Document:

Exhibit 10.1

 

CANO PETROLEUM, INC’S.
2005 DIRECTORS’ STOCK OPTION PLAN
 
 1. PURPOSES OF THE PLAN.        The purpose of the Cano Petroleum, Inc. 2005 Directors Stock Option Plan is to attract, retain and compensate highly-qualified individuals who are not employees of Cano Petroleum, Inc. or any of its subsidiaries or affiliates for service as members of the Board by providing them with competitive compensation and an ownership interest in the Common Stock of the Company. The Company intends that the Plan will benefit the Company and its stockholders by allowing Non-Employee Directors to have a personal financial stake in the Company through an ownership interest in the Common Stock and will closely associate the interests of Non-Employee Directors with that of the Company’s stockholders.
 
 All options granted hereunder shall be nonstatutory stock options.
 
 2. DEFINITIONS.    As used herein, the following definitions shall apply:
 
(a) “BOARD” means the Board of Directors of the Company.
 
(b) “CHANGE OF CONTROL” means a sale of all or substantially all of the Company’s assets, or any merger or consolidation of the Company with or into another corporation other than a merger or consolidation in which the holders of more than 50% of the shares of capital stock of the Company outstanding immediately prior to such transaction continue to hold (either by the voting securities remaining outstanding or by their being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by the voting securities of the Company, or such surviving entity, outstanding immediately after such transaction.
 
(c) “CODE” means the Internal Revenue Code of 1986, as amended.
 
(d) “COMMON STOCK” means the Common Stock of the Company.
 
(e) “COMPANY” means Cano Petroleum, Inc., a Delaware corporation.
 
(f) “CONTINUOUS STATUS AS A DIRECTOR” means the absence of any interruption or termination of service as a Director.
 
(g) “CORPORATE TRANSACTION” means a dissolution or liquidation of the Company, a sale of all or substantially all of the Company’s assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation.

 

(h) “DIRECTOR” means a member of the Board.
 
(i) “EMPLOYEE” means any person, including any officer or Director, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director’s fee by the Company shall not be sufficient in and of itself to constitute “employment” by the Company.
 
(j) “EXCHANGE ACT” means the Securities Exchange Act of 1934, as amended.

 

 

(k) “OPTION” means a stock option granted pursuant to the Plan. All options shall be nonstatutory stock options (i.e., options that are not intended to qualify as incentive stock options under Section 422 of the Code).
 
(l) “OPTIONED STOCK” means the Common Stock subject to an Option.
 
(m) “OPTIONEE” means an Outside Director who receives an Option.
 
(n) “OUTSIDE DIRECTOR” means a Director who is not an Employee.
 
(o) “PARENT” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.
 
(p) “PLAN” means this 2005 Directors’ Stock Option Plan.
 
(q) “SHARE” means a share of the Common Stock, as adjusted in accordance with Section 11 of the Plan.
 
(r) “SUBSIDIARY” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.
 
 3. STOCK SUBJECT TO THE PLAN.      Subject to the provisions of Section 11 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 150,000, plus an annual increase on the first day of each of the Company’s fiscal years beginning in 2005, 2006, 2007, 2008 and 2009 equal to the lesser of (i) 100,000 Shares, (ii) one-half of one percent (0.5%) of the Shares outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of Shares as is determined by the Board (the “Pool”). The Shares may be authorized, but unissued, or reacquired Common Stock.
 
 If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan has been terminated, become available for future grant under the Plan. In addition, any Shares of Common Stock that are retained by the Company upon exercise of an Option in order to satisfy the exercise price for such Option, or any withholding taxes due with respect to such exercise, shall be treated as not issued and shall continue to be available under the Plan. If Shares that were acquired upon exercise of an Option are subsequently repurchased by the Company, such Shares shall not in any event be returned to the Plan and shall not become available for future grant under the Plan.
 
 4. ADMINISTRATION OF AND GRANTS OF OPTIONS UNDER THE PLAN.
 
a) ADMINISTRATOR. Except as otherwise required herein, the Plan shall be administered by the Board.
 
(b) PROCEDURE FOR GRANTS. All grants of Options hereunder shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions:
 
(i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors.

 

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(ii) Each Outside Director shall be automatically granted an Option to purchase 25,000 Shares (the “First Option”) on the date on which such person first becomes an Outside Director after the effective date of this Plan, whether through election by the shareholders of the Company or appointment by the Board of Directors to fill a vacancy.
 
(iii) Each Outside Director, including an Outside Director who did not receive a First Option grant, shall be automatically granted an Option to purchase 25,000 Shares (the “Subsequent Option”) on the date of each Annual Meeting of the Company’s stockholders immediately following which such Outside Director is serving on the Board, provided that, on such date, he or she shall have served on the Board for at least six (6) months prior to the date of such Annual Meeting.
 
(iv) Each Outside Director, including an Outside Director who did not receive a First Option grant, who chairs either the Compensation Committee, Audit Committee or Compliance Committee shall be automatically granted an Option to purchase 5,000 Shares (the “Subsequent Option”) on the date of each Annual Meeting of the Company’s stockholders immediately following which such Outside Director is serving on the Board, provided that, on such date, he or she shall have served on the Board for at least six (6) months prior to the date of such
 
Annual Meeting.
 
(v) Notwithstanding the provisions of subsections (ii) and (iii) hereof, in the event that a grant would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the Pool, then each such automatic grant shall be that number of Shares determined by dividing the total number of Shares remaining available for grant by the number of Outside Directors receiving an Option on the automatic grant date. Any further grants shall then be deferred until such time, if any, as additional Shares become available for grant under the Plan through action of the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder.
 
(vi) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any grant of an Option made before the Company has obtained stockholder approval of the Plan in accordance with Section 17 hereof shall be conditioned upon obtaining such stockholder approval of the Plan in accordance with Section 17 hereof.
 
(viii) The terms of each option granted hereunder shall be as follows:
 
(1) each option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 9 below;
 
(2) the exercise price per Share shall be 100% of the average of fair market value per Share for the twenty (20) trading days immediately preceding the date of grant of each option, determined in accordance with Section 8 hereof;
 
(3) each Option shall vest and be exercisable one (1) year from the date of grant.
 
(c) POWERS OF THE BOARD. Subject to the provisions and restrictions of the Plan, the Board shall have the authority, in its discretion: (i) to determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine the exercise price per Share of Options to be granted, which exercise price shall be determined in accordance with Section 8 of the Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to the Plan; (v) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an

 

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Option previously granted hereunder; and (vi) to make all other determinations deemed necessary or advisable for the administration of the Plan.
 
(d) EFFECT OF BOARD’S DECISION. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan.
 
(e) SUSPENSION OR TERMINATION OF OPTION. If the Chief Executive Officer or his or her designee reasonably believes that an Optionee has committed an act of misconduct, such officer may suspend the Optionee’s right to exercise any option pending a determination by the Board (excluding the Outside Director accused of such misconduct). If the Board (excluding the Outside Director accused of such misconduct) determines an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his or her estate shall be entitled to exercise any Option whatsoever. In making such determination, the Board of Directors (excluding the Outside Director accused of such misconduct) shall act fairly and shall give the Optionee an opportunity to appear and present evidence on Optionee’s behalf at a hearing before the Board or a committee of the Board.
 
 5. ELIGIBILITY.      Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4(b) above. An Outside Director who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options in accordance with such provisions.
 
 The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time.
 
 6. TERM OF PLAN; EFFECTIVE DATE.  The Plan shall become effective on April 1, 2005. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 13 of the Plan.
 
 7. TERM OF OPTIONS.          The term of each Option shall be ten (10) years from the date of grant thereof unless an Option terminates sooner pursuant to Section 9 below.
 
 8. EXERCISE PRICE AND CONSIDERATION.
 
(a) EXERCISE PRICE. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be 100% of the average of the fair market value per Share for the twenty (20) trading days immediately preceding the date of grant of the Option.
 
(b) FAIR MARKET VALUE. The fair market value shall be determined by the Board; provided however that in the event the Common Stock is traded on the American Stock Exchange or listed on a stock exchange, the fair market value per Share shall be the average closing sales price on such system or exchange for the twenty (20) trading days immediately preceding the date of grant of the Option (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall Street Journal, or if there is a public market for the Common Stock but the Common Stock is not traded on the American Stock Exchange or listed on a stock exchange, the fair market value per Share shall be

 

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the mean of the bid and asked prices of the Common Stock in the over-the-counter market on the date of grant, as reported in The Wall Street Journal.
 
 (c) FORM OF CONSIDERATION. The consideration to be paid for the Shares to be issued upon exercise of an Option shall consist entirely of cash, check, other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which the Option shall be exercised (which, if acquired from the Company, shall have been held for at least six months), or any combination of such methods of payment and/or any other consideration or method of payment as shall be permitted under applicable corporate law.
 
 9. EXERCISE OF OPTION.
 
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4(b) above; provided however that no Options shall be exercisable prior to stockholder approval of the Plan in accordance with Section 17 below has been obtained.
 
 An Option may not be exercised for a fraction of a Share.
 
 An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan.
 
Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.
 
(b) TERMINATION OF CONTINUOUS STATUS AS A DIRECTOR. If an Outside Director ceases to serve as a Director, he or she may, but only within ninety (90) days after the date he or she ceases to be a Director of the Company, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that such Outside Director was not entitled to exercise an Option at the date of such termination, or does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan.
 
(c) DISABILITY OF OPTIONEE. Notwithstanding Section 9(b) above, in the event a Director is unable to continue his or her service as a Director with the Company as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Code), he or she may, but only within twelve (12) months from the date of such termination, exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that he or she was not entitled to exercise the Option at the date of

 

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termination, or if he or she does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan.
 
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee: (A) during the term of the Option who is, at the time of his or her death, a Director of the Company and who shall have been in Continuous Status as a Director since the date of grant of the Option, or (B) three (3) months after the termination of Continuous Status as a Director, the Option may be exercised, at any time within twelve (12) months following the date of death, by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death or the date of termination, as applicable. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that an Optionee was not entitled to exercise the Option at the date of death or termination or if he or she does not exercise such Option (to the extent he or she was entitled to exercise) within the time specified above, the Option shall terminate and the Shares underlying the unexercised portion of the Option shall revert to the Plan.
 
 10. NONTRANSFERABILITY OF OPTIONS.           The Option may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order (as defined by the Code or the rules there under). The designation of a beneficiary by an Optionee does not constitute a transfer. An Option may be exercised during the lifetime of an Optionee only by the Optionee or a transferee permitted by this Section.
 
 11.ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
 
(a) ADJUSTMENT. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option, the number of Shares of Common Stock set forth in Sections 4(b)(ii), (iii) and (iv) above, and the number of Shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock (including any such change in the number of Shares of Common Stock effected in connection with a change in domicile of the Company) or any other increase or decrease in the number of issued Shares of Common Stock effected without receipt of consideration by the Company; provided however that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option.
 
(b) CORPORATE TRANSACTIONS; CHANGE OF CONTROL. In the event of a Corporate Transaction, including a Change of Control, and except as otherwise provided in a Stock Option Agreement issued under the Plan, each outstanding Option shall be assumed or an equivalent option shall be substituted by the successor corporation or a Parent or Subsidiary of such successor corporation, unless the successor corporation does not agree to assume the

 

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outstanding Options or to substitute equivalent options, in which case the Options shall terminate upon the consummation of the transaction.
 
 For purposes of this Section 11(b), an Option shall be considered assumed, without limitation, if, at the time of issuance of the stock or other consideration upon such Corporate Transaction or Change of Control, each Optionee would be entitled to receive upon exercise of an Option the same number and kind of shares of stock or the same amount of property, cash or securities as the Optionee would have been entitled to receive upon the occurrence of such transaction if the Optionee had been, immediately prior to such transaction, the holder of the number of Shares of Common Stock covered by the Option at such time (after giving effect to any adjustments in the number of Shares covered by the Option as provided for in this Section 11); provided however that if such consideration received in the transaction was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the Option to be solely common stock of the successor corporation or its Parent equal to the Fair Market Value of the per Share consideration received by holders of Common Stock in the transaction.
 
(c) CERTAIN DISTRIBUTIONS. In the event of any distribution to the Company’s stockholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per Share of Common Stock covered by each outstanding Option to reflect the effect of such distribution.
 
 12. TIME OF GRANTING OPTIONS.       The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4(b) hereof. Notice of the determination shall be given to each Outside Director to whom an Option is so granted within a reasonable time after the date of such grant.
 
 13. AMENDMENT AND TERMINATION OF THE PLAN.
 
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain approval of the stockholders of the Company to Plan amendments to the extent and in the manner required by such law or regulation.
 
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan that would impair the rights of any Optionee shall not affect Options already granted to such Optionee and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company.
 
 14. CONDITIONS UPON ISSUANCE OF SHARES.    Notwithstanding any other provision of the Plan or any agreement entered into by the Company pursuant to the Plan, the Company shall not be obligated, and shall have no liability for failure, to issue or deliver any Shares under the Plan unless such issuance or delivery would comply with the legal requirements relating to the administration of stock option plans under applicable U.S. state corporate laws, U.S. federal and applicable state securities laws, the Code, any stock exchange or Nasdaq rules or regulations to which the Company may be subject and the applicable laws of any other country or jurisdiction where Options are granted under the Plan, as such laws, rules, regulations and requirements

 

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shall be in place from time to time (the “Applicable Laws”). Such compliance shall be determined by the Company in consultation with its legal counsel.
 
 As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by law.
 
 15. RESERVATION OF SHARES.           The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.
 
 16. OPTION AGREEMENT.     Options shall be evidenced by written option agreements in such form as the Board shall approve.
 
 17. STOCKHOLDER APPROVAL.          If required by the Applicable Laws, continuance of the Plan shall be subject to approval by the stockholders of the Company. Such stockholder approval shall be obtained in the manner and to the degree required under the Applicable Laws.

 

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CANO PETROLEUM, INC’S
2005 DIRECTORS’ STOCK OPTION PLAN
 
NOTICE OF STOCK OPTION GRANT
 
[DATE]
 
 
 
 You have been granted an option to purchase Common Stock of Cano Petroleum, Inc. (the “Company”) as follows:
 
 Date of Grant:
 
 Vesting Commencement Date:
 
 Exercise Price per Share:     $                 
 
 Total Number of Shares Granted:
 
 Total Exercise Price:
 
 Expiration Date:
 
 Vesting Schedule: This Option may be exercised, in whole or in part, on the Vesting Commencement Date.
 
 Acceleration of Vesting Schedule: In the event Optionee’s Continuous status as a Director is terminated without Cause in connection with or within three (3) months following a Change of Control, an additional 25% of the Shares subject to the Option shall vest.  Notwithstanding the foregoing, in no event shall Optionee be entitled to exercise a number of shares under this Option in excess of the Total Number of Shares Granted set forth above.
 
Definitions:
 
For purposes of this Agreement, “Change of Control” shall have the meaning set forth in Section 2(b) of the 2005 Directors’ Stock Option Plan.
 
For purposes of this Agreement, “Cause” for Optionee’s  termination of Continuous Status as a Director will exist at any time  after the happening of one or more of the following events:
 
(a) Optionee’s willful misconduct or gross negligence in performance of his duties hereunder;
 
(b) Dishonest or fraudulent conduct, a deliberate attempt to do an injury to the Company, or conduct that materially discredits the Company or is materially detrimental to the reputation of the Company, including conviction of a felony; or   (c) Optionee’s incurable material breach of any element of the Company’s Confidential Information, including without limitation, Optionee’s theft or other misappropriation of the Company’s proprietary information.

 

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Termination Period: This Option may be exercised for 90 days after termination of Optionee’s Continuous Status as a Director, or such longer period as may be applicable upon death or Disability of Optionee as provided in the Plan, but in no event later than the Expiration Date as provided above.
 
 By your signature and the signature of the Company’s representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the 2005 Directors’ Stock Option Plan and the Nonstatutory Stock Option Agreement, all of which are attached and made a part of this document.
 
OPTIONEE: CANO PETROLEUM, INC.

 

 

	
   

  	
   

  
	
   

  	
   

  
	By:
	 
	 

	 
	 

	Title:
	 
	 

					

 

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CANO PETROLEUM, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
 
 1. GRANT OF OPTION. The Board of Directors of the Company hereby grants to the Optionee named in the Notice of Stock Option Grant attached as Part I of this Agreement (the “Optionee”), an option (the “Option”) to purchase a number of Shares, as set forth in the Notice of Stock Option Grant, at the exercise price per share set forth in the Notice of Stock Option Grant (the “Exercise Price”‘), subject to the terms and conditions of the 2005 Directors’ Stock Option Plan (the “Plan”), which is incorporated herein by reference. (Capitalized terms not defined herein shall have the meanings ascribed to such terms in the Plan.) In the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Nonstatutory Stock Option Agreement, the terms and conditions of the Plan shall prevail.
 
 2. EXERCISE OF OPTION.
 
(a) RIGHT TO EXERCISE. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Stock Option Grant and the applicable provisions of the Plan and this Nonstatutory Stock Option Agreement. In the event of Optionee’s death, disability or other termination of Optionee’s employment or consulting relationship, the exercisability of the Option is governed by the applicable provisions of the Plan and this Nonstatutory Stock Option Agreement.
 
(b) METHOD OF EXERCISE. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the “Exercise Notice”), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.
 
 No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange or quotation service upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.
 
 3. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:
 
(a) cash;
 
(b) check;
 
(c) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; or

 

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(d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares.
 
 4. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution or pursuant to a domestic relations order (as defined by the Code or the rules thereunder) and may be exercised during the lifetime of Optionee only by the Optionee or a transferee permitted by Section 10 of the Plan. The terms of the Plan and this Nonstatutory Stock Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.
 
 5. TERM OF OPTION. This Option may be exercised only within the term set out in the Notice of Stock Option Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Nonstatutory Stock Option Agreement.
 
 6. TAX CONSEQUENCES. Set forth below is a brief summary of certain federal tax consequences relating to this Option under the law in effect as of the date of grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
 
 (a) EXERCISING THE OPTION. Since this Option does not qualify as an incentive stock option under Section 422 of the Code, the Optionee may incur regular federal income tax liability upon exercise. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Exercised Shares on the date of exercise over their aggregate Exercise Price.
 
 (b) DISPOSITION OF SHARES. If the Optionee holds the Option Shares for more than one year, gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. The long-term capital gain will be taxed for federal income tax purposes at a maximum rate of 20 percent.
 
By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Nonstatutory Stock Option Agreement. Optionee has reviewed the Plan and this Nonstatutory Stock Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Nonstatutory Stock Option Agreement and fully understands all provisions of the Plan and Nonstatutory Stock Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Nonstatutory Stock Option Agreement.
 

	CANO PETROLEUM, INC.

	 

	 

	 
	 

	 
	 

	By:
	 
	 

	 
	 

	Title:
	 
	 

	 
	 

	Date:
	 
	 

				

 

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CONSENT OF SPOUSE
 
The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Nonstatutory Stock Option Agreement. In consideration of the Company’s granting his or her spouse the right to purchase Shares as set forth in the Plan and this Nonstatutory Stock Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Nonstatutory Stock Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned’s spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Nonstatutory Stock Option Agreement.

 

 

	 
	 

	Spouse of Optionee
	 

	 
	 

	Date:
	 
	 

			

 

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EXHIBIT A
 
NOTICE OF EXERCISE
 
To: Cano Petroleum, Inc,
 
Attn: Stock Option Administrator
 
Subject: Notice of Intention to Exercise Stock Option
 
 This is official notice that the undersigned (“Optionee”) intends to exercise Optionee’s option to purchase 25,000 shares of Cano Petroleum, Inc. Common Stock, under and pursuant to the Company’s 2005 Directors’ Stock Option Plan and the Nonstatutory Stock Option Agreement dated                               , as follows:
 

	Grant Number:
	 
	 
	 

	 
	 
	 

	Date of Purchase:
	 
	 
	 

	 
	 
	 

	Number of Shares:
	 
	 
	 

	 
	 
	 

	Purchase Price:
	 
	 
	 

	 
	 
	 

	Method of Payment of
	 
	 

	Purchase Price:
	 
	 
	 

	 
	 
	 

	Social Security No.:
	 
	 
	 

	 
	 
	 

	The shares should be issued as follows:
	 
	 

	 
	 
	 

	Name:
	 
	 
	 
	 

	 
	 
	 
	 

	Address:
	 
	 
	 
	 

	 
	 
	 
	 

	 
	 
	 
	 

	 
	 
	 
	 

	Signed:
	 
	 
	 
	 

	 
	 
	 

	Date:
	 
	 
	 
	 

													

 

14Exhibit
4.26

 

 

28July 2004

 

 

CHINA UNICOM (HONG KONG) GROUP LIMITED

 

 

CHINA UNICOM LIMITED

 

 

 

AGREEMENT

for the sale and purchase of

the issued share capital of

CHINA UNICOM INTERNATIONAL

LIMITED

 

 

 

 

CONTENTS

 

	
  CLAUSE

  	
   

  
	
   

  	
   

  	
   

  
	
  1.

  	
  INTERPRETATION

  	
   

  
	
   

  	
   

  	
   

  
	
  2.

  	
  SALE OF THE SHARES AND PRICE

  	
   

  
	
   

  	
   

  	
   

  
	
  3.

  	
  CONDITIONS PRECEDENT

  	
   

  
	
   

  	
   

  	
   

  
	
  4.

  	
  PRE-COMPLETION UNDERTAKINGS

  	
   

  
	
   

  	
   

  	
   

  
	
  5.

  	
  COMPLETION

  	
   

  
	
   

  	
   

  	
   

  
	
  6.

  	
  POST-COMPLETION UNDERTAKINGS; RESTRICTIONS
  ON VENDOR

  	
   

  
	
   

  	
   

  	
   

  
	
  7.

  	
  WARRANTIES

  	
   

  
	
   

  	
   

  	
   

  
	
  8.

  	
  LIMITATIONS ON CLAIMS

  	
   

  
	
   

  	
   

  	
   

  
	
  9.

  	
  PURCHASER’S RIGHTS TO RESCISSION

  	
   

  
	
   

  	
   

  	
   

  
	
  10.

  	
  ENTIRE AGREEMENT

  	
   

  
	
   

  	
   

  	
   

  
	
  11.

  	
  VARIATION

  	
   

  
	
   

  	
   

  	
   

  
	
  12.

  	
  ASSIGNMENT

  	
   

  
	
   

  	
   

  	
   

  
	
  13.

  	
  COSTS

  	
   

  
	
   

  	
   

  	
   

  
	
  14.

  	
  SEVERABILITY

  	
   

  
	
   

  	
   

  	
   

  
	
  15.

  	
  FURTHER ASSURANCE

  	
   

  
	
   

  	
   

  	
   

  
	
  16.

  	
  NOTICES

  	
   

  
	
   

  	
   

  	
   

  
	
  17.

  	
  WAIVERS/PURCHASER’S RIGHTS AND REMEDIES

  	
   

  
	
   

  	
   

  	
   

  
	
  18.

  	
  GOVERNING LAW

  	
   

  
	
   

  	
   

  	
   

  
	
  SCHEDULE 1 INTERPRETATION

  	
   

  
	
   

  	
   

  	
   

  
	
  SCHEDULE 2 EACH GROUP COMPANY

  	
   

  
	
   

  	
   

  	
   

  
	
  PART A
  : DETAILS OF THE COMPANY

  	
   

  
	
   

  	
   

  	
   

  
	
  PART B
  : DETAILS OF THE SUBSIDIARY

  	
   

  
	
   

  	
   

  	
   

  
	
  SCHEDULE 3 THE WARRANTIES

  	
   

  
	
   

  	
   

  	
   

  
	
  PART A
  : GENERAL

  	
   

  
	
   

  	
   

  	
   

  
	
  PART B
  : TAX WARRANTIES

  	
   

  
	
   

  	
   

  	
   

  
	
  PART C
  : PROPERTY WARRANTIES

  	
   

  

 

 

THIS AGREEMENT is made on 28 July 2004

 

BETWEEN

 

(1)                                  CHINA UNICOM (HONG KONG) GROUP LIMITED whose registered office is at 75th Floor, The Centre, 99
Queen’s Road Central, Hong Kong (the Vendor)

 

(2)                                  CHINA UNICOM LIMITED
whose registered office is at 75th Floor, The Center, 99 Queen’s
Road Central, Hong Kong and whose shares are listed on The Stock Exchange of
Hong Kong Limited and whose American depository shares are listed on New York
Stock Exchange, Inc. (the Purchaser)

 

WHEREAS

 

(A)                              China
Unicom International Limited (the Company) is
a private company limited by shares incorporated in Hong Kong.  The Vendor is the sole beneficial owner of
the entire issued share capital of the Company.

 

(B)                                The
Vendor has agreed to sell and the Purchaser has agreed to purchase all of the
issued share capital of the Company for the consideration and upon the terms
set out in this Agreement.

 

IT IS AGREED as follows:

 

1.                                      INTERPRETATION

 

1.1                                 Words
and expressions used in this Agreement shall have the meanings set out in Schedule 1,
unless the context requires otherwise.

 

1.2                                 The
Schedules comprise schedules to this Agreement and form part of this Agreement.

 

2.                                      SALE OF THE SHARES AND PRICE

 

2.1                                 The
Vendor shall sell or procure the sale of, and the Purchaser shall purchase, the
Shares as beneficial owner.  The Shares
shall be sold free from all security interests, options, equities, claims or
other third party rights (including rights of pre-emption) of any nature
whatsoever, together with all rights attaching to them.

 

2.2                                 The
total price payable by the Purchaser to the Vendor for the Shares shall be the
sum of HK$37,159,995.77.

 

3.                                      CONDITIONS
PRECEDENT

 

3.1                                 Completion
of the sale and purchase of the Shares shall be conditional upon the fulfilment
to the reasonable satisfaction of the Purchaser that there have
been no material adverse change to the financial condition, business
operations or prospects of the Company.

 

 

3.2                                 If
the condition precedent referred to in Clause 3.1 has not been fulfilled (or
waived) on or before 11 August 2004 or such other date as the parties to
this Agreement may agree in writing, this Agreement (other than Clauses 1, 3.2,
10 to 18 and Schedule 1, which shall continue to be in force) shall
automatically terminate and no party shall have any claim of any nature
whatsoever against the other parties under this Agreement (save in respect of
its accrued rights arising from any prior breach of this Agreement).

 

4.                                      PRE-COMPLETION UNDERTAKINGS

 

4.1                                 Pending
Completion, the Vendor shall procure that:

 

(a)                                  each Group Company
shall carry on its business in the ordinary and usual course and shall not make
(or agree to make) any payment other than routine payments in the ordinary and
usual course of trading;

 

(b)                                 each Group Company
shall take all reasonable steps to preserve and protect its assets;

 

(c)                                  the Purchaser’s representatives shall be allowed, upon reasonable
notice and during normal business hours, access to the books and records of
each Group Company (including, without limitation, all statutory books, minute
books, leases, contracts, supplier lists and customer lists) together with the
right to take copies;

 

(d)                                 no Group Company shall do, allow or procure any act or omission
which would constitute or give rise to a breach of any Warranty as if the
Warranties were to be repeated on or at any time before Completion by reference
to the facts and circumstances then existing;

 

(e)                                  prompt disclosure is made to the Purchaser of all relevant
information which comes to the notice of the Vendor in relation to any fact or
matter (whether existing on or before the date of this Agreement or arising
afterwards) which may constitute a breach of any Warranty as if the Warranties
were to be repeated on or at any time before Completion by reference to the
facts and circumstances then existing;

 

(f)                                    no dividend or
other distribution shall be declared, paid or made by any Group Company;

 

(g)                                 no share or loan
capital shall be allotted or issued or agreed to be allotted or issued by any
Group Company;

 

(h)                                 all transactions
between each Group Company and the Vendor shall be on arm’s length commercial
terms and in their respective ordinary and usual course of business; and

 

(i)                                     no action is taken
by any Group Company or the Vendor which is inconsistent with the
provisions of this Agreement or the consummation of the transactions
contemplated by this Agreement.

 

2

 

4.2                                 Pending
Completion, the Vendor shall procure that the Group Companies consult fully
with the Purchaser in relation to any matters which may have a material effect
upon the Group Companies.  Without the
prior written consent of the Purchaser, the Group Companies shall not, and the
Vendor shall ensure that the Group Companies do not:

 

(a)                                  enter into any contract or commitment (or make a bid or offer which
may lead to a contract or commitment) having a material value or involving
material expenditure or which is of a long term or unusual nature or which
could involve an obligation of a material nature or which may result in any
material change in the nature or scope of the operations of such Group Company;

 

(b)                                 agree to any variation or termination of any existing contract to
which that Group Company is a party and which may have a material effect upon
the nature or scope of the operations of such Group Company;

 

(c)                                  (whether in the ordinary and usual course
of business or otherwise) acquire or dispose of, or agree to acquire or dispose
of, any material business or any material asset; or

 

(d)                                 enter into any
agreement, contract, arrangement or transaction (whether or not legally
binding) other than in the ordinary and usual course of business.

 

4.3                                 Pending
Completion, the Vendor shall obtain, effect or procure
for the obtaining and effecting of all approvals, registrations and filings
required by applicable laws and regulations for the Completion to be effected,
including but not limited to approval by the Ministry of Commerce of China.

 

5.                                      COMPLETION

 

5.1                                 The
sale and purchase of the Shares shall be completed at 75th Floor,
The Centre, 99 Queen’s Road Central, Hong Kong on 11 August 2004 or such
later date as the Vendor and the Purchaser may agree, following notification by
the Purchaser to the Vendor of the fulfilment to the satisfaction of the
Purchaser (or waiver) of the condition precedent referred to in Clause
3.1.  The events referred to in the
following provisions of this clause 5 shall take place on Completion.

 

5.2                                 The
Vendor shall deliver (or cause to be delivered) to the Purchaser:

 

(a)                                  duly executed
instruments of transfer into the name of the Purchaser or its nominee and each
duly pre-stamped with nominal stamp duty, in respect of all of the Shares,
together with the relative share certificates;

 

(b)                                 duly executed sold
notes in favour of the Purchaser and/or its nominees in respect of all the Shares;

 

(c)                                  the Certificate of Incorporation, Common Seal, Register of Members
and Share Certificate Books (with any unissued share certificates), all minute
books and other statutory books (which shall be written-up to but not including
Completion) of each Group Company; and

 

3

 

(d)                                 all such other
documents (including any necessary waivers or consents) as may be required to
enable the Purchaser and/or its nominee to be registered as the holder(s) of
the Shares.

 

5.3                                 The
Vendor shall procure that resolutions of the Board of Directors of the Company
are passed by which the registration (subject to their being duly stamped) of
the transfers in respect of the Shares referred to in clause 5.2 are
approved and any additional directors nominated by the Purchaser are appointed
to the Board of Directors of the Company;

 

5.4                                 The
Purchaser shall:

 

(a)                                  in satisfaction of its obligations under 2.2, cause the price to be
paid by banker’s draft made payable to the Vendor or electronic funds transfer
to such a bank account as may be directed by the Vendor; and

 

(b)                                 produce to the
Vendor duly executed bought notes in respect of all the Shares.

 

Any payment made in accordance with
clause 5.4(a) shall constitute a good discharge for the Purchaser of
its obligations under clause 2.2 and the Purchaser shall not be concerned
to see that the funds are applied in payment to the Vendor.

 

6.                                      POST-COMPLETION UNDERTAKINGS;
RESTRICTIONS ON VENDOR

 

6.1                                 The
Vendor shall not (whether alone or jointly with another and whether directly or
indirectly) carry on or be engaged or (except as the owner for investment of
securities dealt in on a stock exchange and not exceeding 5 per cent. in
nominal value of the securities of that class) be interested economically or
otherwise in any manner whatsoever in any Competing Business during the
Relevant Period.

 

6.2                                 The
Vendor shall not during the Relevant Period, directly or indirectly, solicit or
endeavour to entice away from the Group Companies, offer employment to or
employ, or offer or conclude any contract for services with, any person who was
employed in skilled or managerial work in the Group Companies’ business at
any time during the 1 year prior to Completion.

 

6.3                                 Except
so far as may be required by law and in such circumstances only after prior
consultation with the Purchaser, the Vendor shall not at any time disclose to
any person or use to the detriment of the Group Companies’ business
any trade secret or other confidential information of a technical character
which it holds in relation to the Group Companies’ business.

 

The
Vendor acknowledges and agrees that the duration, extent and application of the
respective restrictions in clauses 6.1, 6.2 and 6.3 are no greater
than is reasonable and necessary for the protection of the interests of the
Purchaser but that, if any such restriction shall be adjudged by any court of
competent jurisdiction to be void or unenforceable but would be valid if part
of the wording thereof was deleted and/or the period thereof was reduced and/or
the area dealt with thereby was reduced, the said restriction shall apply
within the jurisdiction of that court with such modifications as may be
necessary to make it valid and effective.

 

4

 

7.                                      WARRANTIES

 

7.1                                 The
Vendor represents, warrants and undertakes to the
Purchaser in the terms of the Warranties and acknowledges that the Purchaser
has entered into this Agreement in reliance upon the Warranties.

 

7.2                                 The
Vendor undertakes (without limiting any other rights of the Purchaser in any
way including its rights to damages in respect of a claim for breach of any
Warranty on any other basis) that it shall pay in cash to the Purchaser (or, if
so directed by the Purchaser, to the Group Company in question) (each an Indemnified Person) by way of
indemnity on demand in the case of a breach of any of the Warranties, a sum
equal to the aggregate of (i) the amount which, if received by the
Indemnified Person, would be necessary to put that Indemnified Person into the
financial position which would have existed had there been no breach of the
Warranty in question; and (ii) all Costs suffered or incurred by the
Indemnified Person, directly or indirectly, as a result of or in connection
with such breach of Warranty.

 

7.3                                 The
Vendor agrees to waive the benefit of all rights (if any) which the Vendor may
have against any Group Company, or any present or former officer or employee of
any such company, on whom the Vendor may have relied in agreeing to any term of
this Agreement and the Vendor undertakes not to make any claim in respect of
such reliance.

 

7.4                                 Each
of the Warranties shall be construed as a separate Warranty and (save as
expressly provided to the contrary) shall not be limited or restricted by
reference to or inference from the terms of any other Warranty or any other
term of this Agreement.

 

7.5                                 The
Warranties shall be deemed to be repeated immediately before Completion with
reference to the facts and circumstances then existing.

 

7.6                                 The
Vendor undertakes to notify the Purchaser in writing promptly if it becomes
aware of any circumstance arising after the date of this Agreement which would
cause any Warranty (if the Warranties were repeated with reference to the facts
and circumstances then existing) to become untrue or inaccurate or misleading
in any respect which is material to the financial or trading position
of either of the Group Companies.

 

8.                                      LIMITATIONS
ON CLAIMS

 

8.1                                 The
aggregate amount of the liability of the Vendor for all Claims shall not exceed
the total price referred to in Clause 2.2.

 

8.2                                 None
of the limitations contained in clause 8.1 shall apply to any breach of
any Warranty which (or the delay in discovery of which) is the consequence of
dishonest, deliberate or reckless mis-statement, concealment or other conduct
by the Vendor or any officer or employee, or former officer or
employee, of the Vendor.

 

5

 

9.                                      PURCHASER’S RIGHTS TO RESCISSION

 

9.1                                 The
Purchaser may by written notice given to the Vendor at any time prior to
Completion rescind this Agreement without liability on the part of the
Purchaser:

 

(a)                                  if any fact, matter
or event (whether existing or occurring on or before the date of this Agreement
or arising or occurring afterwards) comes to the notice of the Purchaser at any
time prior to Completion which:

 

(i)                                     constitutes a
breach by the Vendor of this Agreement (including, without limitation, any
breach of the pre-Completion undertakings in clause 4); or

 

(ii)                                  would constitute a
breach of any Warranty if the Warranties are repeated on or at any time before
Completion by reference to the facts and circumstances then existing; or

 

(iii)                               affects or is likely to affect in a materially adverse manner the
business, financial position or prospects of the Group Companies taken as a
whole; or

 

(b)                                 if at any time
after signing of this Agreement and before Completion there is a material
adverse change in the market price of the shares of the Purchaser and the
Purchaser is of the opinion that it will not be in the interests of its
shareholders as a whole to proceed with the acquisition of the Shares.

 

10.                               ENTIRE AGREEMENT

 

This Agreement constitutes the entire
agreement and understanding between the parties in connection with the sale and
purchase of the Shares. Neither party has entered into this Agreement in
reliance upon any representation, warranty or undertaking which is not set out
or referred to in this Agreement.

 

11.                               VARIATION

 

11.1                           No
variation of this Agreement (or of any of the documents referred to in this
Agreement) shall be valid unless it is in writing and signed by or on behalf of
each of the parties to it.  The
expression “variation” shall include any variation, supplement, deletion or
replacement however effected.

 

11.2                           Unless
expressly agreed, no variation shall constitute a general waiver of any
provisions of this Agreement, nor shall it affect any rights, obligations or
liabilities under or pursuant to this Agreement which have already accrued up
to the date of variation, and the rights and obligations of the parties under
or pursuant to this Agreement shall remain in full force and effect, except and
only to the extent that they are so varied.

 

6

 

12.                               ASSIGNMENT

 

Neither party shall nor shall it purport to
assign, transfer, charge or otherwise deal with all or any of its rights under
this Agreement nor grant, declare, create or dispose of any right or interest
in it without the prior written consent of the other party.

 

13.                               COSTS

 

Each of the parties shall bear its own
Costs incurred in connection with the negotiation, preparation and
implementation of this Agreement.  Any
stamp duty payable in respect of the transfer of Shares shall be paid by the
Vendor and the Purchaser in equal shares.

 

14.                               SEVERABILITY

 

If any provision of this Agreement is held
to be invalid or unenforceable, then such provision shall (so far as it is
invalid or unenforceable) be given no effect and shall be deemed not to be
included in this Agreement but without invalidating any of the remaining
provisions of this Agreement.

 

15.                               FURTHER
ASSURANCE

 

The Vendor agrees to perform (or procure
the performance of) all further acts and things, and execute and deliver (or
procure the execution and delivery of) such further documents, as may be
required by law or as the Purchaser may reasonably require, whether on or after
Completion, to implement and/or give effect to this Agreement and the
transaction contemplated by it and for the purpose of vesting in the Purchaser
the full benefit of the assets, rights and benefits to be transferred to the
Purchaser under this Agreement.

 

16.                               NOTICES

 

16.1                           Any notice
or other communication to be given by one party to the other under, or in
connection with, this Agreement shall be in writing and signed by or on behalf
of the party giving it.  It shall be
served by sending it by fax to the number set out in clause 16.2, or
delivering it by hand, or sending it by pre-paid recorded delivery, special
delivery or registered post, to the address set out in clause 16.2 and in
each case marked for the attention of the relevant party set out in
clause 16.2 (or as otherwise notified from time to time in accordance with
the provisions of this clause 16). 
Any notice so served by hand, fax or post shall be deemed to have been
duly given:

 

(a)                                  in the case of
delivery by hand, when delivered;

 

(b)                                 in the case of fax,
at the time of transmission;

 

7

 

(c)                                  in the case of
prepaid recorded delivery, special delivery or registered post, at 10am on the
second Business Day following the date of posting

 

provided that in each case where delivery
by hand or by fax occurs after 6pm on a Business Day or on a day which is not a
Business Day, service shall be deemed to occur at 9am on the next following
Business Day.

 

References to time in this clause are to
local time in the country of the addressee.

 

16.2                           The
addresses and fax numbers of the parties for the purpose of clause 16.1
are as follows:

 

Vendor

 

	
  Address:

  	
  75th
  Floor, The Center

  
	
   

  	
  99 Queen’s
  Road Central

  
	
   

  	
  Hong Kong

  
	
   

  	
   

  
	
  Fax:

  	
  852 2126
  2016

  
	
   

  	
   

  
	
  For the
  attention of:

  	
  The
  Directors

  

 

Purchaser

 

	
  Address:

  	
  75th
  Floor, The Center

  
	
   

  	
  99 Queen’s
  Road Central

  
	
   

  	
  Hong Kong

  
	
   

  	
   

  
	
  Fax:

  	
  852 2126
  2016

  
	
   

  	
   

  
	
  For the
  attention of:

  	
  The
  Directors

  

 

16.3                           A party may
notify the other party to this Agreement of a change to its name, relevant
addressee, address or fax number for the purposes of this clause 16,
provided that, such notice shall only be effective on:

 

(a)                                  the date specified
in the notice as the date on which the change is to take place;  or

 

(b)                                 if no date is
specified or the date specified is less than five Business Days after the date
on which notice is given, the date following five Business Days after notice of
any change has been given.

 

8

 

17.                               WAIVERS/PURCHASER’S RIGHTS AND REMEDIES

 

17.1                           No failure
or delay by the Purchaser in exercising any right or remedy provided by law
under or pursuant to this Agreement shall impair such right or remedy or
operate or be construed as a waiver or variation of it or preclude its exercise
at any subsequent time and no single or partial exercise of any such right or
remedy shall preclude any other or further exercise of it or the exercise of
any other right or remedy.

 

17.2                           The rights
and remedies of the Purchaser under or pursuant to this Agreement are
cumulative, may be exercised as often as such party considers appropriate and
are in addition to its rights and remedies under general law.

 

17.3                           The rights
and remedies of the Purchaser under this Agreement shall not be affected, and
the Vendor’s liabilities under this Agreement shall not be released, discharged
or impaired, by (i) Completion, (ii) any investigation made into the
affairs of any Group Company or any knowledge held or gained of any such
affairs by or on behalf of the Purchaser, (iii) the expiry of any
limitation period prescribed by law, or (iv) any event or matter
whatsoever, other than a specific and duly authorised written waiver or release
by the Purchaser.

 

18.                               GOVERNING LAW

 

This Agreement and the relationship between
the parties shall be governed by, and interpreted in accordance with, Hong Kong
law.

 

AS WITNESS this Agreement has been signed on behalf of the parties the day and
year first before written.

 

9

 

SCHEDULE 1

 

INTERPRETATION

 

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

 

Accounts means the audited balance sheet of each
Group Company as at the Accounts Date and the audited profit and loss account
of each Group Company in respect of the financial year ended on the Accounts
Date, together with any notes, reports, statements or documents included in or
annexed to them;

 

Accounts
Date means
31 December 2003;

 

Business
Day means
a day (excluding Saturdays) on which banks generally are open in Hong Kong for
the transaction of normal banking business;

 

Business IP means the registered and material
unregistered Intellectual Property Rights owned by either of the Group
Companies, for which purpose registered  includes
registrations and applications for registration;

 

China or the PRC means the
People’s Republic of China;

 

Companies Ordinance means
the Companies Ordinance (Chapter 32 of the Laws of Hong Kong);

 

Company means China
Unicom International Limited, the details of which are set out in Part A of Schedule 2;

 

Competing Business means a business which is carried on by either Group Company on the
date of this Agreement;

 

Completion means completion of the sale and
purchase of the Shares under this Agreement;

 

Costs means liabilities, losses, damages,
costs (including legal costs) and expenses (including taxation), in each case
of any nature whatsoever;

 

Group means the Company and the Subsidiary;

 

Group Company means the Company or the Subsidiary;

 

Hong Kong means the Hong Kong Special Administrative Region of the PRC;

 

HK$ means the lawful currency of Hong Kong;

 

10

 

Intellectual
Property Rights means patents,
trade marks, service marks, logos, get-up, trade names, internet domain names,
rights in designs, copyright (including rights in computer software) and moral
rights, database rights, semi-conductor topography rights, utility models,
rights in know-how and other intellectual property rights, in each case whether
registered or unregistered and including applications for registration, and all
rights or forms of protection having equivalent or similar effect anywhere in
the world;

 

Leased Properties means the properties leased by the Group;

 

Management Accounts means the unaudited balance sheet and profit and loss account of
each Group Company as at the Management Accounts Date;

 

Management
Accounts Date means June 30 2004;

 

Relevant Period means the period commencing from the date of Completion and ending
on the date on which (i) the shares or the American Depository Shares of
the Purchaser cease to be listed and traded on the New York Stock Exchange,
Hong Kong Stock Exchange and any other stock exchanges or (ii) China
United Telecommunications Corporation ceases to be a controlling shareholder of
the Purchaser or an associate of such controlling shareholder under the Rules Governing
the Listing of Securities on the Stock Exchange of Hong Kong Limited, whichever
is the earlier;

 

security
interest means
any security interest of any nature whatsoever including, without limitation,
any mortgage, charge, pledge, lien, assignment by way of security or other
encumbrance;

 

Shares means all the issued shares in the
capital of the Company;

 

Subsidiary means China Unicom USA Corporation, the details of which are set out
in Part B of Schedule 2;

 

subsidiary and
subsidiaries shall be construed in accordance with section 2
of the Companies Ordinance;

 

Tax
Warranties means the representations and warranties set out in Part B of Schedule 3;

 

Warranties means the representations and
warranties set out in Schedule 3.

 

1.2                                 In
this Agreement, unless the context otherwise requires:

 

(a)                                  the headings are
inserted for convenience only and shall not affect the construction of this
Agreement;

 

(b)                                 references to one gender include all
genders;

 

(c)                                  references to the singular shall
include the plural and vice versa; and

 

11

 

(d)                                 any statement qualified by the expression to
the best knowledge of the Vendor  or so
far as the Vendor is aware  or any similar expression shall be
deemed to include an additional statement that it has been made after due and
careful enquiry.

 

12

 

SCHEDULE 2

EACH GROUP COMPANY

 

PART A :
DETAILS OF THE COMPANY

 

	
  1.

  	
  Name:

  	
  China Unicom
  International Limited

  
	
   

  	
   

  	
   

  
	
  2.

  	
  Date of Incorporation:

  	
  24
  May 2000

  
	
   

  	
   

  	
   

  
	
  3.

  	
  Place of Incorporation:

  	
  Hong Kong

  
	
   

  	
   

  	
   

  
	
  4.

  	
  Registered Number:

  	
  717768

  
	
   

  	
   

  	
   

  
	
  5.

  	
  Registered Office:

  	
  25th
  Floor,

  One Peking Road, Tsim Sha Tsui,

  Kowloon, Hong Kong

  
	
   

  	
   

  	
   

  
	
  6.

  	
  Directors:

  	
  Hong Ming

  Dai Renfei

  
	
   

  	
   

  	
   

  
	
  7.

  	
  Secretary:

  	
  Kwickserve
  Limited

  
	
   

  	
   

  	
   

  
	
  8.

  	
  Authorised Capital:

  	
  HK$100,000
  divided into 100,000 shares of HK$1.00 each

  
	
   

  	
   

  	
   

  
	
  9.

  	
  Issued Capital:

  	
  100,000
  Shares

  
	
   

  	
   

  	
   

  
	
  10.

  	
  Registered Shareholders:

  	
  China Unicom
  (Hong Kong) Group Limited: 99,999 Shares

   

  China United
  Telecommunications Corp (HK) Limited: 1 Share (held on trust for the benefit
  of China Unicom (Hong Kong) Group Limited)

  
	
   

  	
   

  	
   

  
	
  11.

  	
  Accounting Reference Date:

  	
  31 December

  
	
   

  	
   

  	
   

  
	
  12.

  	
  Auditors:

  	
  PricewaterhouseCoopers

  
	
   

  	
   

  	
   

  
	
  13.

  	
  Subsidiaries:

  	
  China Unicom USA Corporation

  
	
   

  	
   

  	
   

  
	
  14.

  	
  Mortgages and Charges:

  	
  None

  

 

13

 

PART B :
DETAILS OF THE SUBSIDIARY

 

	
  1.

  	
  Name:

  	
  China Unicom
  USA Corporation (before conversion into a corporation, China Unicom USA LLC)

  
	
   

  	
   

  	
   

  
	
  2.

  	
  Date of Incorporation:

  	
  24 May 2002 (conversion effective on 17 April 2003)

  
	
   

  	
   

  	
   

  
	
  3.

  	
  Place of Incorporation:

  	
  California,
  USA

  
	
   

  	
   

  	
   

  
	
  4.

  	
  Registered Number:

  	
  2507822

  
	
   

  	
   

  	
   

  
	
  5.

  	
  Principal Executive Office:

  	
  624 South Grand Avenue

  
	
   

  	
   

  	
  Suite 900

  
	
   

  	
   

  	
  Los Angeles CA90017

  
	
   

  	
   

  	
  USA

  
	
   

  	
   

  	
   

  
	
  6.

  	
  Directors:

  	
  Hong Ming (President) /Xiao

  Jingming (Vice President)

  
	
   

  	
   

  	
   

  
	
  7.

  	
  Share capital:

  	
  Authorised number of shares: 10,000, of which 100 shares have been
  issued for US$10,000

  
	
   

  	
   

  	
   

  
	
  8.

  	
  Registered Shareholders:

  	
  China Unicom International Limited

  
	
   

  	
   

  	
   

  
	
  9.

  	
  Accounting Reference Date:

  	
  31 December

  
	
   

  	
   

  	
   

  
	
  10.

  	
  Auditors:

  	
  K T Leung, a California CPA

  
	
   

  	
   

  	
   

  
	
  11.

  	
  Subsidiaries:

  	
  None

  
	
   

  	
   

  	
   

  
	
  12.

  	
  Mortgages and Charges:

  	
  None

  

 

14

 

SCHEDULE 3

THE WARRANTIES

 

PART A : GENERAL

 

1.                                      EXHIBITS

 

1.1                                 Each
of the following Exhibits delivered by the Vendor to the Purchaser accurately
sets out the information required to be provided in that Exhibit and is
not misleading:

 

Exhibit A – Accounts:  The Accounts of each of the
last three (3) financial years (or, in the case of the Subsidiary, for the
period since its incorporation) ended on the Accounts Date and the Management
Accounts for the period from 1 January 2004 to the Management Accounts
Date.

 

Exhibit B – Licences:  A list of all licences,
permissions, authorisations and consents referred to in Warranty 5.1, copies of
which have been provided to the Purchaser.

 

Exhibit C – Employees: A list of employees of each Group Company as at the Management
Accounts Date.

 

Exhibit D – Insurances: A
summary of all policies of insurance of each Group Company referred to in
Warranty 6.4, copies of which have been provided to the Purchaser.

 

Exhibit E – Material Contracts:
A list of all agreements of the kinds described in Warranty 8.1 to which any
Group Company is a party, copies of which have been provided to the Purchaser.

 

Exhibit F – Intellectual Property:
A list, including details, of the Business IP.

 

Exhibit G – List of Properties:
A list, including brief details, of the Leased Properties occupied by each
Group Company.

 

Exhibit H – List of
Litigations: A list, including brief
details, of litigations, arbitrations or administrative proceedings to which
any Group Company is a party.

 

2.                                      THE VENDOR AND THE GROUP

 

2.1                                 Authorisations

 

The Vendor has
obtained all corporate authorisations and all other applicable governmental,
statutory, regulatory or other consents, licences, authorisations, waivers or
exemptions required to empower it to enter into and perform its obligations
under this Agreement.

 

15

 

2.2                                 The Company and the Shares

 

(a)                                  All
of the Shares are fully-paid or properly credited as fully-paid and the Vendor
or its nominee is the sole legal and beneficial owner of them free from all
security interests, options, equities, claims or other third party rights
(including rights of pre-emption) of any nature whatsoever.

 

(b)                                 The
information in respect of the Company set out in Part A
of Schedule 2 is true and accurate.

 

2.3                                 The Subsidiary

 

(a)                                  The
Company is the sole legal and beneficial owner of all of the issued share
capital of the Subsidiary, free from all security interests, options, equities,
claims or other third party rights (including rights of pre-emption) of any
nature whatsoever.

 

(b)                                 The
information in respect of the Subsidiary set out in Part B of Schedule 2
is true and accurate.

 

2.4                                 Other Interests

 

No Group Company owns or has any interest of
any nature whatsoever in any shares, debentures or other securities issued by
any undertaking other than the Subsidiary.

 

3.                                      FINANCIAL MATTERS

 

3.1                                 The Accounts

 

(a)                                  The
Accounts give a true and fair view of the state of affairs of each Group
Company as at the Accounts Date and of the results thereof for the financial
year ended on the Accounts Date.

 

(b)                                 Without
limiting the generality of paragraph (a);

 

(i)                                     the
Accounts of each Group Company either make full provision for or, disclose all
liabilities (whether actual, contingent or disputed and including financial
lease commitments and pension liabilities), all outstanding capital commitments
and all bad or doubtful debts of the relevant Group Company as at the Accounts
Date, in each case in accordance with generally accepted accounting principles;

 

(ii)                                  the
Accounts of each Group Company for each of the last three (3) financial
years (or in the case of the Subsidiary, for the period since its
incorporation) ended on the Accounts Date were prepared under the historical
convention, complied with the requirements of all relevant laws then in force
and with all statements of standard accounting practice (or financial reporting
standards) and generally accepted accounting principles then in force; and

 

16

 

(iii)                               the
results shown by the Accounts of each Group Company for each of the last three (3) financial
years (or in the case of the Subsidiary, for the period since its
incorporation) ended on the Accounts Date were not (except as therein
disclosed) affected by any extraordinary or exceptional item or by any other
factor rendering such results for all or any of such periods unusually high or
low.

 

3.2                                 Management Accounts

 

(a)                                  The
Management Accounts of each Group Company were properly prepared in a manner
consistent with that adopted in the preparation of its management accounts for
all periods ended during the twelve (12) months prior to the Management
Accounts Date.

 

(b)                                 Having
regard to the purpose for which such Management Accounts were prepared, they
are not misleading in any material respect and neither materially over-state
the value of the assets nor materially under-state the liabilities of any Group
Company as at the dates to which they were drawn up and do not materially over-state
the profits of any Group Company in respect of the periods to which they
relate.

 

3.3                                 Position since Accounts Date

 

(a)                                  Since
the Accounts Date there has been no material adverse change in the financial or
trading position or in the prospects of any Group Company and no event, fact or
matter has occurred which is likely to give rise to any such change.

 

(b)                                 Since
the Accounts Date:

 

(i)                                     the
business of each Group Company has been carried on in the ordinary and usual
course and no Group Company has made or agreed to make any payment other than
routine payments in the ordinary and usual course of trading;

 

(ii)                                  no dividend or other distribution has
been declared, paid or made by any Group Company (except for any dividends
provided for in the Accounts);

 

(iii)                               no share or loan capital has been
allotted or issued or agreed to be allotted or issued by any Group Company;

 

(iv)                              there has been no material change in
the level of borrowing or in the working capital requirements of the Company;

 

(v)                                 no
contract, liability or commitment (whether in respect of capital expenditure or
otherwise) has been entered into by any Group Company which is of a long term
or unusual nature or which involved or could involve an obligation of a
material nature or magnitude;

 

17

 

(vi)                              no Group Company
has (whether in the ordinary and usual course of business or otherwise)
acquired or disposed of, or agreed to acquire or dispose of:

 

(A)                              any business or any asset having a
value in excess of HK$7,000,000 on an individual basis; or

 

(B)                                businesses (each having a value in
excess of HK$1,000,000 on an individual basis) and assets (each having a
value in excess of HK$1,000,000 on an individual basis) having a
combined value in excess of HK$13,000,000;

 

(vii)                           no debtor
has been released by any Group Company on terms that it pays less than the book
value of its debt and no debt owing to any Group Company has been deferred,
subordinated or written off or has proved to any extent irrecoverable;

 

(viii)                        no Group Company has repaid any
borrowing or indebtedness in advance of its stated maturity.

 

3.4                                 Past Transactions in accordance with
applicable laws

 

During the
period in which it has been a subsidiary of the Vendor, all transactions
undertaken by each Group Company have been carried out in accordance with all
applicable laws and regulations.  No such
transaction constituted a transfer at an undervalue,
or an unlawful distribution, or unlawful financial assistance under the
Companies Ordinance by or to any Group Company. 
At no time during such period have the net assets of any Group Company
been less than the aggregate amount of its share capital and undistributable
reserves.

 

3.5                                 Accounting and other records

 

The statutory
books, books of account and other records of each Group Company are up-to-date
and have been maintained in accordance with all applicable laws and generally
accepted accounting practices on a proper and consistent basis and comprise
complete and accurate records of all information required to be recorded.

 

4.                                      DEBT POSITION

 

4.1                                 Debts owed to the Group

 

There are no debts owing to any Group Company
other than trade debts incurred in the ordinary and usual course of business
and bad or doubtful debts for which specific provision has been made in the
Accounts or the Management Accounts.

 

18

 

4.2                                 Debts owed by the Group

 

(a)                                  No
Group Company has outstanding any borrowing or indebtedness in the nature of
borrowing (including, without limitation, any indebtedness for moneys borrowed
or raised under any acceptance credit, bond, note, bill of exchange or
commercial paper, finance lease, hire purchase agreement, trade bills (other
than those on terms normally obtained), forward sale or purchase agreement or
conditional sale agreement or other transaction having the commercial effect of
a borrowing).

 

(b)                                 No
Group Company has received any notice to repay under any agreement relating to
any borrowing or indebtedness in the nature of borrowing which is repayable on
demand.

 

5.                                      REGULATORY MATTERS

 

5.1                                 Licences

 

(a)                                  Each
Group Company has obtained all licences, permissions, authorisations and
consents required for carrying on its business effectively in the places and in
the manner in which such business is now carried on and a list of all such
licences, permissions, authorisations and consents is set out in Exhibit B.

 

(b)                                 The
licences, permissions, authorisations and consents referred to in
paragraph 5.1(a) are in full force and effect, are not limited in
duration or subject to any unusual or onerous conditions and have been complied
with in all material respects.

 

(c)                                  No
Group Company is in breach of any terms or conditions attaching to any of the
licences, permissions, authorisations and consents referred to in
paragraph 5.1(a).

 

(d)                                 To
the best knowledge of the Vendor, there are no circumstances which indicate
that any of the licences, permissions, authorisations or consents referred to
in paragraph 5.1(a) will or are likely to be revoked or not renewed,
in whole or in part, in the ordinary course of events (whether as a result of
the acquisition of the Shares by the Purchaser or otherwise).

 

5.2                                 Compliance with Laws

 

(a)                                  Each
Group Company has conducted its business and corporate affairs in accordance
with its Memorandum and Articles of Association or equivalent and with all
applicable laws and regulations of Hong Kong, the PRC or any other
jurisdiction.

 

(b)                                 There
is no violation by any Group Company of, or default with respect to, any
statute, regulation, order, decree or judgment of any court or any governmental
or regulatory authority of Hong Kong, the PRC or any other jurisdiction.

 

19

 

6.                                      THE GROUP’S ASSETS

 

6.1                                 Ownership

 

(a)                                  All
the assets included in the Accounts or acquired since the Accounts Date (other
than assets sold in the ordinary course of business) are the absolute property
of the relevant Group Company.  Those
assets are not the subject of any security interest or any assignment, equity,
option, right of pre-emption, royalty, factoring arrangement, leasing or hiring
agreement, hire purchase agreement, conditional sale or credit sale agreement,
agreement for payment on deferred terms or any similar agreement or arrangement
(or any agreement or obligation, including a conditional obligation, to create
or enter into any of the foregoing).

 

6.2                                 Possession and Third Party Facilities

 

(a)                                  All
of the assets owned by each Group Company, or in respect of which any Group
Company has a right of use, are in the possession or under the control of that
Group Company.

 

(b)                                 Where
any assets are used but not owned by any Group Company or any facilities or
services are provided to any Group Company by any third party, there has not
occurred any event of default or any other event or circumstance which may
entitle any third party to terminate any agreement or licence in respect of the
provision of such facilities or services (or any event or circumstance which
with the giving of notice and/or the lapse of time and/or a relevant
determination would constitute such an event or circumstance).

 

6.3                                 Adequacy of Assets

 

(a)                                  The
assets of each Group Company and the facilities and services to which each
Group Company has a contractual right include all rights, properties, assets,
facilities and services desirable for the carrying on of the business of that
Group Company in the manner in which it is presently carried on.

 

(b)                                 No
Group Company depends in any material respect upon the use of assets owned by,
or facilities and services provided by, the Vendor.

 

6.4                                 Insurances

 

(a)                                  There
is set out in Exhibit D a summary of the insurances maintained by or
covering the Group.  Such insurances are
in full force and effect and, to the best knowledge of the Vendor, there are no
circumstances which might lead to any liability under such insurance being
avoided by the insurers or the premiums being increased and Completion will not
have the effect of terminating, or entitling any insurer to terminate, cover
under any such insurance.

 

20

 

(b)                                 No
claim is outstanding by any Group Company under any such policy of insurance
and, to the best knowledge of the Vendor, there are no
circumstances likely to give rise to such a claim.

 

7.                                      INTELLECTUAL PROPERTY AND INFORMATION
TECHNOLOGY

 

7.1                                 Business IP

 

(a)                                  Exhibit F
contains a complete and accurate list of the Business IP.  The owner or applicant for each Intellectual
Property Right specified in Exhibit F is correctly stated.

 

(b)                                 Either
of the Group Companies owns all of the rights and interests in, and has title
to, the Business IP.  The Business IP is
valid and subsisting.

 

(c)                                  Either
of the Group Companies is the registered proprietor of the registrations and
applications included in the Business IP, and the registrations and
applications are not subject to, or likely to be subject to, amendment,
challenge, removal or surrender.  There
is nothing which might prevent the applications from being granted.

 

(d)                                 No
compulsory licences, licences of right or anything similar have been, or are
likely to be, granted for the Business IP.

 

(e)                                  All
application, filing, registration, renewal and other fees for the Business IP
have been paid.

 

(f)                                    There
are no licences of Intellectual Property Rights granted to the Group or granted
by the Group to third parties.

 

7.2                                 No Infringement by Group

 

(a)                                  None
of the operations of the Group infringes, or is likely to infringe, the
Intellectual Property Rights of a third party.

 

(b)                                 No
claim has been made by a third party which alleges that the operations of the
Group infringe, or are likely to infringe, the Intellectual Property Rights of
a third party or which otherwise disputes the right of a Group Company to use
the Intellectual Property Rights owned or used by the Group.  The Vendor is not aware of any circumstances
likely to give rise to a claim.

 

7.3                                 No Infringement by Third Parties

 

(a)                                  No
third party is infringing, or is likely to infringe, the Intellectual Property
Rights owned or used by the Group.

 

(b)                                 No
claim has been made by the Group which alleges that a third party is
infringing, or is likely to infringe, the Intellectual Property Rights owned or
used by the Group or which otherwise disputes the right of a third party to use
the Intellectual Property Rights owned or used by the third party.  The Vendor is not aware of any circumstances
likely to give rise to a claim.

 

21

 

(c)                                  No
Group Company has acquiesced in the unauthorised use by a third party of the
Intellectual Property Rights owned or used by the Group.

 

(d)                                 There
have been no acts or omissions which would prejudice the rights of the
Purchaser to enforce the Intellectual Property Rights owned or used by the
Group.  In particular, transactions
relating to them have been registered promptly, and within applicable time
limits.

 

7.4                                 Confidential Information

 

(a)                                  Confidential
information of the Group, or which has been used by the Group, has been kept
confidential and has not been disclosed to third parties except in the ordinary
course of business.

 

(b)                                 None
of the operations of the Group involves the unauthorised use of confidential
information disclosed in circumstances which might entitle a third party to
make a claim against a Group Company.

 

(c)                                  Except
for agreements entered into in the ordinary course of business, the Group is
not subject to any obligation which restricts the free use or disclosure of
confidential information used by the Group.

 

7.5                                 Adequacy of Intellectual Property Rights

 

The Group
owns, or has licensed to it, all Intellectual Property Rights which are
required to carry on the Group’s business as it is presently carried on, and in
accordance with the current documented plans of the Vendor for the Group’s
business.

 

8.                                      CONTRACTUAL MATTERS

 

8.1                                 Material Contracts

 

Other than as
set out in Exhibit E, there is not outstanding any agreement or
arrangement to which either of the Group Companies is a party:

 

(a)                                  which, by virtue of the acquisition
of the Shares by the Purchaser or other performance of the terms of this
Agreement, will result in:

 

(i)                                     any other party being relieved of any
obligation or becoming entitled to exercise any right (including any right of
termination or any right of pre-emption or other option); or

 

(ii)                                  any
Group Company being in default under any such agreement or arrangement or
losing any benefit, right or licence which it currently enjoys or in a
liability or obligation of any Group Company being created or increased;

 

(b)                                 which was entered into otherwise than
by way of bargain at arm’s length;

 

22

 

(c)                                  which
requires (or confers any right to require) the allotment or issue of any
shares, debentures or other securities of any Group Company now or at any time
in the future;

 

(d)                                 which establishes any joint venture,
consortium, partnership or profit (or loss) sharing agreement or arrangement;

 

(e)                                  which involves or is likely to
involve obligations or restrictions of the Company of an unusual or exceptional
nature or not in the ordinary and usual course of business;

 

(f)                                    which establishes any material
agency, distributorship, marketing, purchasing, manufacturing or licensing
agreement or arrangement;

 

(g)                                 which is any other agreement or
arrangement having or likely to have a material effect on the financial or
trading position or prospects of any Group Company.

 

8.2                                 Defaults

 

(a)                                  No
Group Company is in default under any agreement to which it is a party and, to the
best knowledge of the Vendor, there are no circumstances likely to give rise to
such a default.

 

(b)                                 To
the best knowledge of the Vendor, no party with whom any Group Company has
entered into any agreement or arrangement is in default under it and there are
no circumstances likely to give rise to such a default.

 

9.                                      LITIGATION AND INVESTIGATIONS

 

9.1                                 Litigation

 

(a)                                  Save
as disclosed in Exhibit H, no Group Company is a plaintiff or defendant in
or otherwise a party to any litigation, arbitration or administrative
proceedings which are in progress or threatened or pending by or against or
concerning any Group Company or any of its assets.  No governmental or official investigation or
inquiry concerning any Group Company is in progress or pending.

 

(b)                                 The
Vendor is not aware of any circumstances which are likely to give rise to any
such proceeding, investigation or inquiry as is referred to in
paragraph (a).

 

10.                               DIRECTORS AND EMPLOYEES

 

10.1                           Employees

 

Exhibit C
sets out or refers to a list of all employees of each Group Company as at the
Management Accounts Date.

 

23

 

10.2                           Agreements

 

There is not
in existence any written or unwritten contract of employment with a director or
an employee of any Group Company (or any, contract for services with any
person) which cannot be terminated by three (3) months’ notice or less
without giving rise to a claim for damages or compensation (other than a
statutory redundancy payment or statutory compensation for unfair dismissal).

 

10.3                           Compliance

 

Each Group
Company has in relation to each of its employees (and so far as relevant to
each of its former employees) complied in all material respects with all
statutes, regulations, codes of conduct, collective agreements, terms and
conditions of employment, orders and awards relevant to their terms and
conditions of service or to the relations between it and its employees (or
former employees, as the case may be).

 

10.4                           Disputes

 

No dispute has
arisen between any Group Company and a material number or category of its
employees and there are no present circumstances which are likely to give rise
to any such dispute.

 

10.5                           Incentive Schemes

 

Other than
discretionary bonus and sales commissions, no Group Company has (nor is any
Group Company proposing to introduce) any share incentive scheme, share option
scheme or profit sharing or other such incentive scheme for all or any of its
directors or employees.

 

10.6                           Payments on Termination

 

(a)                                  Except
to the extent (if any) to which provision or allowance has been made in the
Accounts no outstanding liability has been incurred by any Group Company for
breach of any contract of employment or for services or redundancy payments,
protective awards, compensation for wrongful dismissal or unfair dismissal or
for failure to comply with any order for the reinstatement or re-engagement of
any employee or for any other liability accruing from the termination of any
contract of employment or for services.

 

(b)                                 No
gratuitous payment has been made or benefit given (or promised to be made or
given) by any Group Company in connection with the actual or proposed
termination or suspension of employment or variation of any contract of
employment of any present or former director or employee.

 

24

 

11.                               INSOLVENCY ETC.

 

11.1                           No order
has been made, petition presented or meeting convened for the purpose of
considering a resolution for the winding up of any Group Company or for the
appointment of any provisional liquidator. 
No steps have been taken by any person with a view to the appointment of
an administrator (whether out of court or otherwise), and no administration
order has been made, in relation to any Group Company.  No receiver (including any administrative receiver)
has been appointed in respect of the whole or any part of any of the property,
assets and/or undertaking of any Group Company.

 

11.2                           No
distress, distraint, charging order, garnishee order, execution or other
process has been levied or applied for in respect of the whole or any part of
any of the property, assets and/or undertaking of any Group Company.

 

25

 

PART B :  TAX WARRANTIES

 

1.                                      DEFINITIONS

 

In this Part B of Schedule 3 the
following expressions shall have the following meanings:

 

event includes (without
limitation) the death or the winding up or dissolution of any person, and any
act, transaction or omission whatsoever, and any reference to an event
occurring on or before a particular date shall include events which for tax
purposes are deemed to have, or are treated or regarded as having, occurred on
or before that date;

 

relief includes, unless the context otherwise requires, any allowance,
credit, deduction, exemption or set-off in respect of any tax or relevant to
the computation of any income, profits or gains for the purposes of any tax, or
any repayment of or saving of tax (including any repayment supplement or
interest in respect of tax), and:

 

(a)                                  any reference to
the use or set
off of relief shall be construed accordingly and shall include
use or set off in part; and

 

(b)                                 any reference to
the loss of a relief shall include the
absence, non-existence or cancellation of any such relief, or to such relief
being available only in a reduced amount;

 

tax includes, without
limitation, (a) taxes on income, profits and gains, and (b) all other
taxes, levies, duties, imposts, charges and withholdings of any nature,
including any excise, property, sales, transfer, franchise and payroll taxes
and any national insurance or social security contributions, and any payment
whatsoever which the relevant person may be or become bound to make to any
person as a result of the discharge by that person of any tax which the
relevant person has failed to discharge, together with all penalties,
additions, charges and interest relating to any of the foregoing or to any late
or incorrect return in respect of any of them, and regardless of whether such
taxes, levies, duties, imposts, charges, withholdings, penalties, additions and
interest are chargeable directly or primarily against or attributable directly
or primarily to the relevant person or any other person and of whether any
amount in respect of them is recoverable from any other person; and

 

tax authority means any
taxing or other authority (whether within or outside the Hong Kong) competent
to impose any tax liability.

 

26

 

2.                                      GENERAL/COMPLIANCE

 

2.1                                 Last Accounts

 

All
liabilities, whether actual, deferred, contingent or disputed, of each Group
Company for tax measured by reference to income, profits or gains earned,
accrued or received on or before the Accounts Date or arising in respect of an
event occurring or deemed to occur on or before the Accounts Date are fully
provided for or (as appropriate) disclosed in the Accounts.  All other warranties relating to specific tax
matters set out in this Schedule are made without prejudice to the
generality of this paragraph.

 

2.2                                 Position since Accounts Date

 

Since the Accounts
Date:

 

(a)                                  no
Group Company has been involved in any transaction which has given or may give
rise to a liability to tax on any Group Company (or would have given or might
give rise to such a liability but for the availability of any relief) other than
tax in respect of normal trading income or receipts of the Group Company
concerned arising from transactions entered into by it in the ordinary course
of business;

 

(b)                                 no
payment has been made by any Group Company which will not be deductible for the
purposes of corporation tax (or any corresponding tax on profits in any
relevant foreign jurisdiction), either in computing the profits of that Group
Company or in computing the corporation tax or corresponding tax chargeable on
it;

 

(c)                                  no
disposal has taken place or other event occurred which has or may have the
effect of crystallising a liability to tax which, if such disposal or event had
been planned or predicted at the Accounts Date, should have been reflected in
the provision for deferred tax contained in the Accounts; and

 

(d)                                 no event has occurred which has or
may have the effect of prejudicing any relief taken into account in computing
or eliminating the provision for deferred tax contained in the Accounts.

 

2.3                                 Continuing commitments

 

All sums payable
under any obligation incurred by any Group Company prior to Completion and
which will continue to bind any Group Company after Completion have been and
will continue to be deductible for the purposes of corporation tax (or any
corresponding tax on profits in any relevant foreign jurisdiction), either in
computing the profits of any Group Company or in computing the corporation tax
or corresponding tax chargeable on it.

 

27

 

2.4                                 Returns etc.

 

Each Group
Company has duly, and within any appropriate time limits, made all returns,
given all notices and supplied all other information required to be supplied to
all relevant tax authorities and has maintained all records required to be
maintained for tax purposes; all such information was and remains complete and
accurate in all material respects and all such returns and notices were and
remain complete and accurate in all material respects and were made on the
proper basis and do not, and so far as the Vendor is aware are not likely to,
reveal any transactions which may be the subject of any dispute with, or any
enquiry raised by, any tax authority.

 

2.5                                 Disputes, investigations

 

No Group
Company is involved in any current dispute with any tax authority or is or has
in the last six years been the subject of any investigation, enquiry, audit or
non-routine visit by any tax authority. 
So far as the Vendor is aware in relation to each Group Company there is
no planned investigation, enquiry, audit or non-routine visit by any tax
authority and there are no facts which might cause such an investigation,
enquiry, audit or non-routine visit to be instituted.

 

2.6                                 Penalties, interest

 

Within the
past six years, no Group Company nor any director or officer of any Group
Company (in his capacity as such) has paid or become liable to pay, and there
are no circumstances by reason of which it or they may become liable to pay to
any tax authority, any penalty, fine, surcharge or interest in respect of tax
(including in respect of any failure to make any return, give any notice or
supply any information to any relevant tax authority, or any failure to keep or
preserve any records or to pay tax on the due date for payment).

 

2.7                                 Consents, clearances

 

No transaction
in respect of which any consent or clearance was required or sought from any
tax authority has been entered into or carried out by any Group Company without
such consent or clearance having first been properly obtained and all
information supplied to any tax authority or other appropriate authority in
connection with any such consent or clearance fully and accurately disclosed
all facts and circumstances material to the giving of such consent or
clearance.  Any transaction for which
such consent or clearance was obtained has been carried out only in accordance
with the terms of such consent or clearance and the application on which the
consent or clearance was based and at a time when such consent or clearance was
valid and effective.  No facts or
circumstances have arisen since any such consent or clearance was obtained
which would cause the consent or clearance to become invalid or ineffective.

 

28

 

2.8                                 Special arrangements

 

No tax
authority has operated or agreed to operate any special arrangement (being an
arrangement which is not based on relevant legislation or any published
practice) in relation to any Group Company’s affairs.

 

2.9                                 Withholdings

 

Each Group
Company has made all deductions and retentions of or on account of tax as it
was or is obliged or entitled to make and all such payments of or on account of
tax as should have been made to any tax authority in respect of such deductions
or retentions.

 

3.                                      EMPLOYEES

 

All amounts
payable to any tax authority in respect of any employee (including any tax
deductible from any amounts paid to an employee, and any national insurance,
social fund or similar contributions required to be made in respect of
employees) due and payable by any Group Company up to the date hereof have been
duly paid and each Group Company has made all such deductions and retentions as
should have been made under applicable laws or regulations.

 

4.                                      COMPANY RESIDENCE/PERMANENT
ESTABLISHMENT

 

4.1                                 Each
Group Company is and has at all times been resident for tax purposes in its
place of incorporation and is not and has not at any time been treated as
resident in any other jurisdiction for any tax purpose (including any double
taxation arrangement).  No Group Company
is subject to tax in any jurisdiction other than its place of incorporation by
virtue of having a permanent establishment or other place of business in that
jurisdiction.

 

4.2                                 No
Group Company is liable for any tax as the agent of any other person or
business or constitutes a permanent establishment of any other person, business
or enterprise for any tax purpose.

 

5.                                      STAMP DUTY/CAPITAL DUTY

 

5.1                                 All
documents in the possession or under the control of each Group Company or to
the production of which any Group Company is entitled which establish or are
necessary to establish the title of any Group Company to any asset, or by
virtue of which any Group Company has any right, have been duly stamped and any
applicable stamp duties or similar duties or charges in respect of such
documents have been duly accounted for and paid.

 

5.2                                 All
duties, fees and penalties payable in respect of the capital of each Group
Company (including any premium over nominal value at which any share was
issued) have been duly accounted for and paid, and there are no circumstances
under which any relief obtained against payment of any such amount could be
withdrawn.

 

29

 

PART C :  PROPERTY WARRANTIES

 

1.                                      GENERAL

 

1.1                                 The
Leased Properties comprise all the land and premises owned, rented, occupied or
otherwise used by any Group Company or in which any Group Company has any right
and interest.

 

1.2                                 All
the estate, interest, right and title of the group companies in, under, over or
in respect of any land or premises and the information set out in Exhibit G
is true, accurate and complete.

 

2.                                      OWNED PROPERTIES

 

2.1                                 There
are no properties owned by the Group.

 

3.                                      LEASED PROPERTIES

 

3.1                                 A
list of all tenancy agreements or leases entered into by the Group Companies in
respect of the Leased Properties has been disclosed in Exhibit G and the
information set out therein is true, accurate and complete.

 

3.2                                 The
Group Companies have paid the rent, rates and all other charges for which the
tenant is responsible under the tenancy agreements or leases of the Leased
Properties up to the last payment date and have observed and performed the
covenants on the part of the tenant and the conditions contained in the tenancy
agreements or leases and all such tenancies or leases are valid, binding and in
full force.

 

3.3                                 All
leasing permits, licences, consents and approvals required from any government
authorities, landlords, superior landlords and mortgagees (where necessary) in
respect of any of the tenancies or leases of the Leased Properties have been
obtained and the covenants on the part of the landlord and/or the tenant
contained in such permits, licences, consents and approvals (if any) have been
duly performed and observed.

 

3.4                                 No
notice affecting any of the Leased Properties or their use has been given or
served by any government authority or any other authority or person or body and
there are no circumstances which are likely to result in the forfeiture of any
of the tenancies or leases in respect of the Leased Properties.

 

3.5                                 Except
in respect of the lease of Shop No. 5, Ground Floor, Pakpolee Commercial
Centre, No. 1A, Sai Yeung Choi Street South, Kowloon which is being
renewed, no rent is currently under review.

 

30

 

	
  SIGNED by:

  	
  /s/ Zhao Le

  	
   

  	
   

  
	
  for and on behalf of

  	
   

  
	
  CHINA UNICOM (HONG
  KONG)

  	
   

  
	
  GROUP LIMITED

  	
   

  

 

 

	
  SIGNED by:

  	
  /s/ Wang Jianzhou

  	
   

  	
   

  
	
  for and on behalf of

  	
   

  
	
  CHINA UNICOM LIMITED

  	
   

  

 

31

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