Document:

Exhibit 10.2

ARTICLES OF
ASSOCIATION

OF

HENGYANG
VALIN MPM STEEL TUBE CO., LTD.

August
15, 2006

 

 

 

TABLE OF CONTENTS

	
  1

  	
   

  	
  DEFINITIONS

  	
   

  	
  2

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2

  	
   

  	
  GENERAL PROVISIONS

  	
   

  	
  6

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3

  	
   

  	
  PURPOSES, SCOPE OF BUSINESS AND SCALE OF PRODUCTION OF THE COMPANY

  	
   

  	
  7

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4

  	
   

  	
  TOTAL AMOUNT OF INVESTMENT AND REGISTERED CAPITAL

  	
   

  	
  9

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5

  	
   

  	
  NON-ENCUMBRANCE

  	
   

  	
  10

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6

  	
   

  	
  BOARD OF DIRECTORS

  	
   

  	
  10

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7

  	
   

  	
  MANAGEMENT ORGANIZATION

  	
   

  	
  19

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8

  	
   

  	
  ANTI-CORRUPTION

  	
   

  	
  24

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9

  	
   

  	
  LABOR MANAGEMENT

  	
   

  	
  25

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10

  	
   

  	
  TRADE UNION

  	
   

  	
  26

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  11

  	
   

  	
  ANNUAL OPERATING PLANS AND BUDGETS

  	
   

  	
  26

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12

  	
   

  	
  TAXATION, THREE FUNDS AND PROFIT DISTRIBUTION

  	
   

  	
  27

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  13

  	
   

  	
  FINANCIAL AFFAIRS AND ACCOUNTING

  	
   

  	
  28

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14

  	
   

  	
  BANK ACCOUNTS AND FOREIGN EXCHANGE

  	
   

  	
  30

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  15

  	
   

  	
  DURATION AND EARLY TERMINATION

  	
   

  	
  30

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  16

  	
   

  	
  LIQUIDATION AND DISSOLUTION

  	
   

  	
  31

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  17

  	
   

  	
  INSURANCE

  	
   

  	
  33

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  18

  	
   

  	
  MISCELLANEOUS

  	
   

  	
  33

  	
   

  

 

Schedule 1                           The Authority of the Director of
Quality Assurance and the Director of International Marketing

Schedule 2                           Qualification Requirements for
the Candidates of CFO

 

 

ARTICLES OF ASSOCIATION

THESE
ARTICLES OF ASSOCIATION are formulated in accordance with the
Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures
and the Regulations for the Implementation of the Law of the People’s Republic
of China on Chinese-Foreign Equity Joint Venture and other relevant and
officially promulgated Chinese laws and regulations and in accordance with the
Joint Venture Contract dated August 15, 2006 between:

Hunan Valin Steel Tube & Wire Co.,
Ltd.(hereinafter as “Valin TW”), a legally established and lawfully
existing joint stock company of the
People’s Republic of China, with the legal address at Valin Plaza, Fu Rong
Zhong Lu, Second Section, No.111, 
Changsha, Hunan, China, and the legal representative is Li Xiaowei;

Hengyang Valin
Steel Tube Co., Ltd. (hereinafter as “Valin ST”), a legally
established and lawfully existing limited liability
company of the People’s Republic of
China, with the legal address at Dalixincun No 10, Zhengxiang District, Hengyang,
Hunan, China, and the legal representative is Hu Henghua;

AND

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

The above Parties
may hereinafter be referred to individually as a “Party” or collectively
as the “Parties”. Valin TW and Valin ST may be referred to
collectively as “the Chinese Parties”.

 1
 

 

 

WHEREAS,

Hengyang Valin MPM
Steel Tube Co., Ltd. (“Valin MPM”) is a limited liability company duly
organized and validly existing under Chinese Laws. On or about the date hereof,
Valin TW, Valin ST, Valin MPM and Star China have entered into the Capital
Increase Agreement (the “Capital Increase Agreement”) and Valin TW,
Valin ST and Star China have entered into the Joint Venture Contract (the “JV
Contract”), according to which Star China will contribute to the registered
capital of Valin MPM, such that upon the contribution of registered capital by
Star China in accordance with the Capital Increase Agreement and the Joint
Venture Contract and the completion of the registration of change of status
with the business registration department, Valin MPM will be converted from a
domestic company into a Sino-foreign equity joint venture company and “Hengyang
Valin MPM Steel Tube Co., Ltd. (衡阳华菱连轧管有限公司)”
will remain to be the company name of it.

1       DEFINITIONS

1.                       In these
Articles of Association, the following expressions shall have the following
meanings:

“Auditors” means one of the Four Accounting
Firms appointed by Valin MPM after the date hereof to serve as the Auditors of
Valin MPM and the Company, and once the Auditors are appointed, the change of
Auditors shall be approved by the Board of Directors pursuant to Section 6.8
below.

“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.

The term “assist” or “assistance” means, respectively, to actively and
aggressively support and implement, or the active and aggressive support and
implementation of, an activity or application with full intent and commitment
to obtain the results sought by the Party or the Company which is being
assisted.

“Board” or “Board of
Directors” means the Board of Directors of the Company.

“Business Day” means a
day, other than a Saturday, Sunday or public holiday, on which banks in the
People’s Republic of China and Dallas, Texas, the United States of America are
open for general business.

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

 2
 

 

 

“Capital Increase Agreement”
means the capital increase agreement for the Company entered into on or about
the date hereof among Valin TW, Valin ST, Star China and Valin MPM in respect
of Star China’s contribution to the registered capital of the Valin MPM.

“Chairman” means the
chairman of the Board of Directors.

“China” or the “PRC”
means the People’s Republic of China, for the purposes of these Articles of
Association only, excluding Hong Kong Special Administrative Region, Macao
Special Administrative Region and Taiwan.

“Company” means Hengyang
Valin MPM Steel Tube Company Limited (衡阳华菱连轧管有限公司) which is a Sino-foreign equity joint venture
company and is converted from Hengyang Valin MPM Steel Tube Co., Ltd. by the
Parties on the Establishment Date pursuant to the Capital Increase Agreement
and the Joint Venture Contract.

“Company Law” means
the PRC Company Law amended and adopted by the Standing Committee of the
National People’s Congress on October 27, 2005 which  came into force as of 1 January 2006 and the
relevant amendments, supplements, restatements or judicial explanations from
time to time according to legal procedure.

“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.

“Deputy General Manager”
means the deputy general manager of the Company.

“Director” means a
member of the Board of Directors.

 3
 

 

 

“Effective Date” means
the effective date of these Articles of Association in accordance with Article
18.3.

“Establishment Date”
means the date on which the Company is converted into a Sino-foreign joint
venture and the first Business License of the Company is issued.

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

“Foreign Exchange” means
any foreign currency which can be freely exchanged, converted, or traded in the
open international currency market.

“Four Accounting Firms” means
any branch or Affiliate of PriceWaterhouseCoopers, Deloitte & Touche, Ernst
& Young and KPMG, such branch or Affiliate to have the required
qualification certificate and business license for their conducting of audit or
evaluation business.

“General Manager” means
the general manager of the Company.

“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).

“JV Contract” means the
joint venture contract entered into on or about the date hereof among Valin TW,
Valin ST and Star China in respect of conversation of Valin MPM into a
Sino-foreign equity joint venture company and the establishment and operation
of the Company.

“Labor Contract” means
the individual labor contract to be entered into between the Company and each
Senior Management Personnel in the form as attached in Schedule 2 of JV
Contract and/or each Working Personnel.

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

“Liabilities” means any debt, loss, damage,
adverse claim, fines, penalties 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 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.

“Lone Star Technologies” means Lone Star
Technologies, Inc., a company legally established and lawfully existing corporation under the
Laws of the State of Delaware (USA), with its legal address at 15660 N.
Dallas Pkwy., Ste. 500, Dallas, 

 4
 

 

 

TX 75248, United States of America.  Star China is an indirect wholly-owned
subsidiary of Lone Star Technologies.

“Overseas” means any
place outside China.

“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 in the PRC, applied on a consistent
basis throughout the periods presented.

“Product” or “Products”
means products to be manufactured by the Company.

“Renminbi” or “RMB”
means the lawful currency of the PRC.

“Registration Authority”
means the State Administration for Industry and Commerce of the PRC or its
designated local authorities.

“Sale, Marketing and Supply
Agreement” means the sale, marketing and supply agreement entered or to be
entered into between the Company, Trading Company (as defined therein), Star China
(or any of its Affiliate, including without limitation Lone Star Technologies) and
VTW 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
amended or supplemented from time to time.

“Senior Management Personnel”
means the General Manager, Deputy Genral Mangers, the Chief Financial Officer
and the Chief Operating Officer of the Company.

“Subsidiaries” means the subsidiaries of the
Parties in which the Parties holds more than 50% equity interest.

“Three Funds” means,
collectively, the Company’s reserve fund, bonus and welfare fund and enterprise
expansion fund.

“Tubular Products” has
the meaning as defined in the Sale, Marketing and Supply Agreement.

“United States Dollars”,
“US Dollars” or “US$” means the lawful currency of the United
States of America.

“US GAAP” means
generally accepted accounting principles in the United States of America,
applied on a consistent basis throughout the periods presented.

“Working Personnel”
means all employees of the Company other than Senior Management Personnel and
members of the Board.

 5
 

 

 

2       GENERAL PROVISIONS

2.1                 Name
and Address of the Company

(a)                          The
name of the Company shall be Hengyang Valin MPM Steel Tube Company Limited in
English and 衡阳华菱连扎管有限公司
in Chinese.

(b)                         The
legal address of the Company shall be Dalixincun No 10, Zhengxiang District,
Hengyang, Hunan, China.

2.2                       Use
of Name

The name of the Company shall not be changed except
with the prior written consent of the Parties.

2.3                       Limited
Liability Company

The Company shall be a limited liability
company.  The liability of each of the Parties for the obligations,
liabilities, debts and losses of the Company shall be limited to that Party’s
obligation to make its respective contribution to the registered capital of the
Company within the period required by Chinese law. Unless it has agreed
otherwise in a separate agreement with a third party, a Party shall not be
liable for any obligations or liabilities of the Company.  Creditors of
the Company shall have recourse only to the assets of the Company and shall not
have any claim against the Parties for the obligations of the Company, and in
case any creditor of the Company brings any action or claim against any Party
for any act of omission of the Company, the Company shall defend, at its cost,
such Party and hold harmless such Party against such claims or actions or any
loss or expenses incurred thereby.  A Party shall not be required to
provide any further funds to or on behalf of the Company beyond the amount
contributed by the Party under the Joint Venture Contract.

2.4                       Legal
Status

The Company shall be a legal person in the PRC. The
Company shall be governed by, and shall be entitled to the protection of the
laws, decrees and pertinent rules and regulations of the PRC.

 6
 

 

 

2.5                       Profits
and Losses

The profits of the Company shall be shared by the
Parties in proportion to and, in the event of losses, to the extent of their
respective contributions to the registered capital of the Company.

2.6                       Branches
and Subsidiaries

The Company may establish
branch offices and/or subsidiaries in the PRC upon the approval of the Board of
Directors and, if necessary, the Examination and Approval Authorities and the
relevant local Government Bodies where such branch offices and/or subsidiaries
shall be located.

3                      PURPOSES, SCOPE OF BUSINESS AND SCALE OF
PRODUCTION OF THE COMPANY

3.1                         The business objectives of the Company are:  to make full use of the advantages of each
Party hereto, strengthen the Company’s capabilities in the areas of technology
research and development, expand the Company’s market share, enhance the
Company’s comprehensive competitiveness, improve the Company’s economic
efficiency, and derive investment returns satisfactory to each Party hereto.

3.2                         The business scope of the Company is:  to produce, process, sell and market
steel tubes, processed products of steel tubes, billet, and by-products during iron
making, steel making and rolling, purchase scraps for production use and any
other business relating to the above (subject to the business scope set forth
in the business licence of the JV Company).

3.3                         Initial Estimated Scale of Production: annual
production of 1,000,000 tons of billet, 500,000 tons of steel tubes and
processed products of steel tubes.

3.4                         Powers of
the Company

In order to achieve its
principal purposes, the Company shall be empowered, within the scope of the
promulgated Laws of the PRC, to undertake the following:

(a)                  employ,
remunerate and dismiss the Working Personnel and retain, compensate and dismiss
outside agents, advisors, consultants and contractors, and pay the above
Working Personnel;

 7
 

 

 

(b)                 purchase,
lease or otherwise establish, acquire, maintain and operate offices,
facilities, branches, subsidiaries and sites in China;

(c)                  lease,
purchase or otherwise acquire premises, equipment, machinery, tools, parts, raw
materials and other property of all kinds;

(d)                 enter
into and perform relevant contracts with any individual, company, enterprise,
economic organization or entity within or outside China;

(e)                  purchase
or otherwise acquire and undertake all or any part of, the business, assets and
liabilities of any other company, enterprise, economic organization or entity
within or outside China;

(f)                    sell,
lease and otherwise dispose of the assets of the Company during the course of
its operations and during the liquidation and dissolution of the Company;

(g)                 acquire
and deal with patents, copyrights, trademarks and other intellectual property
rights;

(h)                 maintain
banking relationships of all types with financial institutions within or
outside the PRC and to draw and deal with cheques, bills of exchange,
promissory notes and other negotiable instruments;

(i)                     obtain
loans, lines of credit or other appropriate financing, obtain or provide
guarantees, indemnities and power of attorney, and mortgage, pledge, create
security interests in, or otherwise encumber, any of its assets as security for
loans;

(j)                     issue
bonds, securities and other financial instruments;

(k)                  obtain
insurance as may be necessary in the course of the Company’s operations;

(l)                     deal
with disputes and participate in legal proceedings of all types including
mediation, administrative proceedings or arbitration;

 8
 

 

 

(m)               invest
the income of the Company and distribute the profits of the Company;

(n)                 perform
all other generally lawful act as may be necessary or desirable to accomplish
the purposes of the Company.

4                                 TOTAL AMOUNT OF INVESTMENT AND REGISTERED
CAPITAL

4.1                         Total
Amount of Investment

The total amount of investment
of the Company shall be RMB2,844,000,000.

4.2                                 Registered
Capital

With the contribution by Star China to the registered capital of the
Company, the Company will have a registered
capital of RMB1,622,875,000, of which the equity interest proportions of each Party
in the registered capital of the Company will be as follows:

(a)          the equity interest proportion of Valin TW
shall be 41.11%;

(b)         the equity interest proportion of Valin ST
in the registered capital of the Company shall be 18.89%; and

(c)          with its contribution of RMB649,150,000 to the
registered capital of the Company, payable in cash in US$ or other convertible
foreign currencies as acceptable to the Chinese Parties, the equity interest
proportion of Star China shall be 40%.

4.3                                 Additional
Financing

The
Company may obtain additional funds through loans from domestic or foreign
financial institutions on terms and conditions approved by the Board of
Directors.  The Company may also obtain
loans or guarantees from the Parties or their Affiliates on terms and
conditions to be determined by the relevant Parties; provided, however, that no
Party shall be obligated to lend funds to the Company or to guarantee a loan to
the Company from a third party or financial institution.  The Company may mortgage or otherwise grant a
security interest in those of its assets permitted by Law to be mortgaged or
secured in order to obtain loans.

4.4                                 Increase
or Reduction of Registered Capital

 9
 

 

 

Any
increase or reduction in the registered capital of the Company shall be
approved by the Board of Directors and submitted to the appropriate Examination
and Approval Authority for approval. 
Upon receipt of such approval, the Company shall register the increase
or reduction in the registered capital with the Registration Authority.

4.5                                 Investment
Certificates

Within five (5) business days after the Parties have
made their respective capital contributions, the Company shall engage an
accountant registered in China (which has been mutually agreed to by the
Parties) to verify such contributions. 
Upon the issuance of a verification report by such accountant, the
Company shall issue to each contributing Party an investment certificate
setting forth the aggregate amount of such Party’s contribution(s).  Such investment certificate shall be signed
by the Chairman with the Company seal affixed thereto.

5                      NON-ENCUMBRANCE

No Party may encumber its share
of the registered capital of the Company or its equity interest, rights and
obligations under the Joint Venture Contract without the prior written consent
of the other Parties and prior approval of the Examination and Approval
Authorities (if applicable).

6                      BOARD OF DIRECTORS

6.1                                 Establishment

The Board of Directors of the Company shall be
established by the Parties and shall hold its first meeting within thirty (30 )
days of the Establishment Date.

6.2                                 Composition
and Term

The Board of Directors shall be composed of ten (10)
Directors, of whom four (4) shall be appointed by Valin TW, four (4) shall be
appointed by Star China and two (2) by Valin ST.   The chairman shall
be appointed by Valin TW. Each individual serving in the capacity of Director
shall hold office for a term of four (4) years, and each shall be eligible for
consecutive terms of office upon 

 10
 

 

reappointment by the original appointing Party. 
Any vacancy created in the Board of Directors shall be filled by the Party
which originally appointed the absent Director causing the vacancy.  Any
Party may at any time remove for any reason any or all of the individuals
appointed by such Party as a Director and appoint in lieu thereof another
individual or individuals to serve the remainder of the relevant term(s).

6.3                                 Authority

The Board of Directors shall be the highest authority
of the Company and shall make decisions on all major and important matters of
the Company.  The rules of procedure
governing the Board of Directors and its powers and responsibilities are as set
forth in the Joint Venture Contract and these Articles of Association.

6.4                                 Legal
Representative

The Chairman of the Board shall be the legal
representative of the Company and shall act only in accordance with the specific decisions, resolutions and
instructions of the Board of Directors. Whenever the Chairman is unable
to discharge his duties, he shall authorize another Director to represent the
Company.

6.5                                 Personal
Liability of Directors

A Director, including the
Chairman, shall not have personal liability for action he undertakes on behalf
of the Company within the scope of authority of these Articles of Association
or the Board resolutions unless his or her action:

(a)                                  is outside
the scope of the approval or authorization given to him by the Joint Venture
Contract, these Articles of Association or the Board of Directors’ resolution;
or

(b)                                 is in breach
of Articles 148 to 150 of the Company Law; or

(c)                                  is in
breach of the Laws of China at the time.

 

 

 11

 

 

Any
Director, including the Chairman, acting in material violation of these
Articles of Association or Board of Director’s resolutions shall indemnify and
hold harmless the Company against all losses caused to or liabilities and
expenses incurred by the Company.  The
Company shall, to the extent permitted by Law, indemnify any Director for
damages or losses incurred in good faith by such Director in the performance of
his or her obligations.

6.6                                 Duties of the Chairman are as follows:

(a)                                  call and
chair the board meetings;

(b)                                 check and
supervise the implementation of the board resolutions;

(c)                                  sign the
Company’s investment certificates;

(d)                                 sign
important legal documents on behalf of the Company; and

(e)                                  undertake
any other responsibilities delegated by the Board of Directors.

6.7                                 Unanimous Approval

Resolutions
of the Board of Directors involving the following matters shall be adopted only
upon the unanimous affirmative vote of all Directors (whether present in person
or by proxy) participating at a duly convened meeting:

(a)                                  amendment
of these Articles of Association;

(b)                                 increase or
reduction of registered capital of the Company;

(c)                                  adjustment
of any Party’s equity interest in the registered capital of the Company;

(d)                                 merger or
consolidation of the Company with any other economic organization or
reorganization of the Company; and

(e)                                  termination,
liquidation or dissolution of the Company.

 12
 

 

 

6.8                                 Other Decisions of the Board

Except
for those matters set forth in Article 6.7, the following matters shall require
the affirmative vote of not less than two-thirds (2/3) of the Directors of
which at least two (2) votes are cast by Directors appointed by the Chinese
Parties and at least two (2) votes are cast by Directors appointed by Star
China:

(a)                                  establishment
of branch offices and subsidiaries;

(b)                                 transfer,
sale, lease or other manner of disposition of the business or assets of the
Company, in whole or in part, which involves an aggregate amount in excess of
five percent (5%) of the net asset value of the Company (based on the latest
financial reports of the Company); the acquisition of the business or assets,
in whole or in part, of any other company or entity that involves an aggregate
amount in excess of five percent (5%) of the net asset value of the Company (based
on the latest financial reports of the Company); or the making of investments
not in the ordinary course of business that involves an aggregate amount in
excess of five percent (5%) of the net asset value of the Company (based on the
latest financial reports of the Company);

(c)                                  granting of
a security interest in any assets of the Company that does not fall within the
annual finance budget as approved by the Board and involve in excess of five
percent (5%) of the net asset value of the Company in the aggregate in any
fiscal year (based on the latest financial reports of the Company) or other
value or amount as may be determined by the Board from time to time;

(d)                                 approval of
any loan that does not fall within the annual finance budget as approved by the
Board, guarantee or lease agreement that involves an aggregate rental income or
payment amount exceeding RMB five (5) million in a financial year;

(e)                                  approval of
the capital expenditures of the Company in an aggregate amount in excess of two
percent (2%) of the net asset value of the Company in any fiscal year (based on
the latest financial reports of the 

 13
 

 

Company) or other amount as may be determined by the Board from time to
time;

(f)                                    the entry
by the Company into any joint ventures or partnerships or any other
profit-sharing agreement and the amendment or termination of any such agreement
or arrangement;

(g)                                 entering
into any substantial transaction that is not in the ordinary course of business
or not on an arm’s length basis;

(h)                                 entering
into any transaction or understanding involving receipt or expenditure of an
amount which exceeds the lesser of (i) US$5 million and (ii) five percent (5%)
of the net asset value of the Company, which has not been included in the
annual finance budget approved by board;

(i)                                     declaration
of dividends and determination of the distribution plan of profits;

(j)                                     determination
of the amounts to be allocated to each of the Three Funds;

(k)                                  the
appointment or dismissal of Senior Management Personnel, examining and
approving the Labor Contracts between the Company and the Senior Management
Personnel and determination of the compensation of such personnel;

(l)                                     examining
and approving significant reports, including long-term business and production
plans, annual operating plans and budgets and financial reports;

(m)                               approving
any change that adversely affects the Company’s tax position or treatment;

(n)                                 approving
any decision which would cause the Company to have an accounting change unless
such change is mandated by law;

 14
 

 

(o)                                  the resolving, settling or
compromising of any conflicts with third parties which is determined by the
General Manager or the CFO to have significant impact on the JV Company’s
business or operation;

(p)                                 examining
and approving contracts between the Company and its shareholders, Affiliates,
Directors or Senior Management Personnel or their Affiliates;

(q)                                 any
agreement or understanding for the transfer of the technology of the Company;

(r)                                    other
contracts or agreements that will have substantial impact on the Company;

(s)                                  any
agreement that restricts the ability of the Company to compete;

(t)                                    the
engagement of the Company’s Auditors;

(u)                                 approval of
any agreements or understandings regarding regional distribution, distribution
on the basis of exclusive agency or plans regarding engaging agents in respect
of the Company’s products;

(v)                                 approval of
the establishment of Board committees and approval of the appointment of
Directors to serve on such committees; and

(w)                               approval of
any plan for environmental investigation or remediation and any capital
expenditures associated therewith, with the exception of the environmental
plans and expenditures that have been included in the annual budget for
environmental protection.

6.9                                 Board
Meetings

The
regular meeting of the Board of Directors shall be held at least once every
quarter. Meetings of the Board of Directors shall normally be held at the
registered address of the Company, but may be held at any other place as may be
jointly selected by the Chairman and one Director appointed by Star China.

 15
 

 

 

6.10                           Special
Board Meeting

Within three (3) Business
Days after the receipt of the request by at least one director appointed by any
Party requesting that a special Board meeting shall be held, either the
Chairman, or in his absence or failure to act, an authorized Director, of the
Board shall deliver a notice to all the Directors to convene a special Board
meeting, which shall be held within fourteen (14) days after the deliver of
such a notice.  A special Board meeting
shall not be requested by a director nominated by the same Party more than once
every calendar quarter, provided that this restriction shall not apply if such
proposal is requested by at least one-third (1/3) of the Directors.

6.11                           Notice
of Meetings

The
Chairman, or in his absence or failure to act, an authorized Director, shall
issue a notice by telephone, facsimile transmission, personal delivery or
verified e-mail at least fourteen (14) days prior to any Board meeting stating
the specific agenda, time and place of the meeting.  Such notice period may be abridged or waived
by the written consent of all the Directors.

6.12                           Attendance

A
Director may attend a Board meeting in person, by conference telephone or
designate another person by proxy to vote in his place.  Such designation shall be in writing, shall
be signed by the Director, and shall identify the meeting or meetings at which
the person may act as a proxy and any instructions that may be applicable to
the proxy.  A Director may appoint
another Director as his proxy.  A person
acting as a proxy may do so for more than one Director at the same time.

6.13                           Quorum
for Meetings

The quorum for a Board
meeting shall consist of two-thirds (2/3) of the total number of Directors
(i.e. seven (7) Directors) present in person or by conference telephone or by
proxy, which shall include at least one (1) Director appointed by each
Party.  However, if proper notice to
convene a Board meeting has been given and there are more than tow-thirds of
the Directors attending the meeting and if the Directors appointed by a Party
fail to attend the meeting in person or by 

 16
 

 

proxy or by conference
telephone, and therefore a quorum is not present in accordance with the
preceding sentence, such Board meeting shall be adjourned and reconvened at the
same location and time fifteen (15) days later and the Directors then present
(which shall be more than Two-thirds of the total number of Directors) shall be
sufficient to form a quorum and the above-mentioned requirement of at least one
Director appointed by each party will not be applicable for this meeting.

6.14                           Voting

The
Directors may vote on any matters either by attending meetings in person, by
telephonic conference or by proxy. 
Except for the matters set forth in Articles 6.7 and 6.8, if a quorum is
present, a simple majority of all of the Directors may pass a resolution at a
duly convened board meeting.

6.15                           Resolutions
of the Board

Resolutions of the Board shall be in the written form.  The Directors shall be responsible for
resolutions adopted by the Board of Directors. 
Where a resolution of the Board violates any Laws or these Articles of
Association, and causes the Company to incur serious loss, those Directors
participating in the adoption of the resolution are liable to the Company for
damages; provided, however, if a Director is proven to have cast a vote against
such a resolution and such a negative vote is recorded in the minutes, the
Director shall be exempt from liability.

6.16                           Decision
of the Board regarding Co-Investment

With respect of the co-investment
proposal of Star China to the Board in accordance with Clause 7.4 of the JV
Contract, Star China undertakes that (i) it will not delay the Board meeting
to discuss the investments in question by not attending the Board meeting, and
(ii) the directors nominated by Star China shall vote in favor of such
investments.

 17
 

 

6.17                           Correspondence
Voting

Notwithstanding any other provisions of these Articles of Association, a
written resolution may be adopted by the Board in lieu of a meeting of the
Board provided that such a resolution is sent to all the directors of the
Company and is signed by the number of Directors required to carry such
resolution had a Board meeting been convened.

6.18                           Compensation
and Expenses

The Company shall not pay any remuneration or subsidy to any Director
for attendance at a Board meeting.  The
Company may reimburse a Director for reasonable expenses incurred in respect of
travelling, accommodation and other living expenses to attend Board meetings if
the Board of Directors agrees to do so.

6.19                           Minutes

Minutes
shall be kept for each Board meeting and signed by all Directors present at the
Board meeting in person or by proxy.  In
order to facilitate the smooth conduct of Board meetings, the Chairman shall
appoint a designee for the purpose of the Board meeting.  The duties of such designee shall be to take
detailed minutes of the Board meeting, procure the proper signatures for the
adoption of such minutes, translate or arrange for the translation of documents
and dispatch documents relating to the Board meeting to the Directors.  Minutes of the Board meeting shall be
maintained in both Chinese and English by the Company.

6.20                           Agreement
to Extend Marketing Agreement

Each Party shall, upon
request of any Party, cause the Directors nominated by such Party to approve
the extension of the term of the Sale, Marketing and Supply Agreement, without
making any other amendment, for the remaining of its original term in the event
that such agreement is early terminated before the expiry of its original
term  mandated by PRC Law, provided that
such extension and the terms and conditions do not contravene applicable PRC
Law.

6.21                           Establishment
of Trading Company

Each Party hereto agrees a
trading company should be established in Cayman Islands by Star China (or its Affiliate, including without limitation,
Lone Star Technologies) and Valin TW for the purpose of being the
importer of 

 18
 

 

record in North America
(Canada, the United States of America and Mexico, which includes any offshore
drilling within the territorial waters of such countries).

6.22                           Establishment
of Audit Committee

The Board will establish an Audit Committee consisting
of three directors. Two members of this committee will be appointed by Star
China and one member will be jointly appointed by the Chinese Parties.  The rights, authority and function of the
Audit Committee are set forth in Schedule 6 hereto.

7                      MANAGEMENT ORGANIZATION

7.1                                 Establishment

(a)                                  The Company
shall establish a management organization which shall be in charge of the daily
operations and management of the Company.

(b)                                 The
management organization shall be headed by the General Manager and constituted
with Senior Management Personnel and other management personnel.

(c)                                  The General Manager and all of the
Deputy General Managers shall be nominated by Valin TW.

(d)                                 The Chief Financial Officer, the
Chief Operating Officer, the Director of Quality Assurance and Technical
Support and the Director of International Sales and Marketing shall be
nominated by Star China.  The Chief
Financial Officer and the Chief Operating Officer are among the Senior
Management Personnel at the same level as Deputy General Manage.  The Director of Quality Assurance and
Technical Support and the Director of International Sales and Marketing shall
be appointed by the General Manager and are among the middle level management
personnel of the Company, which is a level immediate lower than Senior
Management Personnel, and their scope of authority is attached as Schedule 1
(The Authority of the Director of Quality Assurance and Technical Support and
the Director of International Sales and Marketing).

 19
 

 

 

(e)                                  Each Party
agrees to cause the Directors appointed by it to approve all persons nominated
to Senior Management Personnel positions. 
Each individual serving in the capacity of Senior Management Personnel
shall hold office for a term of three (3) years, and each shall be eligible for
consecutive terms of office if re-nominated by the original nominating Party.

7.2                                 Responsibilities
of the General Manager

The duties of the General
Manager shall consist of carrying out the decisions of the Board of Directors
and organizing and directing the day-to-day operations and management of the
Company and shall have the authorities and responsibilities set forth below:

(a)                                  implementation
of the decisions of the Board;

(b)                                 formulation
and execution of rules and regulations of the Company within the scope of power
delegated by the Board;

(c)                                  supervision
of the Senior Management Personnel;

(d)                                 implementation
of Operation Plan as approved or amended by the Board of Directors;

(e)                                  determination
of the criteria and number of Working Personnel of the Company and formulation
of training scheme;

(f)                                    employment
and dismissal of Working Personnel other than Senior Management Personnel, and
determination of salaries, wages, subsidies, benefits, insurance, allowances,
rewards and other compensation matters related to Working Personnel;

(g)                                 within
the scope of power delegated with a board resolution, being responsible for
external relations and execution of business documents and other corporate
documents with third parties on behalf of the Company;

 

 20

 

 

(h)                                 presentation
to the Board of reports related to operation, including but not limited to
long-term business and production plans, annual operational plans and budgets,
and financial plans and budgets; and

(i)                                     within
the scope of power delegated by the Board and subject to the restrictions
imposed by the Board, being responsible for other affairs.

7.3                                 Duties
of Deputy General Managers

Deputy General Managers shall
assist General Manager, assume powers and responsibilities assigned by General
Manager and save as provided otherwise below report to General Manager.

(a)                                  Duties of Finance and Accounting Deputy General
Manager:

(i)            report to the General Manager;

(ii)           provide information
and assistance required by the Chief Financial Officer to enable him to
exercise the power to supervise the Company’s financial matters as indicated in
(d) below;

(iii)                               management of financial and accounting affairs
of the Company in a manner as consistent with the China Laws, PRC GAAP and US
GAAP;

(iv)                              formulation and implementation of accounting
rules and procedures of the Company;

(v)                                 analysis and advice on the managements and
operations of the Company;

(vi)          maintenance of accounting books and
records of the Company;

(vii)         management of insurance affairs of the
Company; and

(viii)                        presentation of financial reports as required by the General Manager
and/or the Chief Financial Officer and the Board of Directors;

 21
 

 

(b)                                 Duties of other Deputy General Managers:

(i)                                     give suggestions about production , technology,
sales, supply, marketing and administrative management when required by General
Manager;

(ii)                                  each Deputy General Manager shall carry out
temperately General Manager’s duties regarding the Company’s daily operation
and management when required by General Manager;

(iii)                               permitted by Board of Directors and head by
General Manager, each Deputy General Manager supervise certain matters of the
Company and has rights to make decisions in the scope of their daily work;

(iv)                              Deputy General Managers shall supervise the
departments distributed by General Manager;

(v)                                 Deputy General Managers shall complete the tasks
asked by General Manager.

(c)                                  Duties of Chief Operation Officer:

(i)                                     give suggestions to General Manager about
appointment of the Working Personnel, adjusting of organization system, project
, new services, annual operation budget, salary management, training and
establishment management;

(ii)                                  supervise the implementation of operation budget
approved by Board of Directors to ensure that the implementation of the budget
meets the purposes and objectives set by the Board of Directors;

(iii)                               supervise the implementation of various
operation and management systems of the Company;

(iv)                              formulate and implement special operation plans
so as to make up the defect of the Company and utilize the business opportunity
advantage of the Company; evaluate operations to detect the demand for
improvement and to resolve the problems;

 22
 

 

 

(v)                                 participate in formulating five-year finance
objectives.

(d)                                 Duties of Chief Financial Officer:

Under the guidance of General
Manager, Chief Financial Officer shall be responsible for financial supervision
of following matters:

(i)                                     direct and assist in general operation of the
Company;

(ii)                                  cooperate with the Deputy General Manager who is
responsible for financial affairs to supervise daily accounting and financial
work of the Company;

(iii)                               participate in formulating annual funds and
business budget;

(iv)                              be responsible for evaluating product potential
and cost analysis;

(v)                                 establish and maintain the accounts in line with
the PRC GAAP ; and

(vi)                              prepare the financial statements of the Company.

Because the CFO has the duty to
apply US GAAP and to ensure compliance with the strict requirements in respect
of finance and accounting for listed companies in United States, the candidates
of CFO should have special back ground of education, training and practice, the
details of such qualification requirements are set out in Schedule 2 (Qualification Requirements for the
Candidates of CFO)

7.4                                 Employment

Except
as otherwise described in the Joint Venture Contract and these Articles of
Association, each Senior Management Personnel shall be appointed and removed by
the Board of the Company. Each Senior Management Personnel (other than the General
Manager) shall receive his assignment from and shall report to the General
Manager, except as provided otherwise in the Joint Venture Contract.  Each Senior Management Personnel shall be
subject to removal at any time by the Board if he/she fails to fulfill his/her
duties properly and the General Manager 

 23
 

 

proposes
the removal.  In the event a Senior
Management Personnel is removed, the Party that originally nominated such
personnel shall nominate another individual for such position.  The Chairman shall have the right to
temporarily appoint such a Senior Management Personnel if such Party fails to
nominate another individual within thirty (30) days of such individual’s
removal until such Party nominates another individual.

7.5                                 Compensation

Matters
such as salaries, wages, subsidies, benefits, insurance, allowances, rewards
and other compensation matters of the Senior Management Personnel shall be
stipulated in the Labor Contract between the Company and such Senior Management
Personnel.

7.6                                 Confidentiality
and Non-Competition

Each Working Personnel who
has access to confidential information of the Company, including technology and
intellectual property, shall, as a condition to employment by the Company,
execute an agreement substantially in the form of Schedule 2 attached to
the JV Contract, which contains provisions prohibiting the disclosure of
confidential information and also restricting the ability of such to compete
with the business of the Company.

8                      ANTI-CORRUPTION

Each of the Chinese
Parties acknowledges that Lone Star Technologies will be required to consolidate
the financial results of the JV Company and its subsidiary(ies) with Lone Star
Technologies’ own financial results, and will be required to ensure that the JV
Company and each of its subsidiaries is operated in accordance with the Laws
that are applicable to companies that are publicly traded in the United
States.  As such, from and after the
Establishment Date, the Chinese Parties will use reasonable efforts to cause
the JV Company to implement, monitor and maintain compliance at the JV Company
and each of its subsidiaries with all policies, procedures and controls that
Lone Star Technologies requires of its subsidiaries (the “LST Policies”).
Such LST Policies will include, but may not be limited to, internal and financial
controls for compliance with the Sarbanes-Oxley Act of 2002 and the rules and
regulations 

 24
 

 

promulgated thereunder,
policies for compliance with the US Foreign Corrupt Practices Act and the rules
and regulations promulgated thereunder, as well as Lone Star Technologies code
of conduct and other financial, treasury, legal, compliance and accounting
policies (including US GAAP).

9                      LABOR MANAGEMENT

9.1                                 Autonomy to Employ Staff

The labour policies of the JV Company shall be formulated
in accordance with applicable PRC Law. 
The JV Company shall have all possible autonomy under the PRC Law
concerning the recruitment, employment, compensation, designation of welfare
benefits, procurement of labour insurance, promotion, discipline and dismissal
of Working Personnel.

9.2                                 Compensation

The compensation to the employees of the JV Company
shall comply with the PRC Law.  Matters
such as the salary system of the JV Company, compensation, wages, subsidies,
benefits, insurance, allowances, rewards and other compensation matters of
Working Personnel shall be stipulated in the Labour Contract between the JV
Company and each Working Personnel.

9.3                                 Training

All candidates hired by the Company must
satisfactorily complete the training program specified in their Labour
Contracts and a subsequent three (3)-month probationary period of work before
they will be officially considered Working Personnel of the Company.  The
General Manager shall have the absolute right to decide, on behalf of the Company,
whether such persons have successfully completed their probationary period and
shall be granted employment, or that such persons shall not be granted
employment for whatever reasons, including lack of qualification, redundancy or
otherwise.  Any person to whom the Company does not offer employment after
the probationary period shall be given notice before dismissal.  The
Company shall not otherwise be liable in any manner to any individual or Party
in connection with the Company’s decision to decline to offer employment to a
person.

 25
 

 

 

10                          TRADE UNION

10.1                           The JV
Company will establish the trade union organization in accordance with the PRC
Law and the Articles of Association of the JV Company and the requirements with
respect to the institutional framework and the activities of the trade union
shall be complied with.

10.2                           The
Company shall contribute such amount to the Company’s trade union fund for such
trade union’s use as is required in accordance with the applicable PRC Laws on
the management of trade union funds.

11                          ANNUAL OPERATING PLANS AND BUDGETS

11.1                           Preparation

The General Manager shall be responsible for the
preparation of the annual operating plans and budgets of the Company.  The operating plan and budget for the next
fiscal year shall be submitted to the Board for examination and approval prior
to November 15 of each year and shall include detailed plans and projections
regarding:

(a)                                  procurement
of materials, machinery, equipment and other capital expenditures of the
Company;

(b)                                 plans
and policies with respect to the manufacture of the Products;

(c)                                  estimated
revenues, expenditures and profits of the Company;

(d)                                 human
resources plans of the Company; and

(e)                                  marketing,
sales and distribution plans and policies for the Products.

11.2                           Examination
and Implementation

The Board shall complete its examination and approval
of each annual operating plan and budget for the next fiscal year on or prior
to December 31 of each year.  

 26
 

 

The General Manager shall be responsible for the
implementation of the annual operating plan and budget as approved by the
Board.

12                  TAXATION, THREE FUNDS AND PROFIT DISTRIBUTION

12.1                           Tax
Treatment

The Company shall comply with
the PRC Law.  The Company shall be
entitled to all preferential treatment in respect to taxes and duties allowed
under China Law.

12.2                           Three
Funds

After fully making up
accumulated losses of previous years, if any, and payment of taxes in
accordance with the relevant Laws of China, the Company shall allocate a
percentage of its annual after-tax profit for contribution towards the Three
Funds.  The amount to be allocated to the
Three Funds shall be decided by the Board of Directors on a yearly basis in
accordance with the financial performance of the Company, in light of the
relevant Laws of China.

12.3                           Profit
Distribution

After recovering prior years’
losses, paying taxes in accordance with the Law and making contributions to the
Three Funds, the remaining earnings of the Company will be available for
dividend distribution to the Parties. 
The Board shall calculate the net profit (or net loss) at the end of
each quarter and distribute the profits in accordance with the dividends
distribution plan passed by the Board. 
In respect to the dividends distribution plan passed by the Board, the
General Manager shall recommend a dividend distribution plan to the Board of
Directors within the first three (3) months following the end of each fiscal
year of the Company for the Board’s consideration and approval or
modification.  In his or her
recommendation, the General Manager shall consider that the Company has
sufficient funds on hand to pay the dividends and meet its approved capital
expenditure budget and working capital requirement for the current budget
year.  The Company shall not distribute
dividends unless the losses of previous fiscal year(s) have been fully made
up.  Remaining undistributed dividend
from previous years may be distributed together with that of the current year.

 27
 

 

 

Dividends shall be distributed
to the Parties in proportion to each Party’s holding of the registered capital
of the Company at the time of the distribution. 
Payment of dividend distributions to each Party shall be in Renminbi,
provided that any dividends payable to Star China shall be freely remittable
out of China in US Dollars or another freely convertible foreign currency
acceptable to Star China.

13                  FINANCIAL AFFAIRS AND ACCOUNTING

13.1                           Accounting
Policy

The
Company shall maintain its accounts in accordance with officially promulgated
PRC Laws and the provisions of the JV Contract and these Articles of
Association and in a manner sufficient to satisfy the PRC GAAP and the
financial and tax reporting requirements of the Parties.  The Chief Financial Officer shall work
together with the Deputy General Manager in charge of finance to establish and
amend from time to time the accounting system and procedures for the Company in
compliance with the PRC GAAP (and to the most extent, US GAAP) and applicable
laws and regulations promulgated by relevant Government Body and submit them to
the General Manager, Audit Committee and the Board for approval.

The
fiscal year of the Company shall start on January 1 of the year and end on
December 31 of the same year.  The first
fiscal year of the JV Company shall commence on the Establishment Date and end
on December 31 of the same year.  The
last fiscal year of the JV Company shall start on January 1 of the year of
termination and end on the date of termination.

13.2                           Books
and Records

The Company shall keep true, correct and complete
records and accounts in accordance with applicable PRC Law and PRC GAAP for
enterprises.

13.3                           Inspection
of Books and Records

Each Party shall have the right to examine and copy all books of
account, records, vouchers, contracts and documents of any kind that are
necessary or appropriate for monitoring the financial performance of the
Company.  Each Party may make such
examination and copies of the documents during the Company’s 

 28
 

 

normal business hours, provided that such examination and copying does
not unreasonably interfere with the business operations of the Company.  Each Party may exercise such rights through
its agent or employee or by an independent accounting firm designated by the
Party.

13.4                           Accounting
Unit

The reporting currency of
accounts of the Company shall be Renminbi. 
When foreign currency transactions take place, the foreign currency
amount will be translated monthly into the reporting currency for recording
purposes in accordance with PRC GAAP, and reconciled to US GAAP on a monthly
basis.  Any increase or decrease in the
balance of accounts relating to foreign currency transactions shall be
translated into the reporting currency of account in accordance with the
Foreign Exchange rate announced by the People’s Bank of China on the
transaction date or on the first day of the month when the transaction takes
place.

13.5                           Audit

(a)                                  The
JV Company’s audited annual financial statements shall be submitted  to the General Manager and the Board for
approval.

(b)                                 Each Party shall be entitled (but not obliged) to appoint (once in each fiscal year) an accountant
registered in China or abroad to audit the accounts of the JV Company. If the
results of any such audit are significantly different from that conducted by the JV Company’s auditors and are accepted by the Board, the expense
of the audit shall be borne by the JV Company. 
Otherwise, the expense of the audit shall be borne by the Party
requesting the audit.  The JV Company
shall permit such accountant to have access to the JV Company’s books and
records and Senior Management Personnel and shall provide such accountant with
office space and all other reasonable facilities to enable the accountant to
carry out the audit.

 29
 

 

13.6                           Additional
Reports and Provision of Returns

The Company shall provide, without charge, to any Party
that may so request a copy of each tax return and report that it is required to
file with any Government Body in sufficient time prior to such filing to permit
its review by such Party prior to filing.

14                  BANK ACCOUNTS AND FOREIGN EXCHANGE

14.1                           Bank Accounts

The Company shall open RMB deposit accounts and
Foreign Exchange deposit accounts in accordance with PRC Law.  The Company may also open Foreign Exchange
deposit accounts with foreign banks outside China, as designated by the Board
subject to approval by the relevant government authorities

14.2                           Foreign
Exchange Requirements of the Company

All of the Company’s Foreign
Exchange receipts shall be deposited in its Foreign Exchange accounts and all
the payments in Foreign Exchange shall be made from its Foreign Exchange
deposit accounts.  Star China and/or its
Affiliates shall have the right to remit outside China all payments made to it
by the Company, including amounts paid to it upon dissolution of the Company, in
accordance with applicable China Laws.

15                  DURATION

Subject to the provisions for
earlier termination under the Joint Venture Contract, the Company shall
continue to operate indefinitely or for the maximum term (including extensions
of term) approved by the Examination and Approval Authorities.

16                  LIQUIDATION AND DISSOLUTION

16.1                           Liquidation

Upon approval by the Examination and Approval
Authorities of a unanimous Board resolution made according to Article 6.7 of
these Articles to dissolve the Company or upon the order of a court or decision
of an arbitration tribunal to 

 30
 

 

dissolve the Company, the Directors shall adopt a
resolution to liquidate the Company. Within seven (7) days after the date of
the court order or arbitral decision to dissolve the Company is rendered (the “Liquidation Commencement Date”), the
Company is required to notify in writing all relevant Government Bodies in
charge (including customs, foreign exchange and tax authorities) and banks of
its proposed liquidation.  The Company shall not carry out any new
business activities prior to the completion of liquidation procedures.

16.2                           Establishment
of Liquidation Committee and Public Announcements

Within fifteen (15) days after Liquidation
Commencement Date, the Board of Directors shall appoint at least three (3)
individuals to form a liquidation committee (the “Liquidation  Committee”). 
Within ten (10) days after its formation, the Liquidation Committee shall
notify in writing all known creditors of the Company of the Company’s proposed
liquidation and make a public announcement in at least one (1) national and one
(1) local newspaper of the Company’s proposed liquidation.  Within sixty
(60) after its formation, the Liquidation Committee shall make a second public
announcement announcement in at least one (1) national and one (1) local
newspaper of the Company’s proposed liquidation.

16.3                           Functions
of the Liquidation Committee

(a)                                  The
Liquidation Committee shall carry out a full examination of the Company’s
assets and liabilities, compile a statement of assets and liabilities, specify
the valuation basis of assets, prepare the plan for liquidation, and submit the
same to the Board for approval and verification by the Examination and Approval
Authorities. Subject to the Liquidation Committee’s recommendations, the
Company’s assets should, in principle, be valued at fair market value as an
on-going concern.

(b)                                 During
the period of liquidation, the Liquidation Committee shall represent the
Company in dealing with the Company’s unfinished business and in any legal
proceedings involving the Company.  As soon as possible after its
establishment, the Liquidation Committee shall, on behalf of the Company,
settle any outstanding accounts receivable with the Company’s debtors.

 

 31

 

(c)                                  The
assets of the Company shall be liquidated in accordance with the specific
liquidation procedures adopted by the Liquidation Committee. The liquidation
procedures shall generally provide that potential buyers, including the
Parties, shall be publicly invited to tender bids. Subject to the approval by
the Board, the Liquidation Committee may also determine whether the bidding
shall be tendered for the entire assets of the Company as a going concern or on
an individual or collective basis.  For the same piece of asset or
category of assets, as the case may be, the bidder tendering the highest offer
shall be awarded the same (subject to a right of first refusal by a Party to
purchase the same on no less favourable terms and conditions).

16.4                           Priority
of Payment of Liquidation Proceeds

The proceeds of the liquidation shall be distributed
in the following order of priority:

(a)                                  payment
of the liquidations costs and expenses and the remuneration of the members of
the Liquidation Committee;

(b)                                 payment
of outstanding salaries, wages, subsidies, benefits, allowances, rewards and
other compensation of Senior Management Personnel and Working Personnel;

(c)                                  payment
of outstanding taxes and customs duties; and

(d)                                 payment
of unsecured debts of the Company.

Any remaining proceeds shall be distributed to the
Parties in proportion to the respective percentage interest each Party holds in
the Company’s registered capital.

16.5                           Cancellation
of Registration

After the liquidation of the Company is completed and
no later than one hundred eighty (180) days after the Liquidation Commencement
Date (unless a special extension is approved), the Liquidation Committee shall
promptly submit a report 

 32
 

 

thereon for verification by the Board and submission
to the relevant Examination and Approval Authority and shall carry out
cancellation procedures with the tax and customs authorities.  Application
shall be made with the Registration Authority for surrender and cancellation of
the business license of the Company and a public announcement of the Company’s
dissolution shall be made.

17                  INSURANCE

The Company shall, at its own cost and expense and at
all times during the operation of the Company, procure and maintain full and
adequate insurance coverage in a manner prudent and advisable for the Company
as permitted by PRC Law.  The relevant
insurance policies may be obtained from any insurance company authorized to
provide such policies in China and approved by the Board.

The insurance shall include property, casualty,
product liability and general liability, which are necessary for fulfilling
obligations or liabilities under relevant Laws of China, contracts with
customers and as required by the terms of the MPM Sale, Marketing and Supply
Agreement.  If one Party proposes to
purchase an insurance policy not directly related to the business of the
Company, such a Party shall be responsible in full for the payment of the
premium.

18                  MISCELLANEOUS

18.1                           Applicable
Law

The Laws of China which are
officially published and publicly available shall apply to and govern the
validity, interpretation and implementation of these Articles of Association.

18.2                           Language

These
Article of Association shall be written and executed in both English and
Chinese in ten (10) originals in each language and each language version has
the same effect.  Each Party shall
receive one original and the remaining originals will be submitted to the
Examination and Approval Authorities as well as the Registration Authority for
approval or registration.  Each Party
acknowledges that it has reviewed these Articles of Association in both
language versions and that they are substantially the same in all material
respects.

 33
 

 

 

18.3                           Effective
Date and Amendment.

These Articles of Association shall become effective
on the date they are approved by the Examination and Approval
Authorities.  Any amendments to these Articles of Association shall be
made in accordance with the Joint Venture Contract and Article 6.7 hereof and
subject to the approval by the Examination and Approval Authorities.

18.4                           Notices

Unless otherwise provided in these Articles of
Association, notices or other communications required to be given by any Party
or the Company pursuant to these Articles of Association 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 date after
the 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 or return
email).

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

 34
 

 

 

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

Address:  Valin Plaza, Fu Rong Zhong Lu, Second
Section, No.111, 
                  Changsha, Hunan, China

Attention:  Head of Securities Department

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

Hengyang Valin
Steel Tube Co. Ltd.:

Address: Dalixincun No 10, Zhengxiang District, Hengyang, Hunan, 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

Any Party may at any time
change its address for service of notice or communication in writing delivered
to the other Party in accordance with the terms hereof.

18.5                           Headings

The headings contained in these
Articles of Association are for reference only 

 35
 

 

 

and shall not be deemed to be a
part of these Articles of Association or to affect the meaning or
interpretation hereof.

IN
WITNESS WHEREOF, the Parties hereto have caused these
Articles of Association to be executed as of the date first above written by
their duly authorized representatives.

 36
 

 

 

 

	
  Hunan Valin Steel
  Tube & Wire Co., Ltd.

  	
  Hengyang Valin
  Steel Tube Co., Ltd.

  
	
  By:

  	
  /s/ Cao HuiQuan

  	
   

  	
  By:

  	
  /s/ Zhao JianHui

  
	
  Name:

  	
  Cao HuiQuan

  	
   

  	
  Name:

  	
  Zhao JianHui

  
	
  Title:

  	
  Director/General
  Manager

  	
   

  	
  Title:

  	
  Chairman/General
  Manager

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Star China Ltd.

  	
   

  	
   

  
	
  By:

  	
  /s/ Rhys J. Best

  	
   

  	
   

  	
   

  
	
  Name:

  	
  Rhys J. Best

  	
   

  	
   

  	
   

  
	
  Title:

  	
  Chief Executive Officer

  	
   

  	
   

  	
   

  

 

[Signature Page of
Articles of Association]

 37
 

 

 

Schedule
1

The Authority of the Director of Quality Assurance
and Technical Support and the

Director of International Sales and Marketing

POSITION: Director of Quality Assurance and
Technical Support — Mid-level Management

REPORTS TO:  General Manager

BASIC FUNCTION:  works with Company Quality
Assurance personnel, and is responsible for overseeing the development,
implementation and coordination of the Company quality control program to
prevent or eliminate defects in new or existing products, processes, and
services.  Responsible to provide
technical support for sales of Tubular Products, and has a coordinating role
with the Director of International Marketing in this respect.  Directs changes in quality control and
related manufacturing policies, procedures, and practices for the purpose of
continual improvement and provides recommendations and guidance for meeting
customer product and service requirements.

EXTERNAL CONTACTS: 
Frequent contact with customers, vendors, consultants, and contractors.

INTERNAL CONTACTS:  Frequent contact with senior
and middle management personnel in sales and operations.

DECISION MAKING RESPONSIBILITIES:  Required
to provide input to decision making regarding the key quality control
activities in the company, which also support commercial initiatives.  Decisions impact sales, operations,
production planning and capital project evaluation.

EXPOSURE TO CONFIDENTIAL INFORMATION: 
Access to confidential business information including proprietary
product information, employee relations information, and company financial
data; unauthorized release could result in financial loss to the company, loss
of current and potential customers, customer and/or employee dissatisfaction,
damage to the company’s reputation, and potential litigation.

KEY ACTIVITIES:  Examples of key activities in which this
position will participate include:

·                  The management
of all aspects of ISO/ABS/TS16949/API5CT/API5L/A2LA programs to maintain
current certifications and upgrade to new versions of these programs.  Ensure compliance of all operations to
standards.  Conduct and oversee periodic
quality review meetings.

·                  Suggest
alternative methods and procedures in solving quality and manufacturing
problems and meeting changing market opportunities.

·                  Develop initial
and subsequent modifications of quality control programs to delineate areas of
responsibility, personnel requirements, and operational procedures within the
department.

 38
 

 

·                  Visit and confer
with vendors to obtain information related to vendor quality standards.  Conduct site audits where appropriate.

·                  Develops customer relationships with goal of
increasing company sales and overall Tubular Products market share.

·                  Interprets drilling and testing information
as it relates to product and system design issues.

·                  Performs product and system design / redesign
engineering activities in full compliance with all American Petroleum Institute
(API) standards.

·                  Conducts research to improve or modify Oil
Field Tubular and Pipe equipment.

·                  Evaluate findings to develop, design, or test
equipment or processes.

·                  Assist engineering or other personnel in
solving operational problems.

·                  Assist customers in interpretation of data
relating to Oil Field Tubular and Pipe equipment performance.

·                  Assists in the resolution of customer claims
and complains.

 39
 

 

POSITION: Director of International
Marketing — Mid-level Management

REPORTS
TO:  General Manager

BASIC FUNCTION:  Responsible for directing and managing
international (non-domestic) sales, business development, marketing, and
product development activities for tubular product lines to meet company sales
objectives and customer expectations.

EXTERNAL CONTACTS:  Frequent contact with customers, Trading
Company, distributors, prospects, and leaders of industry groups (API, PESA,
IPAA, NASPD, etc.) as well as Lone Star Technologies’ sales department and
other senior Lone Star Technologies’ staff.

INTERNAL CONTACTS:  Frequent contact with members of senior and
middle management and board members.

DECISION MAKING RESPONSIBILITIES:  Attending 
the meetings regarding sales and marketing strategy with General
Manager.  Oversees development of new
products and markets, participates in making credit recommendations, and the
resolving of product delivery, pricing, transportation, logistics and credit
issues.

The Director of
International Marketing will be responsible for all export marketing and sales,
and will also have a close working relationship with the Marketing General
Manager responsible for domestic sales.

KEY ACTIVITIES:

·                  Provides the
marketing, sales, account management and leadership and business acumen
essential to achieving revenue, market and profit goals according to the
business plan.  Interfaces productively
and closely with peers in operations, quality assurance and technical support,
finance, human resources, etc.

·                  Aggressively
manages time and territory objectives with the sales team.  Proactively spends a majority of his time
with the sales staff and clients.

·                  Developing,
implementing and continuously updating the Joint Venture’s international
strategic marketing plan, services, business development, pricing, promotion,
etc.

·                  Creates and fosters an environment of
high energy, creativity and teamwork.

·                  Collects and integrates market
intelligence including, but not limited to, competitor analysis, customer
operations and industry trends.  Uses
this data to ensure market share and profitability exceeds industry and
regional averages.

 40
 

 

·                  Creating marketing & sales
programs and develops account management strategies and other tactical plans to
enhance international market penetration. 
Measures the effectiveness of programs and fine-tunes as necessary.

·                  Oversees advertising and promotional
material content to ensure that it represents the JV’s desired image, products
and services.

·                  Prepares detailed budgets, forecasts,
sales updates, gross margin plans and related reports, communicating sales
performance, account effectiveness, etc. 
Also, contributes to the development of the JV’s annual business and
marketing plan.

·                  Develops and confirms actions of
policies, procedures, and disciplines required to effectively manage the field
sales organization.

·                  Assisting in the development and
confirms actions of policies, procedures, and disciplines required to
effectively manage the field sales organization.

·                  Responds quickly
to customer problems and develops corrective action plans.  Ensures that inquiries, orders and customer
requests for assistance are handled effectively and efficiently.

·                  Builds and
maintains a professional and capable sales & marketing team.  Conducts regular performance appraisals,
prepares development programs and provides opportunities to existing staff to
gain additional responsibilities.  Making
proposal one employee promotion and employment of additional employees as
required.

·                  Continually
analyzes the need for professional development programs and works with the
Human Resources staff to ensure effective delivery and proactive participation.

 41
 

 

Schedule 2 Qualification Requirements for the
Candidates of CFO

EDUCATIONAL REQUIREMENTS: Bachelor’s degree in Finance or Accounting required. CPA and/or
MBA also preferred.

EXPERIENCE
REQUIREMENTS:  Public
accounting background and/or extensive knowledge of U.S. public reporting
requirements and accounting systems required. 
Strong management, analytical, and problem solving skills, as well as
the ability to make sound financial decisions, is also required.  Must possess demonstrated intellectual and
task management agility.

 

 42Exhibit 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.

 26
 

 

 

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.

 29
 

 

 

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).

 35
 

 

 

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

 36
 

 

 

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.

 37
 

 

 

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.

 

 39

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