Document:

exh10-3.htm

 

Exhibit 10.3

[Chinese to English translation]

Lingshi Xinghai Magnesium Industry Co., Ltd.

Equity Transfer Contract

Entered by

Taiyuan Ruiming Yiwei Magnesium Industry Co., Ltd

(Party A)

And

Taiyuan Yiwei Magnesium Industry Co., Ltd.

 (Party B)

And

Lingshi Xinghai Magnesium Industry Co. Ltd.

(Target Company)

China Direct Industries, Inc.

And

CDI China, Inc.

And

Pine Capital Enterprises, Inc.

And

Yuwei Huang

August 30, 2011

  

  

  

Table of Contents

	 	 	
Preface

	 	 	3	 
	 	1.	 	
Definitions and Interpretation

	 	 	3	 
	 	2.	 	
Parties in the Contract

	 	 	3	 
	 	3.	 	
Transaction Target

	 	 	5	 
	 	4.	 	
Transaction Price, Payment and Closing

	 	 	6	 
	 	5.	 	
Transaction Process and Delivery

	 	 	9	 
	 	6.	 	
Mutual Covenants of Parties after Transaction

	 	 	11	 
	 	7.	 	
Business Operations

	 	 	12	 
	 	8	 	
Non-Competition

	 	 	12	 
	 	9	 	
Labor Management

	 	 	13	 
	 	10	 	
Taxes and Insurance

	 	 	13	 
	 	11	 	
Representations, Warranties and Indemnification

	 	 	14	 
	 	12	 	
Breach of Contract

	 	 	15	 
	 	13	 	
Duties of Confidentiality

	 	 	16	 
	 	14	 	
Force Majeure

	 	 	17	 
	 	15	 	
Disputes Resolutions

	 	 	17	 
	 	16	 	
Miscellaneous Provisions

	 	 	18	 
	
Exhibit II

	 	
Definition and Interpretation

	 	 	23	 
	
Exhibit II

	 	
Investment Letter

	 	 	25	 

  

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Equity Transfer Contract

This contract (the “Contract”) was entered by and between the following parties at Taiyuan China, on August 30, 2011: Taiyuan Ruiming Yiwei Magnesium Industry Co. Ltd., a limited liability company established and existing under the laws of China with its registered address at Shagou Village, Yangqu County, Taiyuan, Shanxi Province, China (hereinafter referred to as “Party A” or “Ruiming”); Taiyuan Yiwei Magnesium Industry Co., Ltd., a limited liability company formed and existing under the laws of China with its registered address at Yangqu County, Nitun Town, Fujiayao Village, the office address is 910, 9th Floor, MeGa Mall Business Center, 10 YiFen Street, Taiyuan City, ShanXi Province, China (hereinafter referred to as “Party B” or “Yiwei Magnesium” ); Lingshi Xinghai Magnesium Industry Co. Ltd., a limited liability company established and existing under the laws of China with its registered address at Zhijia Zhuang Village, Duanchun Town, Lingshi County, Jin Zhong City, Shanxi Province, China (hereinafter referred to as the “Target Company” or “Lingshi Xinghai”); China Direct Industries, Inc., a Florida corporation with its registered address at 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441 (“CDII”); CDI China, Inc., a Florida corporation with its registered address at 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441 (“CDII China”); and Pine Capital Enterprises, Inc., a limited liability company formed and existing under the laws of the Cayman Islands with its registered address at 51, 5th Fl, Britannia House, Jalan Cator BS8811, BSB Brunei Darassalam and Yuwei Huang.

Preface

After friendly consultations conducted in accordance with the principles of equality and mutual benefit, the Parties have agreed to enter into this Contract in accordance with the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures, Regulations for the Implementation of the Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign Investment, Company Law of the People's Republic of China, Contract Law of the People’s Republic of China and other applicable laws and provisions of this Contract.

Now the Parties hereby agree as follows:

	
1.

	
Definitions and Interpretation

Unless the terms or context of this Contract otherwise provide, this Contract shall be interpreted in accordance with, and each of the terms used herein shall have the meaning ascribed to it in Exhibit I.

	
2.

	
Parties in the Contract

	
  

	
2.1

	
Profiles of Parties in the Contract

Parties in the Contract are as follows:

(a) Party A: Taiyuan Ruiming Yiwei Magnesium Industry Co. Ltd., a limited liability company formed and existing under the laws of China with registered address at Shagou Village, Yangqu County, Taiyuan, Shanxi Province, China.

  

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Authorized Representative of Party A:

Name:  Yuejian Wang

Title:Chairman

Nationality: U.S. Citizen

(b) Party B: Taiyuan Yiwei Magnesium Industry Co., Ltd, a limited liability company formed and existing under the laws of China with registered address at Yangqu County, Nitun Town, Fujiayao Village, the office address is 910, 9th Floor, MeGa Mall Business Center, 10 YiFen Street, Taiyuan City, ShanXi Province, China.

Authorized Representative of Party B:

Name: Yuwei Huang

Title: Chairman

Nationality: China

	
(c)

	
Target Company: Lingshi Xinghai Magnesium Industry Co., Ltd., a limited liability company formed and existing under the laws of the China with registered address at ZhijiaZhuang Village, Duanchun Town, Lingshi County, JinZhong City, Shanxi Province, China

Authorized Representative of the Target Company: Xiangyun Zhai

Title:Chairman

Nationality: China

	
(d)

	
CDII: China Direct Industries, Inc., a Florida corporation with its registered address at 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441

Authorized Representative of CDII: Yuejian Wang

Title:Chief Executive Officer

Nationality: U.S.

	
(e)

	
CDI China, Inc., a Florida corporation with its registered address at 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441 (“CDI China”);

Authorized Representative of CDI China: Yuejian Wang

Title:Chief Executive Officer

Nationality: U.S.

	
(f)

	
Pine Capital: Pine Capital Enterprises, Inc., a limited liability company formed and existing under the laws of the Cayman Islands with its registered address at 51, 5th Fl, Britannia House, Jalan Cator BS8811, BSB Brunei Darassalam.

  

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Name: Xiaorui Su

Title: Executive Director

Nationality: China

(g) Yuwei Huang

Nationality: China

	
  

	
2.2

	
Replacement of Authorized Representatives of Parties

Each Party has the right to replace its own legal person or authorized representative. If the replacement occurs, the Party shall notice the other two Parties the name, title, and nationality of its new legal person or authorized representative in a timely manner.

	
3.

	
Transaction Target

	
  

	
3.1

	
Target Company Name

The name of the Target Company is Lingshi Xinghai Magnesium Industry Co., Ltd.,

	
  

	
3.2

	
Target company of the Transaction

The Target Company of the transaction is a limited liability company established and existing under the Laws of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures, Regulations for the Implementation of the Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign Investment, and other applicable laws and provisions of this Contract. Each Party acknowledges that the final controller of the Target Company is Mr. Yuwei Huang of this Contract.

	
  

	
3.3

	
Registered Address of the Target Company

The registered address of the Target Company is ZhijiaZhuang Village, Duanchun Town, Lingshi County, JinZhong City, Shanxi Province, China.

	
  

	
3.4

	
Registration Information of the Target Company

The registered capital of the Target Company is RMB 10,000,000. The business license number is 140729170000295. Except the above information, the Target Company doesn’t have any other options, warranties, and other Contract, plan, and commitment regarding shares. Target Company does not have any contractual obligations regarding shares repurchase, shares re-subscription and other debt, loan and interment etc. Target Company does not have any subsidiaries and branches.

Party B is the only shareholder of the Target Company, and Party B legally holds 100% of its shares which have been issued, granted and paid.

The following is the list of the current owners of 100% of the ownership interests in the Target Company:

	
Name

	
Ownership Interest

	
Taiyuan Yiwei Magnesium Industry Co., Ltd,

	
100%

  

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Except as set forth above, there are no options, subscriptions or other rights, agreements, arrangements or commitments (contingent or otherwise) of any character issued or authorized by the Target Company relating to ownership of an equity interest in the Target Company to issue or sell any ownership interest or options, warrants, convertible securities, subscriptions or other equity interests in the Target Company. There are no outstanding contractual obligations of the Target Company to repurchase, redeem or otherwise acquire any ownership interest in the Target Company or make any other distribution in respect thereof or to provide funds to, or make any investments (in the form of a loan, capital contribution or otherwise). The Target Company does not have any subsidiaries.

The Ownership Interests listed in the table above is duly authorized, validly issued, fully paid and nonassessable and each such interest owned by the person or entity listed above is free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on the Target Company or such other Subsidiary’s voting rights, charges and other encumbrances of any nature whatsoever.

	
  

	
3.5

	
Limited Liability Company

The Target Company is formed as a limited liability company. Any Party is liable only up to its contributed portion of its registered capital in the Target Company. The Target Company shall assume all liabilities to its creditors against its assets.

	
  

	
3.6

	
Applicable Chinese Laws

The Target Company is a separate legal entity under Chinese laws. The Target Company is under both the jurisdiction and protection of applicable Chinese laws. The conduct of the Target Company shall abide by applicable Chinese laws.

	
  

	
3.7

	
Party A will acquire one hundred (100) percent interest in the Target Company ( the “Acquired Interest”). CDI China owns an 80% of interest in Ruiming and Pine Capital owns a 20% interest in Ruiming. Once completed, the ownership interests in the Target Company will be as follows:

	
Name

	 	
Ownership Interest

	 
	
Taiyuan Ruiming Yiwei Magnesium Industry Co. Ltd.

	 	 	100	%

	
4.

	
Transaction Price, Payment and Closing

4.1 Party A shall acquire 100% of Party B’s interest in the Target Company on the Closing Date as hereinafter defined. The purchase price for the Acquired Interest shall be RMB 112,000,000 (the “Purchase Price”) and is be based on 100% of Lingshi net shareholder equity as set forth in its Financial Statements, subject to adjustment as provided for in Section 4.5. The Purchase Price is payable as set forth in Section 4.2 below. In this Agreement, the stock price shall be based on the closing price on the

  

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signing date, the exchange rate shall equal to the U.S. dollar to Renminbi exchange rates on the average of the official rates announced by the People’s Bank of China on midnight of the signing date (the exchange rate of August 29, 2011 is 6.3883). The CDII stock price for purposes of computing the number of shares of CDII common stock to be issued as partial payment for the Purchase Price shall be the average closing price of CDII’s common stock ($0.946) on the Nasdaq Stock Market during the 10 trading days from August 15, 2011 to August 26, 2011.

	
  

	
4.2

	
Payment

The Purchase Price will be paid by Party A’s two shareholders (CDI China and Pine Capital) as follows:

4.2.1 Pine Capital shall wire RMB 22,400,000 to Party B’s designated bank account within 15 business days after the Closing Date; and

4.2.2 CDI China shall pay Party B RMB 29,800,000 as follows::

(1) CDI China shall wire RMB 15,680,000 to Party B’s designated bank account within 15 business days after the Closing Date or utilizing the cash proceeds from repayment of an intercompany loan between CDII and its subsidiary upon repayment of such loan.

(2) Within 15 business days after the completion of the conditions set forth in Section 5, CDI China shall deliver to Party B cash in US dollars or CDII common stock equal to RMB 14,120,000.

4.2.3 CDI China shall deliver to Party B shares of CDII common stock equal to the U.S. dollar equivalent of RMB 29,800,000 (the “Stock Consideration”) in two separate payments, as follows:

	
  

	
1)

	
within 15 business days after the Closing Date, CDI China shall deliver to Party B 2,465,527 shares of CDII common stock equal to the U.S. dollar equivalent of RMB 14,900,000; and

	
  

	
2)

	
CDI China shall deliver to Party B 2,465,527 shares of CDII’s common stock equal to the U.S. dollar equivalent of RMB 14,900,000 within 15 days after the completion of the conditions set forth on Section 5.

Number of CDII shares = RMB 14,900,000divided by Exchange Rate (6.3883)divided by the Average Closing Price of CDII’s Common Stock ($0.946) During the 10 Trading Days From August 15, 2011 to August 26, 2011.

  

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4.2.4 Within 15 business days upon the completion of the conditions set forth in Section 5, CDI China shall transfer to Party B all of CDI China’s beneficial ownership interest in Excel Rise Technology Co., Ltd. (the “Excel Rise Rights”) valued at $4,657,411.98 USD.  The Parties hereby agree that CDI China’s beneficial ownership interest in Excel Rise Technology Co., Ltd. is valued at RMB 30,000,000.

4.3 Closing

4.3.1 Closing.  The date of closing (“Closing Date”) of the transactions contemplated by this Contract shall occur following completion of the conditions set forth in Section 4.4, and upon delivery of the Purchase Price as described in Section 4.2 herein. The Closing shall take place at a mutually agreeable time and place but in no event later than December 31, 2011.

4.3.2 Closing Events.  At the Closing, Party A and Party B shall execute, acknowledge, and deliver (or shall ensure to be executed, acknowledged, and delivered), any and all certificates, opinions, financial statements, schedules, agreements, resolutions, rulings or other instruments required by this Contract to be so delivered at or prior to the Closing Date, together with such other items as may be reasonably requested by the parties hereto and their respective legal counsel in order to effectuate or evidence the transactions contemplated hereby.

4.3.3 Termination.  This Contract may be terminated by the Board of Directors of CDII or Party A only in the event that Party B or Target Company do not meet the conditions precedent set forth in Section 4.4. If this Contract is terminated pursuant to this section, this Contract shall be of no further force or effect, and no obligation, right or liability shall arise hereunder.

	
  

	
4.3

	
Conditions to Close

4.4.1 The obligations of Party A and CDII under this Contract are subject to the satisfaction, at or before the Closing Date, of the following conditions:

4.4.2 Accuracy of Representations and Performance of Covenants.  The representations and warranties made by Party B and Target Company in this Contract were true when made and shall be true at the Closing Date with the same force and effect as if such representations and warranties were made at and as of the Closing Date (except for changes therein permitted by this Contract).  Party B and Target Company shall have performed or complied with all covenants and conditions required by this Contract to be performed or complied with by Party B and Target Company prior to or at the Closing Date.

4.4.3 Approval by CDII’s Shareholders.  This Contract shall have been approved by CDII’s shareholders as provided for in CDII’s by-laws and as required by Applicable Laws and the applicable NASDAQ Market Place Rules and Regulations.

  

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4.4.4 No Governmental Prohibition.  No order, statute, rule, regulation, executive order, injunction, stay, decree, judgment or restraining order shall have been enacted, entered, promulgated or enforced by any court or governmental or regulatory authority or instrumentality which prohibits the consummation of the transactions contemplated hereby.

4.5 Post Closing Adjustments.

The Purchase Price after closing shall be adjusted based on the difference between the Stockholder’s Equity set forth on the Target Company’s Balance Sheet as of the end of the month prior to the Closing Date (the “Closing Acquisition Balance Sheet”) and the Stockholder’s Equity set forth the balance sheet of the Target Company as of June 30, 2011 (the “Acquisition Balance Sheet”). Party B shall deliver to Party A and Pine Capital the Closing Acquisition Balance Sheet within 30 days after the Closing Date (with supporting documentation including detailed schedules of each item included on such balance sheet). The Closing Acquisition Balance Sheet shall be prepared in accordance with generally accepted accounting principles in the United States, including being based on the fiscal year ended September 30, 2010 audited financial statements of the Target Company (the “2010 Audited Financial Statements”) and the Acquisition Balance Sheet. If the Purchase Price after adjustment is lower than the agreed purchase price, Party B shall promptly pay the difference to Party A and Pine Capital in proportion to the amounts they paid towards the Purchase Price. If the Purchase Price after adjustment is higher than the agreed purchase price, Party A and Pine Capital shall promptly pay the difference to Party B in proportion to the amounts they paid towards the Purchase Price.

For example, if the Closing Date is September 15, 2011, then the Closing Acquisition Balance Sheet means the balance sheet as of August 31, 2011.

	
5.

	
Transaction Process and Delivery

5.1 Initial Payment

All Parties agree that the Purchase Price shall be paid according to section 4.2 of this Contract.

5.2 Title Transfer

When Party B receives the initial payment, Party B shall complete the title transfer of the Acquired Interest within 60 business days and formally provide the relevant certificate of equity ownership to Party A. The certificate of equity ownership and title transfer process referred to herein includes but is not limited to the Stock Rights Record certificate, registration of Equity Ownership Change for Foreign-invested Joint Venture, transfer of the Land Use Right and Party B’s other obligations under this Contract (the “Post Closing Title Transfers”). The Target Company is responsible for all the cost associated with the Post Closing Title Transfers. In addition, Party A shall cooperate with Party B in Party B’s efforts to complete a valid transfer of the Acquired Interest.

5.3 Delivery at Closing and Post Closing Obligations

  

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5.3.1 Party A’s purchase of the Acquired Interest is based on the net equity as set forth in the Financial Statements, as hereinafter defined. The assets shall be transferred in accordance with the audited results on the assets and the condition of operations of the Target Company that are determined by the auditing firm Sherb & Co., LLP; both Party A and B shall send staff to verify the relevant assets and equipment of the Target Company, and compile reconciliation schedules. The authorized representatives of both parties shall duly sign to confirm the completion of transfer in assets and equipments, and record the book accordingly. Party B represents and warrants that

Since the June 30, 2011 date of the Financial Statements, there has not been:

(a)           any sale, lease or other disposition of any of the Target company’s assets, other than in the ordinary course of business;

(b)           any damage, destruction, loss or other change (whether or not insured) materially and adversely affecting the Target company’s assets;

(c)           any loans or advances or charges, which in any way create a lien on the Target company’s assets that are not included in the Financial Statements; or

(d)           any write offs of any debt, contingency or other reserve against the Target company’s accounts receivables included in the Financial Statements; or

5.3.2 Delivery of Engineering Project Information: Besides Certificate of the Use of State-owned Land, Land Use Planning Permit, Construction Engineering Planning Permit, Party B shall deliver the original copy of all the documents and technological information of the Target Company to Party A, including but not limited to:

	
  

	
1)

	
The documents related to the founding of engineering projects and any changes;

	
  

	
2)

	
Contracts for engineering design and blue prints;

	
  

	
3)

	
Construction contracts;

	
  

	
4)

	
Contracts to purchase and install equipment and materials; documents related to equipment such as certificate of fitness, installation and user manual, after-sales service contracts, maintenance contracts, technology criteria description, manufacturers’ information, specifications and models, purchase date, operational status, repair and maintenance records, compatibilities of equipment with procedures, etc; and

	
  

	
5)

	
Project Supervision Contract.

5.3.3 Accounting Information Delivery:

  

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1)

	
Accounting information shall be transferred in accordance with the audited results on the assets and the condition of operations of the Target Company as of the Closing Date as determined by the auditing firm Sherb & Co., LLP and the date of the Financial Statements, including detailed schedules and aging reports of all assets and liabilities;

	
  

	
2)

	
Party B shall provide: evidence for tax payments in Fiscal 2010 until the Closing Date, provided by the State and Local Tax Bureau; evidence of full amount payments for electricity, water, and sanitation services in Fiscal 2010 until the Closing Date, provided by the suppliers of power, water, and sanitation services.

	
  

	
3)

	
Party B shall deliver the accounting book to Party A for safekeeping, including but not limited to the purchase contracts and original invoices for the assets (valued at RMB 200,000 or more).

5.3.4 Delivery of Incorporation Documents

Upon change of equity ownership and legal person of the Target Company at Shanxi Administration for Industry and Commerce and issuance of new business license (including original and copy), Party B shall deliver the new business license to Party A; Party A and B shall turn in all the corporate seals of the Target Company that are held by either party to the management jointly designated by both parties.

5.4 Within 15 business days after completion of all of the above mentioned deliveries, Party A shall pay the following to Party B:

	
  

	
a)

	
Cash in US dollar or CDII common stock amount equals to RMB 14,120,000, See section 4.2.2 (2);

	
  

	
b)

	
CDII’s common stock equal to the U.S. dollar equivalent of RMB 14,900,000, See section 4.2.3 (2);

	
  

	
c)

	
The Excel Rise Rights provided for in   Section 4.2.4.

	
6.

	
Mutual Covenants of Parties after Transaction

6.1 Covenants of Party A

Besides the obligations stipulated in other sections of this Contract, Party A is obliged to perform the items as follows:

	
(a)

	
Party A shall make payment for the transaction in accordance with the provisions of this Contract;

	
(b)

	
After the new business license is issued, Party A shall sign off and execute the supplementary contracts in which it is one of engaging parties (if there is any), and facilitate its related parties to sign off and execute the supplementary contracts in which its related party is one of engaging parties (if there is any);

	
(c)

	
Party A shall handle other matters requested by the Target Company in accordance with other written provisions of this Contract.

     6.2 Covenants of Party B

Besides the obligations stipulated in other sections of this Contract, Party B is obliged to perform the items as follows:

	
  

	
(a)

  

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Party B shall file applications and registration with government agencies to obtain the applicable approvals and related official documentation, and provide Party A and the Target Company with the official documents issued by government agencies and other documents related to the business or joint operations of the Target Company;

	
(b)

	
Party B shall assist the Target Company in obtaining the revised or updated approvals concerning its business operations;

	
(c)

	
After the business license is issued, Party B shall sign off and execute the contracts in which Party B is one of engaging parties (if there is any), and facilitate each of its related parties to sign off and execute the contracts in which it related party is one of engaging parties (if there is any);

	
(d)

	
Party B shall handle other matters requested by the Target Company in accordance with other provisions of this Contracts; and

	
7.

	
Business Operations

 The operations of the Target Company shall be conducted in accordance with the Management Contract signed by both parties on the Closing Date.

	
8

	
Non-Competition

	
  

	
8.1

	
Restriction

	
  

	
(a) Exclusive of any “Approved Company”, as hereinafter defined and unless having received prior approval from Party A in writing, Party B or Yuwei Huang shall not individually or jointly, or through any person (or on behalf of any person), directly or indirectly, perform the following actions regarding magnesium powder:

(i)      Carry out or engage or participate in activities (or manufacture or distribute Target Company products and / or provide Target Company services (or in which it has any interest);

(ii) Attempt to conduct the following competitive behaviors against Target Company with anyone who is or used to be the client of Target Company during the term of this contract:

(1) Place orders

(2) Make transactions; or

(3) encourage anyone, directly or indirectly, to place orders or make transactions;

(iii) In order to employ such personnel by any party other than the Target Company, encourage or contact the following persons: current employees, officers or managers of the Target Company, or the employees, management, or department manager who worked with the Target Company in the past two years. The exception is the employees who were temporarily transferred from either party to the Target Company and have returned at the expiration of the term.

	
  

	
8.2

	
Treatment of Invalid Provisions

	
(a)

	
Each of the restrictive provisions of section 8.1 is severable and independently applicable, and the invalidity or no force of certain restrictive provisions does not have effect on other restrictive provisions.

	
  

	
(b)

  

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Each party confirms that the restrictive provision of section 8.1 is reasonable and necessary to protect the interests of the Target Company. If any part of the restricted provisions is invalid but turns effective after having removed or reduced the scope of implication, the section shall be revised as mentioned above to make it valid and enforceable.

	
  

	
8.3

	
Duration

The restrictive provisions in section 8.1 have effect on Party B and Yuwei Huang and shall remain in effect for the term of the Management Agreement and for a period of two years thereafter.

The restrictive provisions in section 8.1 have effect on Party B and shall remain in effect for the term of the Management Agreement and for a period of two years thereafter and, see “Management Agreement”.

	
9

	
Labor Management

	
  

	
9.1

	
Employees of the Target Company

Party B will assist in terminating the employment of all current employees of the Target Company. The costs associated with employment termination are the responsibility of Party B unless such costs are reserved for and set forth in the Closing Acquisition Balance Sheet. If labor disputes occur due to this equity transfer, Party B is responsible for dealing with any labor disputes and staff recruitment, hiring, dismissal, resignation, wages, benefits and other related issues that are not set forth in the Closing Acquisition Balance Sheet.

9.2               Upon the closing of the equity transfer of the Target Company, all employees of the Target Company who return to work shall have Party B’s assistance. The labor management such as wages shall be conducted in accordance with the applicable provisions of the Management Contract.

	
9.3 Party B promises to assist the Target Company with fore-mentioned employee and labor issues of the Target Company. If labor issues occur among the employees of the Target Company, Party B and the Target Company shall share responsibilities to handle the issues other than payment of any costs or expenses provided for in Section 9.1 above.

 

 

	
10

	
Taxes and Insurance

	
10.1

	
Income tax, customs duties and other taxes

	
  

	
(a)

	
The Target Company should pay taxes in accordance with relevant Chinese tax laws.

	
  

	
(b)

	
After the business license is issued (or the Target Company obtains the appropriate qualifications in accordance with applicable laws), the Target Company shall apply to government agencies for tax incentives in connection with relevant laws as soon as possible.

	
  

	
(c)

  

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The Chinese and foreign employees of the Target Company should pay personal income taxes according to the relevant provisions of Chinese tax laws.

	
  

	
(d)

	
Party B shall be responsible for the payment of any taxes, fines, penalties or late charges due as a result of taxes due by the Target Company prior to the Closing Date unless such amounts are reserved for and set forth in the Closing Acquisition Balance Sheet.

	
10.2

	
Insurance

	
  

	
(a)

	
If required by the Board of Directors, the Target Company shall at all times purchase the full and sufficient insurance policies at its own expenses from the insurance companies established in China. The coverage shall include fire and other policies generally applicable to the industry.

	
  

	
(b)

	
The insurance policies to protect from the risks for properties, vehicles and other factors shall be purchased in RMB or foreign currency (subject to the circumstances). The types, scopes, and amounts of insurance policies are determined by the Board of Directors in accordance with relevant laws.

	
11

	
Representations, Warranties and Indemnification

	
11.1

	
Party B represents and warrants to Party A that the Target Company is in compliance with, all permits, licenses and government authorizations and have filed all notices and paid all fees and taxes that are required under all applicable governmental regulation in the Peoples Republic of China relating to protection of the environment, pollution control, production of magnesium, the operation of Target Company’s magnesium production facility and hazardous materials (the “Governmental Regulations”) applicable to the Target Company, and the Target Company is in compliance with all applicable limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in those laws or contained in any law, regulation, code, plan, order, decree, judgment, notice, permit or demand letter issued, entered, promulgated or approved thereunder.

As used in this Contract, the term “hazardous materials” means any waste, pollutant, hazardous substance, toxic, ignitable, reactive or corrosive substance, hazardous waste, special waste, industrial substance, by-product, process intermediate product or waste, petroleum or petroleum-derived substance or waste, chemical  liquids or solids, liquid or gaseous products, or any constituent of any such substance or waste, the use, handling or disposal of which by the Target Company is in any way governed by or subject to any Governmental Regulation in the PRC.

11.2               Party A and Party B. Each party represents and warrants to the counterpart that on the date hereof:

	
(a)

	
The Parties meet all qualification requirements of applicable Chinese laws and regulation authorities on Chinese or foreign investors in the scope of industries that the Target Company operates;

	
(b)

	
The Parties are independent legal persons duly organized, validly existing in good standing under the laws of the place of their respective establishment or incorporation;

	
(c)

	
The Parties have obtained the right to make consent, approve and implement all necessary actions in order to effectively enter into and validate this Contract. The Parties have the full right to enter into this contract and to perform their respective obligations hereunder;

	
  

	
(d)

  

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The Parties have authorized their respective representatives to sign this Contract and from and after the signing date the provisions of this Contract shall be legally binding upon them;

	
(e)

	
If a Party fails to initiate or take any measures to threaten legal proceedings or any application for dissolution, the Party shall file for bankruptcy or insolvency application, or appoint the liquidation committee or designate a manager to manage the assets or business;

	
(f)

	
The Parties execution of this Contract and the performance of their respective obligations hereunder: (i) shall not violate any provisions of their respective business license, articles of incorporation, articles of association or similar organizational documents; (ii) shall not violate any applicable laws or any governmental authorization or approval; and (iii) shall not violate or result in a default under any contract to which they are a party or to which they are subject; and (iv) shall not violate any rulings or arbitrations, or the decisions or regulations of any governmental authorization to which they are subject;

	
(g)

	
No lawsuit, arbitration or other legal or governmental proceeding is pending or, to its knowledge, has threatened against either Party that would affect its ability to perform their respective obligations under this Contract;

	
(h)

	
Party B has disclosed to Party A all documents issued by any governmental department that may have a material adverse effect on the Target Company and Party B’s ability to fully perform its obligations to the Target Company under this Contract, and the documents previously provided by Party B do not contain any misstatements or omissions of material facts.

	
11.3

	
Consequences of Inaccuracy in Representations and Warranties

If any of items in Section 11.1 or 11.2 are not accurate in all material respects on the date hereof or a Party to this Contract fails to perform any other term or condition of this Contract, the party who is responsible for performance of that term or condition shall be in material breach of this Contract.

	
  

	
11.4

	
The Responsibilities for Breach of Representations and Warranties

If one party breaches any of its representations or warranties or obligations in sections 11.1, 11.2, 11.3 or any other section of this Contract, the non-breaching party may seek any possible relief based on this Contract or applicable laws and the defaulting party shall indemnify the non-defaulting party or the Target Company for any loss, damages, costs, expenses, liabilities, claims, law suits or other legal proceedings, liabilities, judgments, penalties, fines, settlements, interest and damages (including reasonable attorneys' fees and expenses), whether suit is instituted or not due to the breach. Party A may off-set any amounts it owes Party B against the balance of any unpaid portion of for the Purchase Price as a result of any amounts due Party A by Party B under this Section 11.3 or a breach of any other term or condition of this Contract.

11.5                Party B’s full obligations, responsibilities and commitment under this Contract, and the guarantee duration is 4 years after the Contract is signed.

  

- 15 -

  

	
12

	
Breach of Contract

	
12.1

	
Remedies for the Breach of Contract

Except as otherwise provided in other provisions of the Contract, if one party (“breaching party”) does not perform under the Contract any one of the major obligations or fundamentally breaches the Contract, the other party “injured party” may:

	
(a)

	
Issue written notice to the breaching party explaining the nature and the scope of the breach and require the breaching party to compensate at their own expense during a period of no less than 20 days as specified in the notice ( but the breaching party shall not be granted a remedy period if it makes any untrue and inaccurate representations and warranties under section 11.1, 11.2 and 11.3 or violate any other provision of this Contract), and

	
(b)

	
If the breaching party fails to remedy during the cure period (or, if not granted such remedy period, then any time after such breach), the injured party may directly file claims for foreseeable loss caused by the breach.

 

 

	
12.2

	
Limitation of Liability

 

Regardless of any other provisions of the Contract, except for a Party who violates Section 13 (Confidentiality), no Party shall be held liable or responsible to the other Party for loss of income or profit, business loss, goodwill or any indirect or consequential loss or liability.  Under any circumstance, the total accumulated loss, damage or compensation shall be up to a maximum, of the total amount of the transaction of RMB 112,000,000, except that the violation of the Section 13 (Confidentiality) or infringement of intellectual property rights.

	
13

	
Duties of Confidentiality

	
13.1

	
Confidentiality

Prior to entering into this Contract, one party ("Disclosing Party") has or may from time to time disclose confidential information to the other party ("Recipient"). For a period of two (2) years after the Closing Date, the Recipient must:

	
  

	
(a) keep the confidentiality of confidential information;

(b) not use confidential information for the purposes other than the ones explicitly defined by the Contract;

(c) limit the disclosure of the confidential information to the employees and agents (including attorneys, accountants, bankers and consultants) necessary to evaluate the transaction, and they must have signed a written nondisclosure contract (whose provisions shall not be less stringent than the provisions of section 13 (collectively, "Permitted Exposure Party”).

	
  

	
 

	
13.2

	
Exceptions

The provisions of section 13.1 above shall not apply to information that:

	
(a)

	
Can be shown to be known by the Recipient by written records made prior to disclosure by the disclosing party;

	
  

	
(b)

  

- 16 -

  

Is or becomes public knowledge otherwise than through the Recipient’s breach of this Contract; or

	
(c)

	
Was obtained by the Recipient from a third party having no obligation of confidentiality with respect to such information.

	
13.3

	
Rules

Each party shall formulate rules and regulations to inform its directors, senior staff, and other employees, and those of their affiliates of the confidentiality obligation set forth in this section.

	
14

	
Force Majeure

	
14.1

	
Definition of Force Majeure

Force Majeure shall mean all events which are beyond the control of the parties to this Contract, and which are unforeseen, unavoidable or insurmountable, and which prevent total or partial performance by either of the parties. Such events shall include earthquakes, typhoons, flood, fire, war, strikes, riots, acts of governments, changes in law or the application thereof or any other instances which cannot be foreseen, prevented or controlled, including instances which are accepted as Force Majeure in general international commercial practice.

	
14.2

	
Consequences of Force Majeure

	
(a)

	
If an event of Force Majeure occurs, a party’s contractual obligations affected by such as an event under this Contract shall be suspended during the period of delay caused by the Force Majeure and shall be automatically extended, without penalty or liability, for a period equal to such suspension.

	
(b)

	
The party claiming Force Majeure shall promptly inform the other parties in writing and shall furnish within fifteen (15) days thereafter sufficient proof of the occurrence and duration of such Force Majeure. The party claiming force Majeure shall also use all reasonable endeavors to terminate the Force Majeure.

	
(c)

	
In the event of Force Majeure, the parties shall immediately consult with each other in order to find an equitable solution and shall use all reasonable endeavors to minimize the consequences of such Force Majeure.

 

	
15

	
Disputes Resolutions

	
15.1

	
Friendly Consultations

In the event of any dispute, controversy or claim arising out of or relating to this Contract, or the breach, termination or invalidity hereof (“dispute”), the parties shall attempt in the first instance to resolve such dispute through friendly consultations.

	
15.2

	
Arbitration

	
(a)

	
In the event such dispute is not resolved through consultations within sixty (60) days after the date such consultations were first requested in writing by a party, then any party may submit the dispute for arbitration in Beijing before the China International Economic and Trade Arbitration Commission (“CIETAC’) in accordance with CIETAC Arbitration Rules then in force.

	
  

	
(b)

  

- 17 -

  

The arbitration tribunal shall consist of three arbitrators, one appointed by each party and, if either of the parties fails to appoint an arbitrator within the time specified in the Arbitration Rules, the Chairman of CIETAC shall make such appointment.

	
(c)

	
A third arbitrator (the “Presiding Arbitrator”) shall be appointed by Contract between the parties, and if the parties fail to jointly appoint the Presiding Arbitrator within the time specified in the Arbitration Rules, the Chairman of CIETAC shall make such appointment.

	
(d)

	
All costs of arbitration (including but not limited to arbitration fees, costs of arbitrators and legal fees and disbursements) shall be borne by the losing party, unless otherwise determined by the arbitration tribunal.

	
(e)

	
The arbitration proceedings shall be conducted in Chinese.

	
15.3

	
Procedural Compliance

The parties undertake:

	
(a)

	
to comply strictly with the time limits specified in the Arbitration Rules for the taking of any step or the performance of any act in or in connection with any arbitration; and

	
(b)

	
to comply with and to carry out, in full and without delay, any procedural orders(including, without limitation to, any interim measures of protection ordered) or any award (interim or final) made by the arbitral tribunal.

	
15.4

	
Enforcement of the Arbitration

	
  

	
Each of the parties irrevocably:

	
(a)

	
agrees that any arbitration result shall be final and binding on both parties;

	
(b)

	
undertakes that it will execute and perform the arbitral award fully and without delay. In the event of judicial acceptance and an order of enforcement, each party expressly waives all rights to target thereto, including any defense of sovereign immunity and any other defense based on the fact or allegation that it is an agency or instrumentality of a sovereign state; and

	
(c)

	
waives any rights which it may have to contest the validity of the arbitration agreement set forth in this section or the jurisdiction of the relevant arbitration institution to hear and to determine any arbitration begun.

	
  

	
   When any dispute occurs and is the subject of friendly consultations or arbitration, the parties shall continue to exercise their remaining respective rights and fulfill their remaining respective obligations under this Contract.

	
15.5

	
Governing Laws

The legal force, interpretation and implementation of this Contract are governed by the laws of the People’s Republic of China.

 

  

- 18 -

  

	
16

	
Miscellaneous Provisions

 

	
16.1

	
Binding Effect

 This Contract is made for the benefit of the parities hereto and their respective lawful successors and Party A and is legally binding on them.

 

	
16.2

	
Amendment

 This Contract shall not be changed verbally, but only by a written instrument signed by the parties; if applicable laws states otherwise, then written consents and the approval from related approving authorities are required before amending this contract.

 

	
16.3

	
Confidentiality of this Contract

The existence of this Contract, as well as its contents, shall be deemed to fall within the scope of confidential information and subject to section 13, and shall not be disclosed in whole or in part to any person or entity, except (i) to a Permitted Disclosure Party, (ii) to authorized securities regulators or exchanges in accordance with applicable laws or the relevant rules of the securities exchange to which the party in question is subject, (iii) to officials in relevant government departments pursuant to the requirements of applicable laws, (iv) in order to fulfill any conditions precedent to the effectiveness of this Contract or (v) for the purpose of the performance by a party of its obligations or exercise of its rights hereunder or relating hereto, or (vi) for the purpose for the business of the Target Company after it is established.

	
16.4

	
Notification

	
  

	
 (a) Any notice or written communication provided for in this Contract by either party to the other, including but not limited to any and all offers, writings, or notices to be given hereunder, shall be made in Chinese with English translation (if the English translation is ambiguous, Chinese version prevails) and delivered:

      (i) by hand;

(ii) by courier service delivered letter, or

(iii) by fax.

(b) Notices shall be deemed to have been delivered at the following times:

(i) If by hand, on reaching the designated address and subject to return receipt or other proof of delivery; 

(ii) If by courier, the fifth business day after the date of dispatch, and  

(iii) If by fax, upon the next business day following the date marked on the confirmation of transmission report by the sender’s fax machine, indicating completed uninterrupted transmission to the relevant facsimile number.

	
  

	
(c) During the term, each party may change its particulars for receipt of notices at any time by notice given to the other party in accordance with this section16.4.   

  

- 19 -

  

Party A:

Taiyuan Ruiming Yiwei Magnesium Industry Co., Ltd

Mailing Address: Shagou Village, Yangqu County, Taiyuan, Shanxi Province, China

Fax Number:

Email:

Attention to:

 

With a copy to:                                CDI China

431 Fairway Drive, Suite 200, Deerfield Beach, FL 33441, USA

Fax Number: (954) 363-7320

Email: generalcounsel@cdii.net

Party B:

Taiyuan Yiwei Magnesium Industry Co., Ltd.

Mailing Address: 910, 9th Floor, MeGa Mall Business Center, 10 YiFen Street, Taiyuan City, ShanXi Province, China

Fax Number: ________________________________

Attention to: ________________________________

Target Company: Lingshi Xinghai Magnesium Industry Co. Ltd.

Mailing Address: ZhijiaZhuang Village, Duanchun Town, Lingshi County, JinZhong City, Shanxi Province, China

Fax Number: ________________________________

Attention to: ________________________________

 

	
16.5

	
Severability

 The Invalidity of any provision of this contract shall not affect the validity of any other provision of this contract.

 

	
16.6

	
Entire Contract

 This Contract and the Schedules and Annexes hereto constitute the entire Contract between the parties hereto with respect to the subject matter of this Contract and supersede all prior discussions, negotiations and Contracts between them. 

	
16.7

	
 Waiver

 Either party’s failure to exercise or delay in exercising any right, power or privilege under this Contract shall not operate as a waiver thereof, and any single or partial exercise of any right, power or privilege shall not preclude the exercise of any other right, power or privilege.

  

- 20 -

  

	
16.8

	
Further Endeavors

 A party shall, at any time, upon the request of the other party, sign (or facilitate the third party to sign) and procure (or facilitate the third party to procure) the execution of such documents, Contracts, contracts or deeds.

	
16.9

	
Target company Bylaws

 If there are discrepancies between the Target Company’s Bylaws and this Contract, this Contract supersedes.

 

	
16.10

	
Schedules and Annexes

 The schedules and annexes of this Contract are inseparable, and have the same legal binding as the provisions in the contract. If there are discrepancies between the provisions in the Contract and the terms and sections in the schedule or annexes, the provisions of the Contract supersedes.

 

	
16.11

	
Securities Laws

Party A and Party B understand and agree that the consummation of this Contract including the delivery of the Purchase Price to Party B in exchange for the Acquired Interest as contemplated hereby constitutes the offer and sale of securities under the United States Securities Act of 1933 (the “Act”).  Party A, Party B, CDII and Target Company agree that such transaction shall be consummated in reliance on exemptions from the registration and prospectus delivery requirements of the Act, which depends, among other items, on the circumstances under which such securities are acquired.

In order to provide documentation for reliance upon the exemptions from the registration and prospectus delivery requirements for such transactions, Party B shall execute and deliver to CDII an Investment Representation Letter in substantially the same form as that attached hereto as Exhibit II.

	
16.12

	
Text

 

This Contract shall have [10] copies of the original Chinese version, and [10] copies of original English version. Both versions shall have the same legal effect. If the English translation is ambiguous, the Chinese version shall prevail.

Both parties have, on the date indicated on the front page of this contract, in the People’s Republic of China, through their authorized representative, signed this contract.

  

- 21 -

  

Party A: Taiyuan Ruiming Yiwei Magnesium Industry Co., Ltd

Signature:  /s/ James (Yuejian) Wang

Printed Name: James (Yuejian) Wang

English Name:

Title: Chairman

Nationality: U.S.

 

Party B:Taiyuan Yiwei Magnesium Industry Co. Ltd.

Signature: /s/ Yuwei Huang

Printed Name: Yuwei Huang

English Name:

Title: Chairman

Nationality: China

Target Company: Lingshi Xinghai Magnesium Industry Co. Ltd.

Signature:  /s/ Yuwei Huang

Printed Name: Yuwei Huang

English Name:

Title: Chairman

Nationality: China

China Direct Industries, Inc.

Signature:  /s/ James (Yuejian) Wang

Printed Name: James (Yuejian) Wang

English Name:

Title: Chief Executive Officer

Nationality: U.S.

CDI China, Inc.

Signature: /s/ James (Yuejian) Wang

Printed Name:  James (Yuejian) Wang

English Name:

Title: Chief Executive Officer

Nationality: U.S. 

Pine Capital Enterprises Inc.

Signature: /s/ Xiaoxin Su

Printed Name: Xiaoxin Su

English Name:

Title: Executive Director

Nationality: China

  

- 22 -

  

Yuwei Huang

Signature: /s/ Yuwei Huang

Printed Name: Yuwei Huang

English Name: Yuwei Huang

Nationality: China

  

- 23 -

  

Exhibit II - Definition and Interpretation

 

Part 1 - Definition

 

Unless specified in the terms or context of the contract, the below terms are defined as follows:

	
  

	
1.

	
“Subsequent approvals” refer to the approvals, consents, registrations, and permits (not including approval for establishment and approval for tax breaks) from the government regarding the validity and enforceability of the Target Company’s operational activities listed on Annex 4 of this Contract or any other supplementary contracts.

	
  

	
2.

	
“Annexes” refer to the required documents provided by the Target Company to obtain approvals from and registration with Chinese government agencies.

	
  

	
3.

	
“Applicable Laws” means the laws, regulations, rules, and the notices, orders, decisions or other public notification documents issued by the legislative, executive or judicial branches, applicable to the parties or the Target Company of this Contract.

	
  

	
4.

	
“Certificates of Approval” refer to the certificates approving the establishment of the Target Company, this Contract and Company Bylaws that are issued by the approving authorities.

	
  

	
5.

	
“Approvals” refer to the approvals signed and issued by approving authorities regarding the establishment of the Target Company, this Contract and Company Bylaws.

	
  

	
6.

	
“Company Bylaws” refer to the bylaws of the Target Company to be established by its Board of Directors.

	
  

	
7.

	
“Assignor” refers to Party B of this Contract, Taiyuan Yiwei Magnesium Industry Co., Ltd.

	
  

	
8.

	
“Confidential Information” refers to all information of business, sales, technology or any other information that disclosed with label of confidentiality, under confidential condition, or regarded to be confidential by both parties based on logical business determination.

	
  

	
9.

	
“Contract” shall have the meaning given in the beginning parts.

	
  

	
10.

	
“Effective Date” means the effective date of this Contract, which is the date the Contract is approved by approving authorities.

  

- 24 -

  

	
  

	
11.

	
“Financial Statements” mean the Target Company’s unaudited financial statements as of June 30, 2011along with the Accounts Detail which are a part thereof.

	
  

	
12.

	
“Fiscal 2010” means the 12 month period ending September 30, 2010.

	
  

	
13.

	
“Fiscal 2011” means the 12 month period ending September 30, 2011.

	
  

	
14.

	
“Fiscal 2012” means the 12 month period ending September 30, 2012.

	
  

	
15.

	
“Fiscal 2013” means the 12 month period ending September 30, 2013.

	
  

	
16.

	
“Fiscal 2014” means the 12 month period ending September 30, 2014.

	
  

	
17.

	
“Land Use Rights” mean the land use rights shown in the following land use right certificate for the use of real property in China by the Target company as included in its Financial Statements: with total area of 20.7 acres.

Land Use Right Certificate (Ling Jiyon (2011) # a060300)

	
  

	
18.

	
“Restriction of Property Rights” means any claims, deposits, set security interest, mortgage, guarantee, pledge, options, equity, selling rights, or any other third party interest, retention of title, priority, preemption or any other form of security interest.

	
  

	
19.

	
“Force Majeure” shall have the meaning defined in section 15.1.

	
  

	
20.

	
“Taxation” means any relevant taxes collected from the Target Company by any taxing collectors at any taxing location (including but not limited to, VAT, sales tax, stamp duty or other taxes, deductions or withholding taxes (regardless of natures and names)

	
  

	
21.

	
“Trade Secrets” means any technical and operating information that is unknown to the general public, is practical and protected by security measures by the owners, and create economic benefits to the owner.

	
  

	
22.

	
“Management Agreement” means “ the Management Agreement among Party A, the Target Company, Yuwei Huang and Kong Tung related to the operation of the Target Company and other magnesium production facilities owned by CDII to be signed on the Closing Date.

	
  

	
23.

	
“Approved Company” means a company in which Party A owns an interest.

  

- 25 -

  

Exhibit II - Investment Letter

INVESTMENT LETTER

___________________________

___________________________

___________________________

China Direct Industries, Inc.

431 Fairway Drive, Suite 200

Deerfield Beach, FL 33441

Gentlemen:

The undersigned hereby represents and warrants to China Direct Industries, Inc. (the “Company") that (i) the shares of the Company's Common Stock (the "Securities") which are being received by the undersigned are being acquired from China Direct Investments, Inc. in connection with the Equity Transfer Contract entered into between the Company and Taiyuan Ruiming Yiwei Magnesium Industry Co., Ltd. are for the undersigned’s own account and for investment and not with a view to the public resale or distribution thereof; (ii) the undersigned will not sell, transfer or otherwise dispose of the Securities except in compliance with the Securities Act of 1933, as amended (the "Act"); and (iii) the undersigned is aware that the Securities are "restricted securities" as that term is defined in Rule 144 of the General Rules and Regulations under the Act.

The undersigned acknowledges that it has been furnished with disclosure documents, including, among other things, the Company's Financial Statements.

The undersigned further acknowledges that it has had an opportunity to ask questions of and receive answers from duly designated representatives of the Company concerning the terms and conditions pursuant to which the Securities are being offered.  The undersigned acknowledges that it has been afforded an opportunity to examine such documents and other information which it has requested for the purpose of verifying the information set forth in the documents referred to above.

The undersigned further acknowledges that it is fully aware of the applicable limitations on the resale of the Securities.  These restrictions for the most part are set forth in Rule 144.  The Rule permits sales of "restricted securities" upon compliance with the requirements of such Rule.  If the Rule is available to the undersigned, the undersigned may make only routine sales of Securities, in limited amounts, in accordance with the terms and conditions of that Rule.

  

- 26 -

  

By reason of the undersigned's knowledge and experience in financial and business matters in general, and investments in particular, the undersigned is capable of evaluating the merits and risks of an investment in the Securities.  The undersigned is capable of bearing the economic risks of an investment in the Securities and fully understands the speculative nature of the Securities and the possibility of such loss.

The undersigned's present financial condition is such that it is under no present or contemplated future need to dispose of any portion of the Securities to satisfy any existing or contemplated undertaking, need or indebtedness.

Any and all certificates representing the Securities, and any and all Securities issued in replacement thereof or in exchange therefor, shall bear the following or comparable legend, which the undersigned has read and understands:

The Securities represented by this Certificate have not been registered under the Securities Act of 1933 (the "Act").  The Securities have been acquired for investment and may not be sold or transferred in the absence of an effective Registration Statement for the Securities under the Act unless in the opinion of counsel satisfactory to the Company, registration is not required under the Act.

Very truly yours,

Taiyuan Yiwei Magnesium Industry Co. Ltd.

Signature:                      ________________________________

Printed Name:                                ________________________________

English Name: ________________________________

Title:                      ________________________________

Nationality:                      ________________________________

 

 

Date:  _____________

  

- 27 -exh10-4.htm

 

Exhibit 10.4

[Chinese to English translation]

Magnesium Industry Company

Management Agreement

Jointly Entered by:

China Direct Industries, Inc. and its wholly owned subsidiary

CDI China, Inc.

And

Yuwei Huang and Kong Tung

August 30, 2011

  

  

  

Party A:                                China Direct Industries, Inc. and its wholly owned subsidiary CDI China,Inc. (“CDI”or “Parent Company”))

Management Party:            Yuwei Huang and Kong Tung ( “Management Party”)

Target Company:                 Lingshi Xinghai Magnesium Industry Co., Ltd. (“Lingshi Xinghai”) Baotou Changxin Magnesium Industry Co., Ltd. (“Baotou Chang Mag”) Taiyuan Changxin Magnesium Industry Co., Ltd. 

             (“Taiyuan Chang Mag”) Shanxi Gu County Golden Magnesium  Co., Ltd. (“Golden Mg”) Golden Trust Magnesium Industry Co., Ltd.  (“Golden Trust”) 

             (the above companies jointly referred to as the “Target Company”)

In order to further stabilize, standardize, and expand the operations of the Target Company, Party A and Management Party have reached an agreement to commission Mr. Yuwei Huang as the General Manager and Mr. Kong Tung as the Deputy General Manager of the Target Company, together with its Management Team to manage the operations of the Target Company based on the audited Financial Statements as of September 30, 2010 and the unaudited financial results as of June 30, 2011 , including Balance Sheet, Income Statement, Adjusted Trial Balances, and fixed assets schedules as of September 30, 2010 and June 30, 2011 (the “Financial Schedules”), which are exhibited herein with this agreement. Accordingly, both parties entered into this agreement with detailed items stipulated as follows:

I. Term for Operational Management

The term for Management Party to manage the operations of the Target Company is three years starting from October 1, 2011 to September 30, 2014 (the “Term”); if both Party A and Management Party do not reach a written agreement to the contrary to propose a management change at least 30 days before the expiration date, the Term shall be automatically extended for a period of one more year.

II. Performance Benchmarks

	
1.

	
The performance benchmarks in this Agreement are based on the total production cost, Ferrosilicon price, and annual production volumes. According to the Target Company’s historical data, the total cost of producing one metric ton of magnesium ingot is RMB 13,500 (excluding Value Added Tax (“VAT”) ), which includes an average cost of ferrosilicon of approximately RMB 6,300, about 47% of the total production cost, the remaining fixed costs make up about 53% of the total production costs. During the term of this Agreement , on the premise that the working capital and gas supply are sufficient, and there is market demand, the Target Company shall complete production of 45,000 metric tons of magnesium ingot during the period from October 1, 2011 to September 30, 2012; and each fiscal year thereafter shall have a benchmark that is at 5,000 metric tons higher in each succeeding fiscal year meaning the Target Company shall complete production of 50,000 metric tons of magnesium in the fiscal year ending September 30, 2013, and 55,000 metric tons in the fiscal year ending September 30, 2014 (collectively, the “Performance Benchmark”).

  

  

  

	
  

	
Formula:

	
  

	
Total production cost (excluding VAT) = Fixed cost + Ferrosilicon cost

	
13,500

	
      = 7,200          + 6,300

	
  

	
Ferrosilicon cost (excluding VAT) = Ferrosilicon price published at Asianmetal.com /1.17 +Ferrosilicon shipping cost

	
  

	
For example: during the previous quarter, the Ferrosilicon cost was RMB 7000/metric ton, the total production cost excluding VAT = fixed cost (RMB 6,700) + Ferrosilicon cost (RMB 7,000) = 13,700 RMB/metric ton, and price including VAT is 16,030 RMB/metric ton

	
  

	
Note:

	
a)

	
Price. For the assessment of performance under this Agreement, the magnesium ingot benchmark price shall be based on the average price of the following: (i) Target Company’s average ex-works price over the period of time from October 1, 2011 to September 30, 2012 (the “Measurement Period”) and (ii) the average ex-works price (including VAT) from Taiyuan or Inner Mongolia region published on Asianmetal.com over the Measurement Period, which amount shall be divided by 1.17 in order to obtain the price excluding VAT (the “Benchmark Price”). For example, if the Asianmetal.com ex-work price of magnesium ingots from Taiyuan is in the range of RMB 18,150 to RMB 18,350 over the Measurement Period, then the average price of RMB 18,250 is divided by 1.17 to obtain the ex-works price (excluding VAT) which is RMB15, 598 per metric ton. The Ferrosilicon ex-work price (excluding VAT) shall be calculated based on the average of the Ferrosilicon ex-work price (including VAT) of Shanxi Province (or Inner Mongolia) published on Asianmetal.com, divided by 1.17 to obtain the factory price (excluding VAT). For example, on the date of assessment, if the Asianmetal.com ex-work price of Ferrosilicon from Taiyuan is between 6,900 and 7,000 the average shall be 6,950, divided by 1.17 and the ex-work (excluding VAT) price shall be RMB5,940 per metric ton, add the transportation costs to obtain the Ferrosilicon costs (excluding VAT).

	
b)

	
If Party A achieved the sales through its own marketing efforts, management shall, at the best of its efforts, ensure the Target Company’s timely production and provided stable supplies, the sales price given to Party A shall be no greater than the sales price  management used in selling to other 3rd party during the same time period.

	
  

	
c)    If the performance benchmark cannot be achieved due to natural disasters, government matters, or other events of force majeure, the performance shall be reassessed according to actual situation.

	
2.

	
Bonus awards: CDII shall pay the following bonus for the services to be provided over the Term of this Agreement if the Target Company’s actual magnesium ingot production reaches the  Performance Benchmark defined in Section II and if during the Measurement Period, the total

  

  

  

fixed production cost (excluding VAT) of magnesium ingot at the Target Company is 50% or less of total cost of production, and if the total cost  of production of magnesium ingot at the Target Company is within 80%-90% of the Benchmark Price defined above, then a bonus of 960,000 shares of CDII’s common stock shall be awarded to Yuwei Huang and 480,000 shares of CDII’s common stock shall be awarded to Kong Tung (collectively, the “Bonus Shares”).  The bonus award is to reward the Management Party during the management term, and shall be computed accordingly to the Performance Benchmark  during the Term.  Management Party may determine the final allocation and the time period when the Bonus Shares shall be distributed.  During the management term,  Yuwei Huang’s monthly salary is RMB 200,000 (annual salary RMB 2,400,000), Kong Tung’s monthly salary is RMB 100,000 (annual salary RMB 1,200,000).

	
3.

	
All of the production of the Target Company shall be sold to end users, trading companies that are not affiliates (as hereinafter defined) of Management Party, Party A’s wholly own subsidiaries or sold via CDI’s wholly own trading subsidiaries. As defined in this Agreement, the term “affiliates” means a person or company that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. The Target Company shall not enter into any sales transaction with or through Management Party or its affiliates. In an effort to ensure the consistency of ex-works prices, the Target Company shall provide Party A with complete sales documents including but not limited to sales contracts and supporting documents within one month after the sales occur.

	
4.

	
During the Term, Party A shall do it s best to ensure sufficient working capital in the Target Company to ensure the normal operation of the Target Company; if management party provides loans to the Target Company as working cash flow, the annual interest rate shall be 12%.

	
5.

	
Both parties agreed, if demanded by the market, the working capital and profits from 2012 and 2013 shall be used to expend the production capacity of the Target Company by the end of 2013, total production capacity after the expansion shall reach 116,000 metric tons(3).

	
6.

	
During the Term, the quarterly and annual income statement of the Target Company shall not have loss in earnings; which means, the net profits shall not be negative.

III. Management Responsibility

	
1.

	
All parties have agreed that Target Company shall operate on the basis of the assets, liabilities, and shareholders’ equities referred to the financial statements as of September 30, 2010 that has been audited and determined by the U.S.-based auditor Sherb Co, LLP and the unaudited trial balance sheet of the Target Company as of June 30, 2011.

	
2.

	
Management Party undertakes to beat the performance benchmarks indicated in article II of this agreement, mange the Target Company’s daily operations, operated with the goal to decrease cost, increase performance and seek the highest profits. Also, management shall follow the SEC regulations and guidance applicable to the parent company, as a public company, to ensure all operations of the Target Company complies with the financial, internal control and disclosure requirements of a US public company.

  

  

  

3.     Management Party undertakes to exercise the following obligations:

	
  

	
3.1. Management Party shall conduct training regularly with the management teams of the Target Company, increase performance quality, train and strengthen management concepts to be consistent with the parent company. Conduct general assessment and evaluation of the management personnel’s performance; be clear on awards and penalties. Management shall mainly focus the Target Company’s productions, operations, sales and collections of the Target Company, based on the projections of the Target Company. All the sales transactions of the Target Company require complete supporting documents. The regular business paperwork that requires endorsements shall first be signed off by the person-in-charge, further approved by the Management Party, and last reviewed, signed, and stamped by the Target Company.

Monthly financial data of the Target Company shall be submitted to Party A by the 18th of each month during the Term, financial data shall be submitted to Party A’s Taiyuan office and US headquarters through the use of accounting software prescribed by Party A.

	
  

	
During the term of the Operation Management Agreement and within two years after leaving the company, the Managing Party shall not, solely, with or through any other person (or as the representative of any other person), directly or indirectly conduct any production or trading transactions of magnesium ingots, magnesium alloy or magnesium powder.

	
  

	
3.2. Manage the operations of the Target Company under the guidance of the annual and quarterly financials and sales budgets and plans set forth by the Board of Directors of the Target Company.

Management Party shall conduct timely, complete, accurate, and standardized financial management and accounting reconciliations of the Target Company, provide to Party A all financial data of the Target Company, submit  accounting information of the Target Company to the accounting department of Party A in accordance with the articles and bylaws of the company and be subject to the supervision and evaluation of the parent company.

	
3.3.

	
Management Party shall provide to the accounting department of Party A the information and access (physical and electronic) to all the bank accounts of the Target Company and all the accounts shall be opened with the banks that provide online banking services.

	
3.4.

	
The annual revenues and net profits of the Target Company shall not include any related party transactions with Management Party or its affiliates (except for the entities jointly funded along with Party A). In the circumstances that a transaction with a related party is necessary, the Target Company shall inform Party A of the nature and details of the transaction and execute the transaction only after Party A has provided written consent.

	
3.5.

	
The Target Company shall be in compliance with the internal control procedures set up by Party A (including but not limited to supporting documents of financial results, interflows of goods and materials, and cash flows, etc.) and cooperate with Party A’s auditors and Party A’s reviews and examinations.

  

  

  

	
  

	
3.6. Under the guidance of the respective Target Company’s board of directors, Management Party shall have the rights and obligations associated with the operational activities during the Term in accordance with the Articles and Bylaws of the Target Company and the terms of this Agreement.

	
3.7.

	
Party A shall be responsible for establishing the Target Company’s internal controls and the implementation of ERP software and accounting systems and procedures at its own cost and expense. The Target Company and Management Party shall fully cooperate in the implementation of these ERP systems and controls and shall utilize the systems and follow the procedures in the daily operation and management of the Target Company. See Parent company’s memo dated March 23, 2011 for the detailed implementation plans of the ERP (see attached).

Other financial requirements

	
4.

	
The Target Company shall not conduct any illegal activities during the Term. Any claims or liabilities resulted from the negligence or misconduct of Management Party during the Term shall be resolve by Management Party and any loss occurred to the Target Company shall also be responsibility of Management Party.

	
5.

	
Upon expiration of the Term, Party A and Management Party shall consult and negotiate in regards to the operation management of the Target Company, if there is no written notice from the parties 30 days prior to the expiration of the Term, this agreement shall automatically extend for one year.

	
6.

	
During the Term, the on-site staff appointed by Management Party and Party A, when requested, shall jointly control the office materials related to accounting management including contract seals, accountant seals, corporate seals, bank account numbers, and accounting books. The Target Company shall update Party A after these office materials have been used in accordance with the terms of providing accounting information. For the purpose of internal control, Party A has the right to monitor and the rights to knowledge in regards to Management Party’s management on the operations of the Target Company.

	
7.

	
During the Term of this Agreement, all labor of the company shall be hired by the Target Company according to actual operating status.  Target Company shall deal with all the labor disputes if there are any. Management Party agrees to fully cooperate with the Target Company in resolving any labor disputes of the Target Company or its own.

	
8.

	
During the Term, Management Party shall establish and implement the following policies: within 15 days of the end of each month, Target Company shall complete the monthly closing of the

  

  

  

accounts, timely compile and submit to Party A all financial statements for the month end or year end, including “Balance Sheet”, “Income Statement”, “Tax Returns” and etc. The Management Party and each of the financial managers of the Target Company shall sign and seal a certification form provided by Party A to certify that the financial information the Target Company has submitted to Party A is true and complete.

V. Effectiveness

This agreement shall take effects upon the joint signatures and stamps of the legal person or authorized representatives of Party A and Management Party. The exhibit is an indispensable part of the agreement and has the same legal force as the body of the agreement. Following the principles defined in this agreement, both parties may sign additional supplementary agreements if necessary.

VI. Termination and Dispute Resolution

	
1.

	
If either of Party A or Management Party commits a breach of any provision of this Agreement and such breach continues for a period of thirty (30) days following a written request to cure such breach, the non breaching party has the rights to terminate this agreement. Breach of the Stock Transfer Agreement shall also be regarded as a breach of this agreement, and the non breaching party has the rights to terminate this agreement in accordance with the above provision.

	
  

	
If either of Party A or Management Party requests for a termination of this agreement, a written request shall be delivered to the other party, if there is no objections from the other party within 30 days after receiving of the written request this agreement shall be automatically terminated, if there are objections raised, the parties shall resolve through consultation.

	
2.

	
This agreement shall be governed by the Laws of People’s Republic of China. Any dispute occurring during the Term of this Agreement between the parties shall be solved through conference by all parties or through meditation. If both methods fail, either party can apply to Beijing-based China International Economic and Trade Arbitration Commission for arbitration. The arbitration proceedings shall be conducted in both English and Chinese (if there is dispute between the two languages, Chinese shall prevail). For any arbitration or litigation related to this agreement, the prevailing party is entitled to reasonable compensation from the losing party. The rulings of the China International Economic and Trade Arbitration Commission shall be the final rulings and have the legal force on every party engaged.

VII. Miscellaneous

This agreement has two original copies of both Chinese and English version, and each party holds one set of copies. All the copies shall be equally binding legally. If there is dispute between the English and Chinese version, Chinese version prevails.

(No text below for the body of the agreement)

  

  

  

Party A:CDI CHINA, INC. (Sign and Seal)

Legal Representative:

/s/ James Wang

Print Name:  James Wang

Date: 2011/08/30

Management Party: (Sign and Seal)

Yuwei Huang:

/s/ Yuwei Huang

Print Name: Yuwei Huang

Date: 2011/08/30

Kong Tung:

/s/ Kong Tung

Print Name: Kong Tung

Date: 2011/08/30

  

  

  

Footnote:

(1) Fiscal year refers to the fiscal year of CDII and shall start on October 1 of each year and end on September 30 of the following year.

(2) Fiscal 2011, the production capacity of each of the magnesium companies of the Target Company is based on the below data, unit: metric tons.

	
Facility Name

	
Production Capacity (metric tons)

	
Lingshi Xinghai

	
12,000

	
Baotou Chang Mag

	
20,000

	
Taiyuan Chang Mag

	
8,000

	
Golden Mg

	
12,000

	
Golden Trust

	
20,000

	
Contracted Facility 1

	
10,000

	
Contracted Facility 2

	
6,000

	
Total:

	
88,000

(3) End of fiscal 2013, the profits and cash flow from the 2 prior years shall be used to increase the production capacity by 12,000 metric tons for Lingshi Xinghai, 4,000 metric tons for Golden Trust, 12,000 metric tons for Golden Mag, after the expansion total production capacity shall reach 116,000 metric tons, as below listed:

	
Facility Name

	
Production Capacity (metric tons)

	
Lingshi Xinghai

	
24,000

	
Baotou Chang Mag

	
20,000

	
Taiyuan Chang Mag

	
8,000

	
Golden Mg

	
24,000

	
Golden Trust

	
24,000

	
Contracted Facility 1

	
10,000

	
Contracted Facility 2

	
6,000

	
Total:

	
116,000

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