  	
  18.2

  
	
  “Star China”

  	
   

  	
  Recitals

  
	
  “Star China
  Indemnified Parties”

  	
   

  	
  14.2

  
	
  “Loss”

  	
   

  	
  14.2

  
	
  “Losses”

  	
   

  	
  14.2

  
	
  “Material
  Contracts”

  	
   

  	
  4.2(o)

  
	
  “Merger”

  	
   

  	
  Recitals

  
	
  “MPM Real
  Property Leases”

  	
   

  	
  4.2(k)

  
	
  “Policies”

  	
   

  	
  6.1(u)

  
	
  “Related
  Persons”

  	
   

  	
  4.2(s)

  
	
  “Terminating
  Party”

  	
   

  	
  15.1

  
	
  “Valin MPM”

  	
   

  	
  Recitals

  
	
  “Valin ST”

  	
   

  	
  Recitals

  
	
  “Valin TW”

  	
   

  	
  Recitals

  






 


1.3                                 In
this Agreement, the headings are inserted for convenience only and shall not
affect the construction of this Agreement.


2.                                       CAPITAL
INCREASE


2.1                                 Principles


(a)                                  Star China
shall make payment of the Capital Increase to the JV Company in US Dollars in
cash (or other freely convertible foreign currency acceptable to the Chinese
Parties).



 7
 






 



 


(b)                                 If
the middle rate of US$/RMB exchange rate as at the Funding Date fluctuates by
ten percent (10%) or less of the US$/RMB middle rate as of the date of this
Agreement, each published by the People’s Bank of China (the “Base Rate”),the
amount of Star China’s capital contribution set forth in Section 2.2 shall be
adjusted in accordance with the formula set forth in Section 2.3.


(c)                                  Notwithstanding
the provisions of paragraph (b) above, if the US$ depreciates against the RMB
by more than ten percent (10%) of the Base Rate, Star China shall have the
right, in its sole discretion, to terminate this Agreement, and if the US$
appreciates against the RMB by more than ten percent (10%) of the Base Rate,
the Chinese Parties shall have the right, in their sole discretion, to
terminate this Agreement.


2.2                                 Capital Contribution


Subject to the adjustments to be
made pursuant to Articles 2.3, it is estimated that the
amount of capital contribution to be made by Star China shall be RMB1,058,888,000
(equivalent to US$132,480,232.21 based on the Base Rate of USD1=RMB7.9928, of
which RMB 649,150,000  shall comprise
registered capital and RMB409,738,000 
shall comprise capital surplus.


2.3                                 Adjustment
Caused by Fluctuation of Exchange Rate


Subject to the maximum amount of the Capital
Increase set forth in Article 2.2, if on the Funding Date:


(a)                                  the
US$ appreciates
against the RMB by ten percent (10%) or less of the Base Rate, the amount of
the Capital Increase to be paid by Star China to the JV Company on the Funding
Date shall be adjusted as follows:




	
  Amount of Capital

  Increase as of the 

  date of this 

  Agreement

  	
  x

  	
  (1

  	
  -

  	
  Half of the percentage increase in the Base Rate)

  






 



 8
 






 



 


(b)                                 the
US$ depreciates against the RMB by ten percent (10%) or less of the Base Rate,
the amount of the Capital Increase to be paid by Star China to the JV Company
on the Funding Date shall be adjusted as follows:




	
  Amount of Capital

  Increase as of the 

  date of this 

  Agreement

  	
  x

  	
  (1

  	
  +

  	
  Half of the
  percentage 

  decrease in the Base Rate)

  






 


2.4           Payment


 


(a)                                 Subject to
fulfilment or waiver (where permissible) of the conditions set forth in Article
11 and the other provisions hereof, on the Funding Date, Star China shall
pay the amount of the Capital Increase set forth in Article 2.2 (as
adjusted pursuant to Article 2.3) by wire transfer of immediately
available funds to a bank account or accounts specified by Valin MPM, provided
that such wiring instructions shall have been provided to Star China not less
than three (3) Business Days prior to such payment.


 


(b)                                Within five
(5) Business Days after the payment provided in Article 2.4(a) is
effected, the JV Company shall complete the relevant Capital Increase asset
verification procedure.  The capital
verification report prepared by a registered accountant in China shall be
conclusive evidence of the performance of all Parties’ contribution obligations
under this Agreement.


 


(c)                                 Subject to
the terms and conditions hereof, Star China shall pay an amount equivalent to
the Capital Increase in one lump sum.


 


(d)                                Subject to
the terms and conditions of this Agreement, Valin TW shall cause an irrevocable
Letter of Credit (“LC”) to be issued on the date of the issuance of the
capital verification report referred to under Article 2.4(b) hereof for the
benefit of Star China in an amount equal to 10% of the Star China’s Capital
Increase to guarantee the performance or fulfilment of any and all obligations
of Valin TW, Valin ST and Valin MPM under the Transaction Documents. The LC
shall be denominated in US Dollars and issued by the Bank of China(Hong Kong)
or another international bank of similar stature. The LC shall have a term of
two (2) complete Audit Cycles of the JV from the date hereof. The LC guaranteed
amount shall not be reduced during such term. Star China shall only draw down
on the LC for the portion of the damages resulting from the breach by the
Chinese Parties or Valin MPM under the
Transaction Documents. “Two (2) complete Audit Cycles” hereof means a term from
the Funding Date until the end of that year and the full fiscal year
thereafter.



 9
 






 



 


3.                                       AGREEMENT
SIGNING AND APPLICATIONS FOR APPROVAL AND REGISTRATION


3.1                                 On or prior
to the date hereof, every Party to this Agreement shall provide the other Parties
with evidence
which proves that it has obtained the necessary internal approvals and
authorization to execute this Agreement. 
An appendix setting forth the necessary internal approvals for each
party is set forth on Appendix 3.1.


3.2                                 Immediately
after the signing of  this Agreement, the
JV Contract and the Articles of Association, the Parties shall submit this Agreement to the Examination
and Approval Authorities for approval. After receiving the approval by the
Examination and Approval Authorities, the Parties shall immediately apply to
the Registration Authority for registration.


3.3                                 As of the Capital Increase Registration
Date, Valin MPM will be converted to a Sino-foreign equity joint venture
enterprise and Star China shall hold 40% of the equity interests in the JV
Company.


4.                                       REPRESENTATIONS
AND WARRANTIES OF THE PARTIES


4.1                                 Each
of the Chinese
Parties and Valin MPM hereby represents and warrants to Star China as of
the date hereof and the Funding Date as follows:


(a)                                  The Chinese
Parties are companies duly organized and validly existing under PRC Law.


(b)                                 As
of the Funding Date, the Chinese Parties will have obtained all
necessary internal and governmental approvals or authorizations for the
transaction contemplated under this Agreement and have full legal right, power
and authority to enter into this Agreement and to perform their obligations
hereunder.  However, this Agreement shall become
effective only upon the satisfaction of the conditions set forth in Article
11.1.


(c)                                  This
Agreement constitutes a legal, valid and binding obligation for the Chinese
Parties. The execution and delivery and performance of this Agreement by the Chinese
Parties, the consummation of the transactions contemplated by this
Agreement and the fulfilment by the Chinese Parties of the terms, conditions
and provisions hereof will not breach any obligations of the Chinese
Parties under any applicable Laws, rules, regulations or legal
interpretations; any judgment, order, writ, injunction, pronouncement or
judicial interpretations of any court, agency or department; the
articles of association and the provisions of any agreement, arrangement
or



 10
 






 



 


                                                understanding
to which the
Chinese Parties are party to the same or by which any of them are
bound.


(d)                                 Each of the individuals who
are
to execute this Agreement on behalf the Chinese Parties have obtained the
necessary authorization for the execution of such document.


4.2                                 Each
of the Chinese Parties and Valin MPM further represents and warrants to Star China as
of the date hereof and the Funding Date as follows:


(a)                                  The
capitalization of Valin MPM, as described in Recital 1 of this Agreement, is
true and correct in all respects.  The
equity interests in Valin MPM owned by the Chinese Parties are validly issued,
fully paid and non-assessable and are free and clear of any and all Liens,
including any claims by any third party, including any Governmental Body, voting proxy
arrangement or voting right trust arrangement.


(b)                                Valin MPM is
a duly incorporated limited liability company and validly existing under PRC
Law and has obtained all the necessary approval, licenses and permits necessary
to conduct its authorized business.


 


(c)                                 The
Merger
and the merger of Hengyang Steel Billet Co Ltd and Hengyang Special Steel Co
Ltd into Hengyang Steel Tube have been completed in accordance with applicable
PRC Law and Valin MPM has assumed ownership of all of Hengyang Steel Tube’s
assets immediately prior to the Merger as described in Recital 2 of this
Agreement.


 


(d)                                 Valin MPM
has complied with applicable PRC Law and product standards of China whether in
the design and manufacturing of its products or otherwise.  Valin MPM has all of the necessary
manufacturing permits for all of the products manufactured by Valin MPM that
are subject to manufacturing permit requirements.


(e)                                  Valin
MPM has no subsidiaries and does not own any equity interests in another
Person.


(f)                                    Each
of the Financial Statements is complete and correct in all material respects
and presents fairly in all material respects the consolidated financial
position, results of operations and cash flows of Valin MPM as at the dates and
for the periods indicated therein.  All
books, records and accounts of Valin MPM are accurate and complete and are
maintained in all material respects in accordance with good business practice
and all applicable Laws.  Valin MPM
maintains systems of internal accounting controls sufficient to 



 11
 






 



 


                                                provide
reasonable assurances that:  (i)
transactions are executed in accordance with management’s general or specific
authorization; (ii) transactions are recorded as necessary to permit the
preparation of financial statements and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management’s
general or specific authorization; and (iv) the recorded accountability for
assets is compared with the actual levels at reasonable intervals and
appropriate action is taken with respect to any differences.


(g)                                 There
are no agreements or understandings that give any person other than Star China
and its designee the right to acquire an interest in the JV Company or Valin
MPM.  There are no agreements or understandings
that require the JV Company or Valin MPM to repurchase the equity interests of
any equity holder.


(h)                                 Valin
MPM does not have any Liabilities other than those (i) specifically reflected
on and fully
reserved against in accordance with PRC GAAP in the Financial
Statements, (ii) incurred in the ordinary course of business consistent with
past practice since the Base Date of Valuation or (iii) that are immaterial to
Valin MPM.


(i)                                     Except
as expressly contemplated by this Agreement, since the Base Date of Valuation
(x) Valin MPM has conducted its business only in the ordinary course of
business consistent with past practice and (y) there has not been any event,
change, occurrence or circumstance that, individually or in the aggregate with
any such events, changes, occurrences or circumstances, has had or could
reasonably be expected to have a material impact on Valin MPM.  Without limiting the generality of the
foregoing, since the Base Date of Valuation:


(i)                       except
as set forth on Appendix 4.2(i)(i), there has not been any damage,
destruction or loss except for normal wear and tear, whether or not covered by
insurance, with respect to the property and assets of Valin MPM having a
replacement cost of more than US$2,000,000 for any single loss or US$2,000,000
for all such losses;


(ii)                    except
as set forth on Appendix 4.2(i)(ii), there has not been any declaration,
setting aside or payment of any dividend or other distribution in respect of
any equity interests of Valin MPM;


 



 12














 


 


(iii)                 except
as set forth on Appendix 4.2(i)(iii), Valin MPM has not reached any
agreement with any national, provincial or local tax authorities to change its
tax position or the general tax treatment;


(iv)                except
as set forth on Appendix 4.2(i)(iv), Valin MPM has not entered into any
transaction or contract the value of which exceeds the amount equivalent to
US$500,000 other than in the ordinary course of business consistent with past
practice, and Valin MPM has not entered into any agreement or understandings
granting any person the direct or indirect right to distribute or market Valin
MPM products;


(v)                   except
as set forth on Appendix 4.2(i)(v), Valin MPM has not failed to pay and
discharge due current liabilities except where such amount has been reflected
in the Financial Statements or Valin MPM has disputed in good faith by
appropriate proceedings and such disputed amounts are properly reserved in the
Financial Statements;


(vi)                except
as set forth on Appendix 4.2(i)(vi), Valin MPM has not made any loans,
advances or capital contributions to, or investments in, any Person or paid any
fees or expenses to any Chinese Party or any director, officer, partner,
stockholder or affiliate of any Chinese Party outside the ordinary course of
business consistent with past practice;


(vii)             except
as set forth on Appendix 4.2(i)(vii), Valin MPM has not mortgaged,
pledged or subjected to any Lien on any of its assets;


(viii)          except
as set forth on Appendix 4.2(i)(viii), Valin MPM has not discharged any
Lien on any of the other’s assets, except in the ordinary course of business
consistent with past practice;


(ix)                  except
as set forth on Appendix 4.2(i)(ix), Valin MPM has not cancelled or
compromised any debt or claim or amended, cancelled, terminated, relinquished,
waived or released any contract or right except in the ordinary course of
business and which, in the aggregate, would not be material to Valin MPM;


(x)                     except
as set forth on Appendix 4.2(i)(x), Valin MPM has not made or committed
to make any capital expenditures or capital additions or betterments in excess
of US$1,000,000 individually or US$5,000,000 in the aggregate;


(xi)                  except
as set forth on Appendix 4.2(i)(xi), Valin MPM has not issued, created,
incurred, assumed, guaranteed, endorsed or otherwise become 



 13
 






 



                                  liable
or responsible with respect to (whether directly, contingently, or otherwise)
any indebtedness outside the ordinary course of business consistent with past
practice;


(xii)               except
as set forth on Appendix 4.2(i)(xii), Valin MPM has not granted any license
or sublicense of any rights under or with respect to any Intellectual Property
Rights held by Valin MPM except in the ordinary course of business consistent
with past practice; and


(xiii)            except
as set forth on Appendix 4.2(i)(xiii), Valin MPM has not instituted or
settled any Legal Proceeding resulting in a payment.


(j)                                     All
tax returns required to be filed by or on behalf of Valin MPM have been duly
and timely filed with the relevant Taxing Authority, and (i) all such tax
returns are true, complete and correct in all material respects; (ii) all taxes
payable by or on behalf of Valin MPM have been fully and timely paid or have
been fully
disclosed or reserved against in accordance with PRC Law; and (iii)
all taxable events on which taxes not yet due and payable prior to the date
hereof or the Funding Date, as applicable, are properly recorded in the
Financial Statements and in the books and records of Valin MPM.


(k)                                  All
real property and interests in real property leased or contracted for
(including, without limitation, land use rights) by Valin MPM are included in
the list attached as Appendix 4.2(k) (the “MPM Real Property Leases”).  Valin MPM, has a valid, binding and
enforceable leasehold interest under each of the leases under which it is a
lessee, free and clear of all Liens. 
Each of the MPM Real Property Leases is in full force and effect.  Save as disclosed in Appendix
4.2(k), Valin MPM is not in default under any MPM Real Property Lease and
no event has occurred and no circumstance exists which, if not remedied, and
whether with or without notice or the passage of time or both, would result in
such a default or the ability of any third party to make any claims against
Valin MPM. Valin MPM has not received or given any notice of any default or event
that with notice or lapse of time, or both, would constitute a default by Valin
MPM under any of the MPM Real Property Leases and, to the Knowledge of Valin
MPM and the Chinese Parties, no other party is in default thereof, and no party
to any MPM Real Property Lease has exercised any termination rights with
respect thereto.


(l)                                     An effective
land use rights certificate has been issued with respect to the land described
on Appendix 4.2(l), which is occupied and used by Valin MPM and,
therefore, there will be no risk of right claim or damage claim against Valin
MPM in relation to the land use right in question. A
valid 



 14
 






 



                                                construction
permit in connection with the Valin MPM office building located at Zhengxiang
District, Dali New Village No. 18 has been issued to Valin MPM and
therefore, there will be no risk of administrative penalisation or administrative
proceedings against Valin MPM in relation to the construction permit of
this building.


(m)                               Except
as otherwise disclosed in Appendix 4.2(m), Valin MPM has good and marketable
title to all of the items of tangible personal property used in the business of
Valin MPM (except as sold or disposed of subsequent to the date thereof in the
ordinary course of business and not in violation of this Agreement), free and
clear of any and all Liens.  All such
items of tangible personal property which, individually or in the aggregate,
are material to the operation of the business of Valin MPM are in good
condition and in a state of good maintenance and repair (ordinary wear and tear
excepted) and are suitable for the purposes used.


(n)                                 Appendix
4.2(n) sets forth an accurate and complete list of all Intellectual Property
Rights owned or used by Valin MPM.  Valin
MPM is the sole and exclusive owner of, or has valid and continuing rights to
use, sell or license, as the case may be, all Intellectual Property Rights
used, sold or licensed by Valin MPM in its business as presently conducted and
as currently proposed to be conducted, free and clear of all Liens or
obligations to others save for the restrictions under the applicable Law and
the obligations provided in the relevant Intellectual Property Rights licensing
agreements.


(o)                                 Appendix
4.2(o) sets forth, by reference to the applicable sub-article of this Article
4.2(o), all of the following effective contracts, whether written or oral,
or understandings, to which Valin MPM is a party or by which Valin MPM or its
assets or properties are bound (collectively, the “Material Contracts”):


(i)                       contracts
with any Chinese Party or any current or former officer, director, stockholder
or Affiliate of Valin MPM or any Chinese Party;


(ii)                    contracts
with any labor union or association representing any employee of Valin MPM;


(iii)                 contracts
for joint ventures, strategic alliances, partnerships, licensing arrangements,
or sharing of profits or proprietary information;


(iv)                contracts
containing covenants of Valin MPM not to compete in any line of business or
with any Person in any geographical area or not to solicit or hire any person
with respect to employment or covenants of 



 15
 






 



                                  any
other Person not to compete with Valin MPM in any line of business or in any
geographical area or not to solicit or hire any person with respect to
employment;


(v)                   contracts
relating to the acquisition (by merger, purchase of stock or assets or
otherwise) by Valin MPM of any operating business or material assets or the
equity of any other Person;


(vi)                contracts
relating to the incurrence, assumption or guarantee of any indebtedness or
imposing a Lien on any of the assets of Valin MPM, including indentures,
guarantees, loan or credit agreements, sale and leaseback agreements, purchase
money obligations incurred in connection with the acquisition of property,
mortgages, pledge agreements, security agreements, conditional sale or title
retention agreements, or outstanding contracts of surety or indemnification,
direct or indirect, by Valin MPM;


(vii)             purchase
contracts giving rise to Liabilities of Valin MPM other than in the ordinary
course of business in excess of the equivalent of US$500,000;


(viii)          all
contracts providing for payments by or to Valin MPM, other than in the ordinary
course of business, in excess of the equivalent of US$500,000 in any fiscal
year or the equivalent of US$500,000 in the aggregate during the term thereof;


(ix)                  all
contracts obligating Valin MPM to provide or obtain products or services for a
period of one year or more or requiring Valin MPM to purchase or sell a stated
portion of its requirements or outputs;


(x)                     contracts
under which Valin MPM has made advances or loans to any other Person;


(xi)                  contracts
providing for severance, retention, change in control or other similar
payments;


(xii)               contracts
for the employment of any individual on a full-time, part-time or consulting or
other basis providing annual compensation in excess of the equivalent of
US$500,000;


(xiii)            material
management contracts and outsourcing contracts with independent contractors or
consultants (or similar arrangements) that 



 16
 






 



 


                                  are
not cancellable without penalty or further payment and without more than 30
days notice;


(xiv)           contracts
(or group of related contracts) which fall outside the ordinary course of
business and involve the expenditure of more than the equivalent of US$500,000
annually or the equivalent of US$500,000 in the aggregate or require
performance by any party more than six months from the date hereof; and


(xv)              contracts
that are otherwise material to Valin MPM.


Each of the Material Contracts is in full force and
effect and is the legal, valid and binding obligation of Valin MPM and of the
other parties thereto, enforceable against each of them in accordance with its
terms and, upon consummation of the transactions contemplated by this
Agreement, shall, except as otherwise stated in Appendix 4.2(o), continue
in full force and effect without penalty or other adverse consequence.  Valin MPM is not in default under any
Material Contract, nor, to the Knowledge of Valin MPM or the Chinese Parties,
is any other party to any Material Contract in breach of or default thereunder,
and no event has occurred that with the lapse of time or the giving of notice
or both would constitute a breach or default by Valin MPM or any other party
thereunder.  No party to any of the
Material Contracts has exercised any termination rights with respect thereto,
and no party has given notice of any significant dispute with respect to
any  Material Contract.  Valin MPM has delivered to Star China true,
correct and complete copies of all of the Material Contracts, together with all
amendments, modifications or supplements thereto.


(p)                                 Attached
as Appendix 4.2(p) is a list of all material benefits that the JV
Company will be required to provide to its employees on an ongoing basis in
accordance with contracts entered into with such employees or in accordance
with applicable PRC Law.


(q)                                 Except
as set forth in Appendix 4.2(q), there is no Legal Proceeding pending
or, to the Knowledge of Valin MPM, threatened against Valin MPM (or to the
Knowledge of Valin MPM or the Chinese Parties, pending or threatened, against
any of the officers, directors or employees of Valin MPM with respect to their
business activities on behalf of Valin MPM), or to which Valin MPM is otherwise
a party before any Governmental Body; nor to the Knowledge of Valin MPM nor the
Chinese Parties is there any reasonable basis for any such Legal
Proceeding.  Except as set forth on
Appendix 4.2(q), Valin MPM is not subject to any effective Order to which it is a
party that has not been fully performed, nor is it in breach or violation of
such 



 17
 






 



                                                Order.  Except as set forth on Appendix 4.2(q), Valin
MPM is not engaged in any legal action to recover monies due it or for damages
sustained by it.  There are no Legal
Proceedings pending or, to the Knowledge of Valin MPM or the Chinese Parties,
threatened against Valin MPM or to which Valin MPM is otherwise a party
relating to this Agreement or the transactions contemplated hereby.


(r)                                    Valin
MPM has insurance policies in full force and effect (a) for such amounts as are
sufficient for all requirements of PRC Law and insurance related provisions of
agreements requiring insurance policies to be taken out to which Valin MPM is a
party or by which it is bound and (b) which are in such amounts, with such
deductibles and against such risks and losses, as are reasonable for the
business, assets and properties of Valin MPM (compared to another PRC
enterprise in the same industry following prudent operational practice).


(s)                                  The
inventories of Valin MPM are in good and marketable condition and are usable
and saleable in the ordinary course of business.  The inventories of Valin MPM set forth in the
Financial Statements were properly stated therein in accordance with PRC
GAAP.  Adequate reserves have been
reflected in the Financial Statements for obsolete, damaged, unqualified,
excess, slow-moving or otherwise unusable inventory in accordance with PRC
GAAP.  The inventories of Valin MPM
constitute sufficient quantities for the normal operation of business in accordance
with past practice.


(t)                                    All
accounts and notes receivable of Valin MPM have arisen from bona fide
transactions in the ordinary course of business consistent with past practice
and are payable on ordinary trade terms. 
All accounts and notes receivable of Valin MPM reflected in the Financial
Statements are good and collectible at the aggregate recorded amounts thereof,
or doubtful
account reserves have been fully made in accordance with PRC GAAP.  Except as set forth in Appendix 4.2(t), all
accounts and notes receivable arising after the Base Date of Valuation are good
and collectible at the aggregate recorded amounts thereof, or doubtful
account reserves have been fully made in accordance with PRC GAAP.  None of the accounts or the notes receivable
of Valin MPM (i) are subject to any setoffs or counterclaims or (ii) represent
obligations for goods sold on consignment, on approval or on a sale-or-return
basis or subject to any other repurchase arrangement.  All accounts payable of Valin MPM reflected
in the Financial Statements or arising after the Base Date of Valuation are the
result of bona fide transactions in the 



 18
 






 



                                                ordinary
course of business and have been paid or are not yet due and payable in
accordance with PRC GAAP.


(u)                                 Except
as set forth in Appendix 4.2(o), no director or senior management personnel or
equity holder of Valin MPM, its directors or senior management personnel, any
member of his, her or their immediate family or any of their respective
affiliates (“Related Persons”) (i) owes any amount to Valin MPM nor does
Valin MPM owe any amount to, or has Valin MPM committed to make any loan or
extend or guarantee credit to or for the benefit of, any Related Person, (ii)
is involved in any business arrangement or other relationship with Valin MPM
(whether written or oral), (iii) owns any property or right, tangible or
intangible, that is used by Valin MPM, (iv) has any claim or cause of action
against Valin MPM or (v) owns any direct or indirect interest of any kind in,
or controls or is a director, officer, employee or partner of, or consultant
to, or lender to or borrower from or has the right to participate in the
profits of, any Person which is a competitor, supplier, customer, landlord,
tenant, creditor or debtor of Valin MPM.


(v)                                 No
events have occurred and no circumstances exist which may prevent or interfere
with the full compliance of Valin MPM with PRC Law on environmental
protection, whether national, local or provincial, or which may give rise to
any legal liability on the part of Valin MPM based on non-compliance with PRC
Law on environmental protection or any requirements of the government
environmental protection agencies, whether national, local or provincial.


(w)                               Immediately
prior to the Merger, Hengyang Steel Tube does not have any Liabilities other
than those (i) specifically reflected on and fully reserved against in accordance
with PRC GAAP in the Financial Statements, (ii) incurred in the ordinary course
of business consistent with past practice since the Base Date of Valuation or
(iii) that are immaterial to Hengyang Steel Tube.


(x)                                   Valin MPM
has,
in relation to each of its current and former Working Personnel and Senior
Management Personnel, fully complied in all material respects with all applicable PRC
Law, whether national, local or provincial and employment contracts concerning
their employment, termination, wages and benefits.


(y)                                 The
Intellectual Property Rights which are owned or otherwise used by Valin MPM
are duly registered with the relevant authorities by Valin MPM or properly licensed to Valin MPM
in accordance with the applicable Law.  



 19
 






 



                                                Except
as set forth on Appendix 4.2 (y), the operations of Valin MPM do not infringe any
Intellectual Property Rights of any third party.  No claim has been made or threatened by any
third party which alleges any such infringement, or which otherwise disputes
the right of Valin MPM to use any Intellectual Property Rights relating to
its business.


(z)                                   Valin MPM
does not have any outstanding Liabilities including indebtedness and
guarantees, other than: (i) those specifically disclosed in the Financial
Statements as of the Base Date of Valuation, as indicated in Appendix
4.2(z); and (ii) Liabilities incurred in the ordinary course of business consistent
with Valin MPM’s past practices, since January 1, 2006.


(aa)                            Valin MPM has
not entered into any contracts, whether written or oral, for the sale of its
products, directly or indirectly, in North America (Canada, the United
States of America and Mexico, which includes any offshore drilling within the
territorial waters of such countries) except as disclosed in Appendix
4.2(aa) as attached herein.


(bb)                          Valin MPM has
not entered into any written or oral agreements or understandings with third
parties relating to the direct or indirect marketing or distribution of Valin
MPM’s products, except as set forth on Appendix 4.2(bb).


(cc)                            Immediately
prior to the Merger, Hengyang Steel Tube had complied in all material aspects
with all applicable PRC Law in respect product design and manufacturing, tax
and labor management and had performed the obligations under the relevant
contracts.


(dd)                          Immediately
prior to the Merger, Hengyang Steel Tube has not entered into any contracts,
whether written or oral, for the sale of its products directly or indirectly in
North America (Canada, the United States of America and Mexico, which includes
any offshore drilling within the territorial waters of such countries) except
as disclosed in Appendix 4.2 (dd) as attached hereto.


(ee)                            Immediately
prior to the Merger, Hengyang Steel Tube has not entered into any written or
oral agreements or understandings with third parties relating to the direct
or indirect marketing or distribution of Hengyang Steel Tube products, except
as set forth on Appendix 4.2(ee).


(ff)                                No
representation or warranty of Valin MPM or the Chinese Parties contained in
this Agreement and no written statement made by or on behalf of Valin MPM or a
Chinese Party to Star China or any of its Affiliates pursuant to this Agreement
contains an untrue statement of a material fact or 



 20
 






 



                                                omits
to state a material fact necessary to make the statements contained herein or
therein not misleading.  There are no
facts which Valin MPM or the Chinese Parties have not disclosed to Star China
in writing which could, individually or in the aggregate, reasonably be
expected to have a material impact on Valin MPM.


4.3                                 Star China represents
and warrants to Valin MPM and the Chinese Parties as of the date hereof and the
Funding Date as follows:


(a)                                  It
is a legally established and lawfully existing corporation under the Laws of
the Cayman Islands.


(b)                                 It
has obtained all necessary internal and external governmental approvals or
authorizations, and has full legal right, power and authority to enter into
this Agreement and to perform its obligations hereunder.


(c)                                  It
will make payment of the Capital Increase in accordance with Article 2
of this Agreement.


(d)                                 To
the extent reasonable and not unduly onerous to Star China , it will handle or
assist the Chinese Parties and the JV Company in handling those
procedures, including but without limitation those which are set forth on
Appendix 4.4(d), that are necessary to effect the Capital Increase under PRC
Law.


(e)                                  This
Agreement constitutes a legal, valid and binding obligation for it. The
execution and delivery and performance of this Agreement by it, the consummation of the
transactions contemplated by this Agreement and the fulfilment by it of
the terms, conditions and provisions hereof will not: contravene or violate or result in
the breach of (i) any obligations of it or of any applicable Laws, (ii)
any judgment, order, writ, injunction or decree of any court or of any
governmental official, agency or department, or (iii) the charter and the provisions
of any material agreement, arrangement or understanding to which it is a
party to
the same or by which it is bound.


(f)                                    Each
of the individuals who are to execute this Agreement on behalf of it has
obtained the necessary authorization for the execution of such document.


(g)                                 It has
prepared sufficient capital or made adequate financial arrangement for the completion of this
transaction, and such arrangements are sufficient for fulfilling its
contribution obligations under this Agreement in accordance with the terms and
conditions of this Agreement.


 



 21














 


 


5.                                       RESPONSIBILITIES
OF THE PARTIES


5.1                                 Responsibilities
of the
Parties in relation to the examination and approval of the Capital Increase:


Unless otherwise stipulated in this Agreement, for completion of the Capital Increase under this
Agreement and for the
conversion of Valin MPM into a Sino-foreign joint venture enterprise, the Chinese Parties and Star China shall work
closely to obtain all necessary governmental approvals.  The Chinese Parties shall take the lead and Star China or its relevant
Affiliates shall provide all the reasonable and necessary assistance to the
Chinese Parties in obtaining all
necessary approvals. The Chinese Parties and
Star China shall provide with each other the true and complete copies of all
correspondence between any of them and any of the Governmental Authorities in
connection therewith, other than correspondence containing governmental secrets
and commercial secrets of the of the relevant Parties; provided, that the
subjects of such correspondence shall be promptly disclosed in writing to the
other Parties.


5.2                                 Responsibilities
of Star China


Unless otherwise stipulated in this Agreement, for the
completion of this Agreement and the Capital Increase hereunder and for the
establishment of the JV Company, Star China shall:


(a)                                  Procure
all authorizations, approvals and consents from Governmental Bodies having
jurisdiction over Star China, or any third party (including without limitation Star
China’s
own creditor or group of creditors), that are requisite to the completion of
the Capital
Increase
under this
Agreement, in accordance with the Laws applicable to Star China as well as the
contracts, its charter and material agreements binding upon it;


(b)                                 In
accordance with the terms of this Agreement together with other relevant documents, make
payment of the Capital Increase amount to the JV Company in full as
contemplated by Article 2; and


(c)                                  According to
the requirements of the operations of the JV Company (if any), assist Valin MPM
to purchase machinery, equipment and other materials outside China upon
favourable
terms and conditions; provided that Star China shall not be required to provide
any financial assistance or support to Valin MPM in order to fulfil this
covenant.



 22
 






 



 


5.3           Miscellaneous


(a)                                  Where
any of the Examination and Approval Authorities requires the Parties to this
Agreement to make any amendment to this Agreement, the Parties shall forthwith
consult in good faith and determine the amendment proposals corresponding to
the requirements of the Examination and Approval Authorities and submit the
revised version of this Agreement to such Examination and Approval Authorities
by the Chinese Parties within ten (10) days after the execution of the revised
version of this Agreement; provided, that any Party may terminate this Agreement
without any liability to any other Party hereto if it determines, in its
reasonable judgment, that any required change is not acceptable.


(b)                                 For
realization of the purpose of this Agreement and the transactions contemplated
hereby, the Parties to this Agreement shall use their commercially reasonable
endeavours to procure all necessary approvals from the Examination and Approval
Authorities. In the process of obtaining such approvals, any Party shall
provide positive and bona fide assistance to the reasonable requirement by
other Parties; provided that such assistance shall not include the incurrence
of more than de minimis cost by any Party.


6.                                       PRE-COMPLETION
CONDUCT


6.1                                 Between the
execution of this Agreement and the Funding Date, unless otherwise consented to
in writing by Star China or expressly permitted or required under this
Agreement, each of the Chinese Parties and Valin MPM shall ensure that Valin
MPM will:


(a)                                  not create,
allot, issue, acquire, repay or redeem any share or capital or agree,
arrange or undertake to do any of those things or acquire, or agree to acquire,
an interest in a corporate body or merge or consolidate with a corporate body
or any other Person, enter into any demerger transaction or participate in any
other type of corporate reconstruction;


(b)                                 operate its
business in the usual way so as to maintain its business as a going concern;


(c)                                  not acquire
or dispose of, or agree to acquire or dispose of, any revenues, assets,
business or undertakings except in the usual course of its business or assume
or incur, or agree to assume or incur, a liability, obligation or expense
(actual or contingent) except in the usual course of its business;


(d)                                 not make, or
agree to make, capital expenditures exceeding in total the equivalent of
US$5,000,000 or incur, or agree to incur, a commitment or 



 23
 






 



                                                commitments
involving capital expenditures exceeding in total the equivalent of
US$5,000,000, except as disclosed in Appendix 6.1(d) as attached
hereto;


(e)                                  not declare,
pay or make a dividend or distribution;


(f)                                    not pass any
shareholders’ resolution other than those necessary for approving the
transaction contemplated under this Agreement or other Transaction Documents;


(g)                                 not create,
or agree to create or amend, any Liens over any asset;


(h)                                 continue,
without amendment, each of the insurance policies in respect of which Valin MPM
has an interest (the “Policies”) and not do, or omit to do, anything
which might:


(i)                                     make any of
the Policies void or voidable; or


(ii)                                  entitle any
of the insurers under any of the Policies to refuse indemnity in relation to
particular claims in whole or in part;


I.                                         result in an
increase in the premium payable under any of the Policies; or


II.                                     prejudice the
ability to effect insurance, on the same or better terms, in the future;


provided, that this shall not
prevent the notification to insurers of claims in circumstances which might
give rise to claims under any of the Policies in accordance with the terms of
the relevant policies;


(i)                                     not enter
into a long-term, onerous, unusual or material agreement, arrangement or
obligation in each case, involving consideration, expenditure or liabilities in
excess of the equivalent of US$5,000,000 other than in the ordinary course of
business;


(j)                                     not amend or
terminate a material agreement, arrangement or obligation to which it is a
party or terminate any contract or commitment which is not capable of being
terminated without compensation or which is not in the ordinary course of
business or which involves or may involve total annual expenditure of the
equivalent of US$5,000,000;


(k)                                  not amend the
terms and conditions of employment or engagement of a director, other officer
or employee (except in the usual course of its business) 



 24
 






 



                                                or employ,
engage or terminate the employment or engagement of, a person (except in the
usual course of its business) or provide, or agree to provide, a gratuitous
payment or benefit to a director, officer or employee (or any of their
dependants), except for the engagement of one of the Four Accounting Firms (as
defined in the JV Contracts) as the Auditors (as defined in the JV Contracts)
of Valin MPM;


(l)                                     not amend, or
agree to amend, the terms of its borrowing or indebtedness in the nature of
borrowing or create, incur, or agree to create or incur, borrowing or
indebtedness in the nature of borrowing (except pursuant to facilities
disclosed in Appendix 6.1(l) where the amount borrowed or indebtedness
does not exceed the amount available to be drawn by Valin MPM under those
facilities);


(m)                               not give, or
agree to give, a guarantee, indemnity or other agreement to secure, or incur
financial or other obligations with respect to, another person’s obligation;


(n)                                 conduct its
business in all material respects in accordance with the requirements of all
applicable PRC Laws and the governmental authorities in charge;


(o)                                 not enter
into an agreement, arrangement or obligation (whether legally enforceable or
not) in which Valin MPM, a director or former director of the Valin MPM or a
person connected with any of them is interested; and


(p)                                 maintain
sufficient funds for its normal business operation.


6.2                                 Each of the
Chinese Parties and Valin MPM shall notify Star China immediately if it becomes
aware of a fact or circumstance which constitutes or which would or might constitute
a breach of its obligations under this Agreement or which would or might cause
a representation or warranty given by any of them to be untrue, inaccurate or
misleading if given in respect of the facts or circumstances as at the Funding
Date.


7.                                       ARRANGEMENT
FOR EMPLOYEES OF VALIN MPM


On or prior to the
Establishment Date, the JV
Company will enter into employment agreements in the form as set forth in Schedule
2 of the JV Contract with the existing Working Personnel of Valin MPM who are
necessary to operate the steel production assets.  The Term of the employment agreement shall
comply with the applicable PRC Law and shall be at least of three (3)
years.  The welfare treatment of the
Working Personnel shall be no less favourite than that was set out in the Schedule
10 



 25
 






 



of the JV Contract.  The JV Company will acknowledge the former
length of service of such Working Personnel with HYST Group and the JV Company
will offer the Working Personnel employment benefits based on the aggregate of
the former length of service with  HYST
Group and the new length of service with the JV Company of such Working
Personnel. During
the operation of the JV Company going forward, issues regarding the labor
contract or the employment relationship with the above Working Personnel shall
be settled in accordance with the then applicable PRC Law.  However, (i) any
compensation, if any, payable to Working
Personnel of
Valin MPM due to the termination of labor contract with such
Working Personnel as a result of the capital contribution to the JV Company by
Star China or the conversion of Valin MPM into the JV Company and (ii) any
liabilities arising from the employees’ employment by HYST Group, Valin MPM,
the JV Company or their respective Affiliates which have not been reflected in
the financial statements as of the Base Date of Evaluation (as defined in the
Capital Increase Agreement) or otherwise disclosed in writing by the Chinese
Parties to Star China before the Funding Date, shall be borne by the Chinese
Parties only.  The occurrence
of any claim in relation to the aforesaid responsibilities of the Chinese
Parties shall not constitute breach of the representations, warranties or
undertakings of the Chinese Parties under this Agreement, provided, however,
that the Chinese Parties shall perform their obligations in a timely manner in
the event that it is obliged to make relevant payments.


8.                                       TAX OF
VALIN MPM


On or before the Capital Increase Registration Date,
Valin MPM shall pay all unpaid taxes including enterprise income tax (including
personal income tax payable on behalf of its Working Personnel), business tax,
value added tax, real estate taxes, custom duties, stamp duty, and any other
taxes or similar government levies, together with related penalties and
interest, which taxes are due and payable by Valin MPM prior to the Capital
Increase Registration Date in accordance with the applicable tax Laws,
regulations and rules of China, or shall make full disclosure
or reserve in accordance with PRC Law with respect to such taxes in its
Financial Statements.  After the
Capital Increase Registration Date, the Chinese Parties shall be
responsible for all tax actually paid or payable by the JV Company in connection with
taxable matters occurring before the Capital Increase Registration Date which have not been
expressly disclosed or reserved in its Financial Statements.  Provided that the Chinese Parties fulfil
their obligations under this Article 8, the occurrence of such
tax-related issues shall not be regarded as the Chinese Parties having
committed a breach of their warranties or covenants or obligations hereof.



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9.                                       ASSETS
AND DEBTS OF VALIN MPM


9.1                                 Unless
otherwise agreed to in this Agreement, the assets and debts of Valin MPM before
the Capital Increase Registration Date shall be vested in the JV Company.


9.2                                 If any
Liabilities of Valin MPM that were not disclosed in the Financial Statements,
individually or in the aggregate, result in a reduction in the net assets of
the JV Company, Valin TW shall indemnify the JV Company in the full amount of
such reduction in net assets, or indemnify Star China, at Star China’s option,
for difference in the amount of the Capital Increase  had such liabilities been disclosed in those
Financial Statements.


10.                                 NO
SHOP


From the date
of this Agreement until the Funding Date or the earlier termination of this
Agreement prior to the Funding Date, the Chinese Parties shall not, and the
Chinese Parties shall cause each Affiliate and each of their respective
officers, directors, employees, representatives and agents not to, directly or
indirectly, initiate, solicit, encourage or otherwise facilitate any inquiry,
proposal, offer or discussion, or engage in any discussions or negotiations,
with any party (other than Star China or its Affiliates) concerning any
business transaction involving the sale of Valin MPM or JV Company, the equity
interests, or any subsidiary or the sale of all or substantially all of the
assets of Valin MPM or JV Company or any of the subsidiaries (other than assets
sold in the ordinary course of business).


11.                                 CONDITIONS
PRECEDENT


11.1                           Upon the following conditions, this
Agreement shall be legally valid:


(a)                                  approvals to
this Agreement by Provincial Commission of State-owned Assets Supervision and
Administration in Hunan;


(b)                                 approval to
this Agreement by National Development and Reform Commission;


(c)                                  approval to
this Agreement, the JV Contract and the Articles of Association by the Examination
and Approval Authority; and


(d)                                 other
governmental approvals (including any Governmental Body anti-trust review and
approval, if  required)
as required by Law.



 27
 






 



 


11.2                           Star
China’s obligation to pay the Capital Increase to the JV Company is conditional
upon the following:


(a)                                  all
necessary corporate approvals (including without limitation, shareholders and
board resolution) of the Chinese Parties and Valin MPM and governmental and
regulatory approvals for the Capital Increase and the establishment of the JV
Company having been obtained and not revoked;


(b)                                 the
execution of the Transaction Documents by the parties thereto;


(c)                                  all the
representations and warranties of the Chinese Parties and/or Valin MPM under
this Agreement shall be true and correct in all material respects as of the
date of this Agreement and as of the Funding Date as though made at and as of
the Funding Date, except to the extent such representations and warranties
expressly speak as of an earlier date (in which case such representations and
warranties shall be true and correct in all material respects on and as of such
earlier date);


(d)                                 there
is no material breach of any of the terms of the Transaction Documents by the
parties thereto (other than Star China ) and no Event of Force Majeure has
occurred under the terms hereof or thereof;


(e)                                  confirmation
that all of the consents to the Merger and the transactions contemplated
hereunder or under the Transaction Documents required by loan agreements listed
in Appendix 11.2(e) have been obtained;


(f)                                    the
termination of the Management Service Agreement dated January 1,
2006 between Valin ST and Valin MPM;


(g)                                 the
Chinese Parties and Valin MPM shall have performed and complied in all material
respects with all obligations and agreements required in this Agreement and
other Transaction Documents to which it is a party from the date hereof to the
Funding Date to be performed or complied with by them on or prior to the
Funding Date;


(h)                                 No
Material Adverse Change has occurred. “Material Adverse Change”  means any change, effect, event, occurrence,
state of facts or development which individually or in the aggregate would
reasonably be expected to result in any change or effect, that is materially
adverse to (i) the historical, short-term or long-term business, assets,
properties, results of operations, condition (financial or otherwise) or prospects
of Valin MPM or the JV Company, (ii) the consummation by the parties hereto of
the transactions contemplated by this Agreement or other Transaction Documents,
(iii) regulatory or political conditions in the PRC or any outbreak of
hostilities, terrorist activities or war or (iv) the ability of the any of the
Chinese Parties or Valin MPM to consummate the transactions contemplated by
this Agreement or other 



 28
 






 



                                                Transaction
Documents or perform their obligations under this Agreement or other
Transaction Documents;


(i)                                     The
employees as identified in Appendix 11.2(i) shall have entered into Employment
Contracts in the form with the JV Company prior to the Funding Date;


12.                                 PERFECTION
OF THE ERP SYSTEM


12.1                           The
Chinese Parties undertake that:


(a)                                  within
ninety (90) days after the Funding Date, the JV Company shall obtain required
license to cure the current IP infringement relating to the ERP System
currently in use in order that the JV Company could use the ERP System with
proper rights or authorisation; or


(b)                                 within
ninety (90) days after the Funding Date, the JV Company will implement a new
ERP system with similar features of the current ERP System with proper rights
or authorisation to replace the current ERP System.


12.2                           As for
any claims against the JV Company raised by third parties in relation to the IP
infringement occurred before the completion of any of the abovementioned
corrective measures the Chinese Parties shall be fully responsible for such
claims.


13.                                 ADJUSTMENT
TO DIVIDENDS PAYABLE TO VALIN MPM’S SHAREHOLDERS


The Parties hereto agree to adjust the dividends
payable to Valin MPM’s shareholders for the period from the date hereof until
the Funding Date in the manner as set for in Appendix 13.


14.                                 LIABILITIES
FOR BREACH OF THIS AGREEMENT


14.1                           The
Parties shall be responsible to the other Parties for their representations,
warranties and covenants which are proven to be untrue, inaccurate or
misleading through and including the second anniversary of the Funding Date
(“Claim Period”); provided, however, that the Claim Period
in relation to the representations and warranties (i) of Valin MPM and
the Chinese Parties set forth in Articles 4.1(a), (b), (c) and (d), and 4.2(a),
(b), (c), (g), (v) and (y) shall survive the Funding Date indefinitely,
(ii) the
Claim Period of the representations and warranties of Valin MPM and the
Chinese Parties set forth in Articles 4.2(i), (j), (t), (w), (x) shall
lapse upon
the expiration of the applicable statue of limitations with respect to the
particular matter that is the subject matter thereof.



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14.2                           Subject
to Article 14.1 hereof, each of Valin TW (in respect of itself and Valin
ST) and Valin ST (in respect of itself) hereby agrees to indemnify and hold
Star China and its respective directors, officers, employees, affiliates,
stockholders, agents, attorneys, representatives, successors and assigns
(collectively, the “Star China Indemnified Parties”) harmless from and
against, and pay to the applicable Star China Indemnified Parties the amount
of, any and all losses, liabilities, claims, obligations, deficiencies,
demands, judgments, damages, interest, fines, penalties, claims, suits,
actions, causes of action, assessments, awards, costs and expenses (including
costs of investigation and defense and attorneys’ and other professionals’
fees), or any diminution in value or prospects, whether or not involving a
third party claim (individually, a “Loss” and, collectively, “Losses”):


(a)                                  based
upon, attributable to or resulting from the failure of any of the representations
or warranties made by Valin MPM or the Chinese Parties in this Agreement to be
true and correct in all respects at and as of the date hereof and at and as of
the Funding Date; and


(b)                                 based
upon, attributable to or resulting from the breach of any covenant or other
agreement on the part of Valin MPM or any of the Chinese Parties under this
Agreement.


14.3                           Subject
to Article 14.1 hereof, Star China hereby agrees to indemnify and hold
the Chinese Parties and their directors, management personnel, employees,
affiliates, stockholders, agents, attorneys, representatives, successors and
permitted assigns (collectively, the “Chinese Parties Indemnified Parties”)
harmless from and against, and pay to the applicable Chinese Parties
Indemnified Parties the amount of, any and all Losses:


(a)                                  based
upon, attributable to or resulting from the failure of any of the
representations or warranties made by Star China in this Agreement to be true
and correct in all respects at the date hereof and as of the Funding Date; and


(b)                                 based
upon, attributable to or resulting from the breach of any covenant or other
agreement on the part of Star China under this Agreement.


14.4                           The
right to indemnification or any other remedy based on representations,
warranties, covenants and agreements in this Agreement shall not be affected by
any investigation conducted at any time, or any knowledge acquired (or capable
of being acquired) at any time, whether before or after the execution and
delivery of this Agreement or the Funding Date, with respect to the accuracy or
inaccuracy of, or compliance with, any such representation, warranty, covenant
or agreement.  The waiver of any
condition based on the accuracy of any such representation or warranty, 



 30
 






 



                                                or
on the performance of or compliance with any such covenant or agreements, will
not affect the right to indemnification or any other remedy based on such
representations, warranties, covenants and agreements.


14.5                           With
regard to the increased capital to be contributed by Star China to Valin MPM pursuant
and subject to the terms and conditions of this Agreement, if Star China fails
to complete the Capital Increase within the time period as provided in Article
2.7 hereof, such failure will be regarded as a breach of this
Agreement.  In addition to completing the
capital contribution as soon as possible, Star China shall pay a liquidated
damage to the Chinese Parties for the overdue amount.  The daily liquidated damage shall be two (2)
times of the amount of the interest calculated on the basis of the applicable
loan interest rate for the shortest term loan published by the People’s Bank of
China and such liquidated damage shall be accrued to the date of full payment
of the Capital Increase.


14.6                           A
claim for indemnification for any matter may be asserted by notice to the Party
from whom indemnification is sought; provided, however, that
failure to so notify the indemnifying Party shall not preclude the indemnified
Party from any indemnification which it may claim in accordance with this Article
14.


14.7                           At
the election of Star China, in its sole judgement, all sums due and owing to
Star China in connection with the indemnification obligations of Valin MPM and
the Chinese Parties shall be paid (a) to the JV Company in full satisfaction of
such sums due and owing to Star China or (b) to Star China, in either US
Dollars or RMB, at the discretion of Star China.


14.8                           The
indemnifying Parties shall be required to pay all sums due and owing to the
Parties to be indemnified in connection with the former’s indemnification
obligations under this Agreement within 90 days of receipt of notice by the
indemnifying Parties of any sums due and owing.


14.9                           Any
dispute under this Article 14 shall be resolved pursuant to the
arbitration provisions of Article 18.


14.10                     Any
indemnification
obligations of the indemnifying Parties under Article 14 hereof shall
not be discharged; provided, however, that the indemnified Parties have given indemnification notice to the
indemnifying Party of the basis of the claim in reasonable detail within the applicableClaim Period
as provided
in Article 14.5.


 



 31














 


15.                                 TERMINATION


15.1                           If any of the
following events occur, then a Party (the “Terminating Party”) may by written
notice to the other Party or Parties and to the JV Company terminate this Agreement
prior to the Funding Date:


(a)                                  by
Star China if it becomes aware of any fact, event, circumstance or series of
facts, events, or circumstances that, individually or collectively, would render
any of the representations and warranties given by Valin MPM or the Chinese Parties to
be materially untrue or misleading;


(b)                                 by Star China
if Valin MPM, the JV Company or the Chinese Parties are in material
breach of any other obligation under this Agreement, the JV Contract, the Sale,
Marketing and Supply Agreements or the Technology Cross License Agreement, other than a breach
of the Sales, Marketing and Supply Agreements or Technology Cross Licensing
Agreement by the JV Company which is caused by Star China or its Affiliates;


(c)                                  by
any of Valin MPM or the Chinese Parties if it becomes aware of any fact, event,
circumstance or series of facts, events, or circumstances that, individually or
collectively, would render any of the representations and warranties given by Star China to
be materially untrue or misleading;


(d)                                 by
any of Valin MPM or the Chinese Parties if Star China is in material breach of
any other obligation under this Agreement, the JV Contract, the Sale, Marketing
and Supply Agreements or the Technology Cross License Agreement, other than
a breach of such agreements which is caused by the Chinese Parties or their
Affiliates;


(e)                                  by
Star China if the amount of the Capital Increase taking into account the
adjustments set forth in Article 2 exceeds the amount set forth in
Section 2 and the Chinese Parties or the Examination and Approval Authorities
require Star China to make contribution exceeding such amount;


(f)                                    by
Star China if the Effective Date has not occurred by June 30, 2007 caused by a
reason (such as government non-approval) other than the fault of Star China;


(g)                                 by
Star China if the Examination and Approval Authorities require its equity
interests in the JV Company to be reduced to below 40% or impose any conditions
on Star China or the JV Company which Star China determines, in its sole
discretion, are onerous and would result in either Star China’s investment in
the JV Company being significantly impaired or could result in 



 32
 






 



                                                Star
China and/or Lone Star Technologies being unable to fulfil requirements of
applicable law; or


(h)                                 by
Star China or the Chinese Parties if they elect to exercise their termination
rights under Article 2.1(c).


and such circumstance or breach where capable
of remedy has not been remedied within thirty
(30)
days after receipt of notice of the breach from the Terminating Party.


15.2                           Such
termination shall not affect any rights to compensation which a Party
may otherwise
have as a result of any breach by any other Party of this Agreement.


16.                                 COSTS
AND TAXES


16.1                           Each Party
shall be responsible for the payment of its own fees and expenses incurred in
connection with this Agreement; provided, however, that the fees and expenses
of all investment bankers, counsel, consultants or other advisors engaged by
Valin ST and Valin MPM in connection with the transactions contemplated by this
Letter shall be borne by the JV Company, as applicable.


16.2                           Each Party shall pay
all taxes and levies payable by it for transactions contemplated under this
Agreement.


17.                                 CONFIDENTIALITY


17.1                           Each Party
shall keep secret and not disclose to any third party any Confidential
Information of a technical, financial and commercial nature that has been or
will be made available to it by any other Party in the course of the
preparation and negotiations of this Agreement except with the prior written
consent of such Party.


17.2                           Star China
shall keep secret and not disclose to any third party (other than its outside
professional advisers) any Confidential Information concerning the Chinese
Parties and their respective associated companies that has been or will be made
available in the course of its due diligence investigations except with the
prior written consent of the Chinese Parties. 
Star China warrants that its confidentiality obligations under this
Agreement shall be applicable to its engaged external consultants and it shall
bear joint and several liability for the breach of its confidentiality
obligations by such external consultants.


17.3                           The above
prohibitions shall cease to apply in the event that the Confidential
Information comes into the public domain (other than through any unauthorized
disclosure by a Party) or disclosure of the Confidential Information is
required by Law or by any court or arbitral tribunal, including, in the case of Star
China , pursuant 



 33
 






 



 


                                                to rules and
regulations of the New York Stock Exchange and the U.S. Securities and Exchange
Commission and, in the case of Valin TW, pursuant to rules and regulations of
the China Securities Regulatory Commission and the Shenzhen Stock
Exchange.  If disclosure of such
information is required by Law or by any court or arbitral tribunal, the Party
so required to disclose the Confidential Information shall promptly inform the
other Parties before taking any actions to make any disclosures.


17.4                           Before the
obtaining of the approval replies with respect to the Capital Increase issued
by the Examination and Approval Authorities, each Party shall not disclose the
existence of this Agreement and its contents without the other Parties’ prior
written consent except as permitted pursuant to Article 17.3.


18.                                 GOVERNING
LAW AND DISPUTE SETTLEMENT


18.1                           This Agreement
and all the other contracts, agreements and documents for completing the
Capital Increase and the manner and procedures of converting Valin MPM into the
JV Company shall be governed by and interpreted in accordance with PRC Law.


18.2                           The
Parties shall make every effort to settle amicably any and all disputes,
controversies and conflicts arising out of or relating to or in connection with
this Agreement and the performance or non-performance of the obligations set
forth herein (including any questions regarding its existence, validity or
termination) (a “Dispute”). 
Disputes or claims, if any, which cannot be settled amicably between the
Parties, within thirty (30) days after written notice of such Dispute has been
given by one party to the other party, shall be referred to the International
Court of Arbitration of the International Chamber of Commerce and finally
resolved by arbitration in Hong Kong under the Rules of Arbitration of the
International Chamber of Commerce (“ICC Rules”) for the time being in force.  The ICC Rules shall be deemed to be
incorporated by reference into this Article within this Agreement.  The Tribunal shall consist of one (1)
arbitrator who shall be appointed by the Chairman of the International Chamber
of Commerce.  Such arbitrator shall not
be a citizen of the United States of America or China. The costs of the
arbitration, including administrative and arbitrator’s fees, shall be borne by
the Parties according to the arbitration award. 
Each Party shall bear the costs of its own attorney’s fees and expert
witness fees.


18.3                           The
arbitration proceedings shall be in both English and Chinese and all pleadings
and written evidence shall be in English and Chinese.  The decision of the arbitrator shall be
final, binding and enforceable upon the Parties and judgment upon any award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof.  In the event that the failure
of a party to this Agreement to comply with the decision of the arbitrator
requires the other party to apply to any court for enforcement of such 



 34
 






 



 


                                                award,
the non-complying Party shall be liable to the other for all cost of such
litigation including attorney’s fees. 
The Parties may apply to any court of competent jurisdiction in
accordance with this Article 19.3 for temporary or permanent injunctive relief,
without breach of this Article 19.3 or abridgement of the
powers of the arbitrator.  Neither Party
shall be entitled to commence or maintain any action in any court of Law upon
any matter in dispute until such matter shall have been submitted to, and
finally determined under, the dispute resolution and arbitration procedures in
this Article 18.3, and then only for the enforcement of any arbitral
award.  Process may be served on any
Party in the manner set forth in this Agreement by such other method authorized
by applicable Law or court rule.


18.4                           During the
period when a dispute is being resolved, the Parties shall in all other respects
continue their implementation of this Agreement.


19.                                 NOTICES


19.1                           Unless
otherwise provided in this Agreement, notices or other communications required
to be given by any Party pursuant to this Agreement may be delivered
personally, by a recognized courier service, sent by facsimile transmission or
sent by e-mail transmission to the addresses, facsimile numbers or e-mail
addresses of the other Parties set forth below or to such other address,
facsimile number or e-mail address as a Party may have specified by notice
given to the other Parties pursuant to this provision.  The dates on which notices shall be deemed to
have been effectively given shall be determined as follows:


(a)                                  Notices given
by personal delivery shall be deemed effectively given on the date of personal
delivery.


(b)                                 Notices given
by registered airmail (postage prepaid) shall be deemed effectively given on
the seventh (7th) day after the date on which they were mailed (as indicated by
the postmark).


(c)                                  Notices given
by air courier shall be deemed effectively given on the third (3) date of
delivery (as indicated by the airway bill).


(d)                                 Notices given
by facsimile or e-mail transmission shall be deemed effectively given on the
first (1st) Business Day following the date of transmission (as indicated by
confirmation of transmission recorded by the sender’s fax machine).



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19.2                           For the purpose of notices,
the addresses, facsimile numbers and e-mail addresses of the Parties are as
follows:


Hunan Valin
Steel Tube & Wire Co., Ltd.:

Hua Ling Tower, No. 111 Fu Rong Road (M)

Changsha Municipality, Hunan Province

People’s Republic of China

Attention: Head of Securities Department

Facsimile No.: (86) 731-2245196; (86) 731-4447112


Hengyang
Valin Steel Tube Co. Ltd.:

No. 10 Dali New Village, Zhengxiang District

Hengyang, Hunan Province

People’s Republic of China

Attention: Head of Office

Facsimile No:  (86)734-8870188


Hengyang
Valin MPM Steel Tube Co. Ltd.:

No. 10 Dali New Village, Zhengxiang District,

Hengyang, Hunan Province

People’s Republic of China

Attention: Head of Office

Facsimile No:  (86)734-8870188


Star China
Ltd.:

c/o Lone Star Technologies, Inc.

15660 N. Dallas Pkwy., Ste. 500,

Dallas, TX 75248

United States of America

Attention: General Counsel

Facsimile No:  (+1) 972-770-6474


with a copy
to:


Weil, Gotshal
& Manges LLP

200 Crescent Court, Suite 300

Dallas, Texas 75201

United States of America

Attention:  Mary R. Korby

Fax: (+1) 214-746-7777



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20.                                 MISCELLANEOUS


20.1                           This
Agreement and the JV Contract constitute the entire agreement among all Parties
with respect to the subject matters set forth herein and therein and supersede
all prior discussions, notes, memoranda, negotiations, understandings and all
the documents and agreements between them relating to the same.  All documents, agreements, understandings and
correspondence between the Parties prior to the execution of this Agreement
shall, with the exception of the JV Contract and any
non-disclosure/confidentiality undertakings, become null and void automatically
when this Agreement is signed by the parties hereto.


20.2                           No amendment
to this Agreement shall be valid unless it is agreed in writing and signed by
each of the Parties and approved by the Examination and Approval Authority.


20.3                           Neither Party
shall assign, transfer or charge its rights under this Agreement without the
prior written consent of the other Parties.


20.4                           If any
provision of this Agreement is held to be invalid, such provision shall be
given no effect but without invalidating any of the remaining provisions of this
Agreement.  The Parties shall then use
their best endeavours to substitute a valid and enforceable provision the
effect of which is as close as possible to the intended effect of the original
provision.


20.5                           No failure or
delay by a Party in exercising any right provided by Law or pursuant to this
Agreement shall be construed as a waiver of such right or preclude its exercise
at any subsequent time, and no single or partial exercise of any such right
shall preclude any other or further exercise of it or the exercise of any other
right.


20.6                           Appendices
shall be part of this Agreement. 
Whenever this Agreement is mentioned it includes its appendices and any amendment and
supplement to this Agreement and its appendices from time to time.


20.7                           This
Agreement shall be written and executed in both English and Chinese.  Both versions shall have the effect of equal
validity.  Both versions shall be
executed in ten (10) originals and each Party shall keep one original.



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IN
WITNESS WHEREOF, this Agreement has been signed by the authorized
representatives of the Parties on the date first above written.


	
  Hunan Valin Steel Tube & Wire Co., Ltd.

  
	
   

  
	
  By:

  	
  /s/ Cao HuiQuan

  	
   

  
	
   

  	
   

  	
   

  
	
  Name: Cao HuiQuan

  	
   

  
	
   

  	
   

  
	
  Title: Director/General
  Manager

  	
   

  
	
   

  	
   

  
	
  Hengyang
  Valin Steel Tube Co., Ltd.

  
	
   

  
	
  By:

  	
  /s/ Zhao JianHui

  	
   

  
	
   

  	
   

  	
   

  
	
  Name: Zhao JianHui

  	
   

  
	
   

  	
   

  
	
  Title:
  Chairman/General Manager

  	
   

  
	
   

  	
   

  
	
  Star
  China Ltd.

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Rhys J. Best

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
  Rhys J. Best

  	
   

  
	
   

  	
   

  
	
  Title:

  	
  Chief Executive
  Officer

  	
   

  
	
   

  	
   

  
	
  Hengyang Valin MPM Steel
  Tube Co., Ltd.

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Zhao JianHui

  	
   

  
	
   

  	
   

  	
   

  
	
  Name: Zhao JianHui

  	
   

  
	
   

  	
   

  
	
  Title: Chairman/General Manager

  	
   

  
	
   

  	
   

  
				



 


[Capital Increase Agreement Signature Page]



 38
 






 



 


Appendix 13


1.                                   A
Big 4 accounting firm selected by Star China and Valin MPM (the “Accountant”)
will prepare an audited balance sheet as of December 31, 2005 (the “2005
Year-End Balance Sheet”).


2.                                   The
Accountant will prepare an audited balance sheet as of the Funding Date (the “Funding
Date Balance Sheet”).


3.                                   If
the Working Capital (defined as current assets minus current liabilities) as of
the Funding Date Balance Sheet (as adjusted below) is lower than the Working
Capital in the 2005 Year-End Balance Sheet, there will be no dividend payable
by Valin MPM to its shareholders out of the incremental to shareholders’ equity
between the period from January 1, 2006 and the Funding Date. If the Working
Capital as of the Funding Date Balance Sheet (as adjusted below) is higher than
the Working Capital in the 2005 year-End Balance Sheet, Valin MPM’s
shareholders will be entitled to a dividend(2) for the period between the
period between January 1, 2006 and the Funding Date. The Working Capital as of
the Funding Date will be the Working Capital indicated in the Funding Date
Balance Sheet, adjusted as follows: (1) the capital expense (i.e.,
fixed asset investment) between the period January 1, 2006 and the Funding Date
will be an addition, (2) the increase of long-term liability for the period
between January 1, 2006 and the Funding Date will be a deduction and (3) the
decrease of long-term liability for the period between January 1, 2006 and the
Funding Date will be an addition. Valin MPM shall covenant that the amount of “due
to related-parties” shall not be decreased during the period between January 1,
2006 and the Funding Date.






(2)                              The
dividend payable to Valin MPM’s shareholders for the period between January 1,
2006 and the Funding Date will be the net income for such period, deducted by
(1) prior year’s losses, (2) income tax payable for such period and (3) legal
reserve or other reserve set aside in accordance with PRC Company Law.  The amount of (3) will be recorded as “payable
to shareholders” and will be included in the future dividend payment payable to
Valin MPM’s shareholders.


4.                                   The
dividend for the period between the Funding Date and December 31, 2006 will be
paid to the MPM’s shareholders based on their respective shareholding
percentage.


5.                                   The auditing expenses for the auditing of
2005 Year-End Balance Sheet will be borne by Star China, and the auditing
expenses for the auditing of Funding Date Balance Sheet and 2006 Year-End Balance
Sheet will be borne by
Valin MPM.


 



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