Document:

exv10w17

Exhibit 10.17

Equity Transfer Contract

     This Equity Transfer Contract (this “Contract”) dated as of January 12, 2011, is entered
into by and between:

     RAE Systems (Asia) Limited , a company established under the laws of Hong Kong, the People’s
Republic of China (“China” or “PRC”), with its legal address being at Units 1516-18, 15/F Delta
House, 3 On Yiu Street, Shatin, N.T., Hong Kong (the “Transferor”); and

     Shenyang Research Institute of China Coal Research Institute , an enterprise established and
existing under and laws of the People’s Republic of China, with its legal address being at 11
Binhe Road, Fushun Economic Development Zone (the “Transferee”).

     The Transferor and the Transferee here in after each a “Party” and collectively the
“Parties”.

     WHEREAS,

     (A) RAE Coal Mine Safety Instruments (Fushun) Co. Ltd. (the “Company”) is a Sino-foreign equity joint venture duly
established and validly existing under the laws of the PRC, in which the Transferor holds 70% of the equity interest and Liaoning Coal Industry(Group) Co., Ltd.
 (a company established and existing under the laws of the PRC, with its legal address being at 13 Xiannongtan Road, Shenhe District, Shenyang;
“Liaoning Coal Group”) holds 30% of the equity interest;

     (B) The Transferor desires to transfer to the Transferee, and the Transferee
desires to purchase from the Transferor, 70% of the equity interest held by the
Transferor in the Company, which has been approved by the board of directors of the
Company and by Liaoning Coal Group, the competent industrial regulators and the
relevant governmental authorities, and in respect of which Liaoning Coal Group has
waived its right of first refusal; and

     (C) Upon the consummation of the transfer of the equity interest as
described above, the Transferee shall become the registered owner of the entire
interest representing 70% of the registered capital of the Company, and the Company
shall be converted from a Sino-foreign equity joint venture into a PRC domestic
company.

     NOW, THEREFORE, it is agreed as follows:

Article 1 Equity Transfer

	1.1	 	Subject to the terms and conditions set forth herein, the Transferor agrees to transfer
to the Transferee, and the Transferee agrees to purchase from the Transferor, the 70% of the
equity interest in the Company, together with all the rights, title, interests, liabilities
and obligations associated therewith (the “Subject Equity”).

Article 2 Purchase Price

	2.1	 	The Parties agree that the Subject Equity is here by transferred for free.

 Article 3 Rights and Obligations of the Parties

 

 

	3.1	 	The transfer of the Subject Equity shall be consummated on the date (the “Closing Date”) on
which the transfer of the Subject Equity is approved by the applicable Authority
of Commerce. The Transferor and the Transferee shall use their best efforts to ensure the transfer
of the Subject Equity is consummated on or before March 31, 2011. In connection therewith, each of
the Transferor and the Transferee shall take all steps necessary and prepare all documents required
to consummate the transfer of the Subject Equity as soon as practicable, including the following
actions:
	 
	(a)	 	to cause Liaoning Coal Group to deliver to the Transferor a termination agreement,
substantially in the form and substance attached hereto as Annex A;
	 
	(b)	 	to obtain the approval of the competent Authority of Commerce for the transfer of the Subject Equity and the change in the
Company name contemplated by Section 3.6 (the “Name Change”);
	 
	(c)	 	to clear the tax refund issues with the competent tax authorities as contemplated by Section 3.2; and
	 
	(d)	 	to make the registrations and filings with the competent governmental authorities, including
the relevant State Administration for Industry and Commerce, the Administration of Foreign
Exchange and the tax authorities, reflecting the transfer of the Subject Equity and the Name
Change.
	 
	3.2	 	The Transferee shall bear all the fees, taxes, duties,  costs and expenses incurred for
obtaining the governmental approvals and registrations provided in Section 3. 1 (b) to (d),
whether or not the Transferor is required by law or otherwise to pay such fees, taxes,
duties, costs and expenses, including any and all tax benefits that the Company has enjoyed
but is required to refund to the tax authorities due to fact that the Company is converted
into a PRC domestic company upon the transfer of the Subject Equity.
	 
	3.3	 	As of the date of this Contract, the Parties shall ensure and procure that the Beijing
Business Unit established by the Company in Beijing and RAE-KLH Technologies (Beijing) Co.,
Ltd. (“RAE-KLH”) will terminate the lease agreement between them pursuant to which Beijing
Business Unit leases from RAE-KLH the office premises and that Beijing Business Unit shall
entirely vacate the office premises under the said lease within a reasonable period agreed
between the Beijing Business Unit and RAE-KLH.
	 
	3.4	 	Following the execution of this Contract, the Parties shall promptly cause the Company to
terminate and immediately cease the performance of any and all of the sales agreements,
agency agreements, distribution agreements, supply agreements, or any other agreements by and
between the Company on one hand and the Transferor or any of its affiliates (including
RAE-KLH) on the other hand for or in connection with the sale of the products of the Company
or the products of the Transferor or any of its affiliates.
	 
	3.5	 	The Transferee undertakes that it shall provide all the facilities to assist the Transferor on
an unconditional-basis to complete in a timely fashion the

 

 

	 	 	preparation of various financial statements and various audits in respect of the Company
for period ending on the Closing Date, including the audit in accordance with the US
generally accepted accounting principles, the audit under the Sarbanes-Oxley Act (SOA) and
the review under the Foreign Corrupt Practices Act (FCPA). The Transferee shall (including
causing the Company to) assist the Transferor or any of its affiliates to complete in a
timely fashion, within sixty (60) days at the request from the Transferor, the preparation,
audit and review of the financial statements and audits described in this Section 3.5.
	 
	3.6	 	Following the date on which the amendment registration of the Company’s business license is
completed with the competent Administration for Industry and Commerce reflecting the
transfer of the Subject Equity (the “Amendment Registration Date”), the Transferee shall,
and shall cause the Company, Liaoning Coal Group and their affiliates to, immediately cease
the use of any words or marks containing “RAE” or  in connection with its business
operations or in their company names.
	 
	3.7	 	On the date hereof, the Transferor shall withdraw the current General Manager of the Company
Chen Shizhong, the current Chief HR Officer Liu Xiaohong, the current manager of sales
administration center of the Company Hu Anhua and the current Chief Financial Officer of the
Company Chang Hong from the Company, all of whom were appointed by the Transferor to the
Company, and cause each of the foregoing persons to submit a resignation to the Company. As
from the date hereof, the employment of the relevant personnel shall be terminated by the
Company and they shall cease to be paid any compensation or benefit by the Company.
	 
	3.8	 	From the date hereof until the Amendment Registration Date, the Transferor shall have the
right to keep the company seal, legal person seal, seal for contract execution, and special
financial seal that the Company has as of the date hereof, and supervise the use
thereof. Within five business days following the Amendment Registration Date, the Transferor’s
designated persons and the Transferee’s designated persons shall jointly surrender to the
competent government authority for destruction all such seals; provided, however, that the
Company shall on the same date deliver to the Transferor a confirmation letter, substantially
in the form and substance attached hereto as Annex B, which confirmation letter shall be
signed by the new legal representative of the Company then appointed by the Transferee.
	 
	3.9	 	The Transferee shall provide sufficient funds to the Company on the date hereof to support
the Company’s on-going operations during the period from the date hereof until the Amendment
Registration Date. The Parties hereby acknowledge and confirm that the Transferor has no
obligation to provide any funds to the Company.
	 
	3.10	 	The Contract for Sino-foreign Equity Joint Venture (the “JVC”), dated December 10, 2006,
between the Transferor and Liaoning Coal Group shall be terminated on the Closing Date.

 

 

	3.11	 	On the Closing Date, the Articles of Association of the Company shall be
amended to the effect that the amended Articles of Association are consistent with the
provisions of this Contract.

Article  4 Representations and Warranties

	4.1	 	Each Party represents and warrants to the other Party that:

	 	(1)	 	It has full power and authority (including the internal corporate approvals and
required governmental approvals, other than the governmental approvals and
registrations provided in Section 3.1(b) to (d)) to execute and perform this
Contract;
	 
	 	(2)	 	The execution, delivery and performance of this Contract will not violate in
any way its business license, certificate of incorporation, bylaws, or any
applicable law, regulation, order, authorization, or approval, or any provisions of
any contractual arrangement to which it is a party or otherwise binding upon it;
	 
	 	(3)	 	Its signing representative has been fully authorized to execute this Contract
on its behalf;
	 
	 	(4)	 	There does not exist any action, arbitration or any other legal or
administrative proceedings whether on-going, pending or to its knowledge
threatened, that may affect the performance of its obligations hereunder; and
	 
	 	(5)	 	It shall execute all necessary documents and take all necessary actions to
consummate the transfer of the Subject Equity or other matters contemplated
hereunder.

	4.2	 	The Transferor undertakes to the Transferee that the Subject Equity is not subject to any
mortgage or pledge, or any right of first refusal of any third party other than those set
forth in the articles of association of the Company.
	 
	4.3	 	(a) The Transferor represents that except as (i) provided in the audit report as of December
31, 2010 prepared by the Transferee’s auditor or the financial statements of the Company or
otherwise disclosed by the Transferor to the Transferee before March 31, 2011, (ii) known to,
or should have been discovered by, the Transferee prior to the Closing Date, (iii) known to
any director or managerial member of the Company appointed by Liaoning Coal Group prior to the
Closing Date, or (iv) incurred in the ordinary course of business of the Company, the Company
does not have any material non-disclosed liabilities as of December 31, 2010 (the “Material
Non-disclosure Liabilities”). The foregoing representation of the Transferor shall remain
effective until the second anniversary of the date hereof (the “Representation Period”),
	 
	 	 	(b)Subject to Section 4.3(d), the Transferor shall indemnify the Company for and against
any Material Non-disclosed Liabilities on a dollar-for-dollar basis; provided,
however, that no claim may be asserted nor may any action be commenced against the
Transferor pursuant to this Section 4.3, unless the Transferor on or prior to the
expiration of the Representation Period receives from the Transferee non-appealable, final
judgments or arbitral awards

 

 

	 	 	granted by a competent court or arbitral tribunal evidencing the existence of such Material
Non-disclosed Liabilities of the Company. For the purpose of this Section 4. 3(b), within the
Representation Period, the Transferor shall, upon the Transferee’s reasonable request, assist
the Transferee in connection with the litigation and arbitration proceedings brought by the
Company against any third parties with respect to the Material Non-disclosed Liabilities (the
“Litigation Assistance”). Notwithstanding any other provisions contained in this
Contract, the Transferee acknowledges and agrees that this indemnification provision of this
Section 4.3 shall be the sole and exclusive remedies of the Transferee for any breach by the
Transferor of this Section 4.3.
	 
	 	 	(c) Before the Company has paid in full the account payables to RAE KLH
and RAE Systems (Shanghai) Co., Ltd.  “RAE
Shanghai”) under the Settlement Agreement, dated as of January 12, 2011, by and
among the Transferor, the Transferee, the Company, RAE-KLH, and RAE
Shanghai, the Transferor shall have the right to set off any of its liabilities under
this Section 4.3 against the account payables then outstanding under the
Settlement Agreement. On and after the Company has paid in full the account
payables to RAE KLH and RAE Shanghai under the Settlement Agreement, the
Transferee shall have the right to bring claims against RAE KLH and RAE
Shanghai for indemnification pursuant to this Section 4.3.
	 
	 	 	(d) Notwithstanding anything to the contrary contained in this Contract, the total
amount of (i) losses which may be recovered from the Transferor and its
affiliates under this Section 4.3 and (ii) the expenses that the Transferor and its
affiliates may incur in connection with its provision of the Litigation Assistance
shall not exceed RMB 2 million.

Article 5 Confidentiality

	5.1	 	The terms of this Contract, the transactions contemplated hereunder, the negotiations
prior to the execution of this Contract and the contents of any other agreements entered into
pursuant to this Contract, shall be confidential information and may not be disclosed to any
person other than those employees, directors, contractors, representatives, counsels or
financial advisors of either Party or actual or prospective acquirers, lenders or investors,
for the need of the performance of their duties and responsibilities or a contract obligation
requirement, which disclosure shall be limited to the extent as necessary for the purpose of
this Contract.
	 
	5.2	 	The foregoing confidentiality and non-disclosure obligations shall not apply to any information
required to be disclosed by either Party pursuant to any laws, legal processes, or the orders
or requirements of any competent court or any other governmental authority, or any rules or
mandatory requirements published by any stock exchange on which the securities of the
Transferor or its holding company are listed or any law applicable to such securities.

Article 6 Breach of Contract

 

 

	6.1	 	In case either Party fails to fully perform or suspends the performance of any of its
material obligations hereunder, the other party (the “Non-breaching Party”) shall have the
right to notify the breaching Party in writing to request the breaching Party to cure such
breach within fourteen (14) days as of the receipt of such notice.
	 
	6.2	 	The breaching Party shall fully indemnify and hold the Non-breaching Party harmless against
any and all the claims, obligations, damages, losses, costs, and expenses (including
reasonable attorney’s fees) of any kind or nature, arising from such breach of breaching
Party.
	 
	6.3	 	Notwithstanding anything to the contrary herein, neither Party shall be liable for any
indirect or consequential damages incurred by the other Party arising from the performance of
or failure to perform this Contract.

Article 7 Termination

	7.1	 	Prior to the Closing Date, this Contract may be terminated:

	 	(1)	 	by the mutual written consent of both Parties;
	 
	 	(2)	 	by either Party if the Settlement Agreement is suspended, terminated, or amended for any
reason or cause prior to the Closing Date (other than any amendment made pursuant to written
consent of the Transferor); or
	 
	 	(3)	 	by either Party if the Parties have failed to obtain the
governmental approval provided in Section 3.1 (b) within six (6) months following the date
hereof.

	7.2	 	In the event of termination of this Contract as provided in Section 7.1, this Contract shall
forthwith become void; provided, that Section 3.2 and Articles 5, 6 and 8 shall survive.
Upon such termination, there shall be no liability on the part of any Party hereto except (a)
as set forth in Section 3.2 and Articles 5, 6 and 8 and (b) that nothing herein shall
relieve any Party from liability for any breach of this Contract.

Article 8 Dispute Resolution

	8.1	 	This Contract shall be governed by and interpreted pursuant to the laws of the PRC.
	 
	8.2	 	The Parties agree that any dispute or discrepancy arising from or in connection with the
execution or performance of this Contract shall be resolved through consultations between the
Parties. In case any dispute fails to be resolved through such consultations within thirty
(30) days after either Party notifies
the other for consultations, such dispute shall be submitted to China International Economic
and Trade Arbitration Commission (“CIETAC”) for confidential and binding arbitration in
Beijing in accordance with the arbitration rules of CIETAC in effect on the date of the
submission of such dispute. The Parties further agree that the parties to the arbitration
shall each pay the fees and expenses (including without limitation, attorney’s fees) incurred
by it in connection with the arbitration.

 

 

	8.3	 	The arbitral tribunal shall consist of three (3) arbitrators, with one (1) to be
appointed by each of the claiming Party and the responding Party, and the third arbitrator
to be jointly appointed by the first two arbitrators. All the proceedings in the arbitration
shall be conducted in both Chinese and English. The Parties hereby agree that the arbitral
award made by such arbitral tribunal shall be final and binding upon both Parties.
	 
	8.4	 	Other than those matters in dispute, the Parties shall continue to perform their respective
obligations hereunder when the dispute is under resolution in accordance with this Article 8.

Article 9 Miscellaneous

	9.1	 	The transfer of the Subject Equity shall take effect when this Contract is approved by the
competent Authority of Commerce.
	 
	9.2	 	Neither Party may assign this Contract or any of its respective rights or obligations hereunder
without consent of the other Party.
	 
	9.3	 	To the extent permitted by PRC law, no failure or delay by either Party to exercise any rights
under this Contract shall operate as a waiver thereof, nor shall any single or partial
exercise of any other rights preclude any further exercise thereof.
	 
	9.4	 	Unless otherwise specified in this Contract or any other agreement or contract referred to
herein, this Contract shall constitute the entire agreement of the Parties with respect to
the subject matter hereof and supersede all prior expression of intention or understanding
between the Parties in respect of the subject matter hereof. This Contract may not be
modified or amended unless by written instrument executed by the authorized representatives
of the Parties.
	 
	9.5	 	If any provision of this Contract is held to be invalid, illegal or incapable of being
enforced by any law or public policy, all other provisions of this Contract shall
nevertheless remain in full force and effect for so long as the economic or legal substance
of the transactions contemplated by this Contract is not affected in any manner materially
adverse to either Party. Upon such determination that any provision is invalid, illegal or
incapable of being enforced, the Parties shall negotiate in good faith to modify this
Contract so as to effect the original intent of the parties as closely as possible in an
acceptable manner in order that the transactions contemplated by this Contract are
consummated as originally contemplated to the greatest extent possible.
	 
	9.6	 	This Contract shall be executed in both Chinese and English with equal force and effect.

 

 

	9.7	 	All notices and written communications from one Party to the other under this Contract shall be
written in English or Chinese and shall be sent by courier service or by facsimile to the
respective Party at the following addresses, unless changed by a Party in a written notice
given to the other Party, and shall be deemed to have been given seven (7) days after deposit
with a courier service if delivered by courier service or two (2) days after the date set
forth on the facsimile record if delivered by facsimile.

	 	 	 

	To the Transferor:
	 	 
	Address
	 	3775 North First Street, San Jose, CA 95134, USA
	Facsimile:
	 	     001-408-952-8480
	Attention:
	 	     Fei Shen
	 
	 	 
	To the Transferee:
	 	 
	Address:
	 	     11         Binhe Road, Fushun Economic Development
	Zone
	 	 
	Facsimile:
	 	     0413-6616900
	Attention:
	 	     Liu Bin

	9.8	 	This Contract shall be binding upon the Transferor, the Transferee and their respective
successors and permitted assigns.

 

 

Execution Version

Equity Transfer Contract

IN WITNESS WHEREOF, the parties hereto have caused this Contract to be executed by their duly
authorized representatives as of the date first above written.

	 	 	 
	Transferor: RAE Systems (Asia) Ltd.
 
	

	 	 	 	 	 

	Authorize Representative:	 	 
	 
	 	 	 	 
	Signature:

	 	/s/ Fei Shen 	 	 
	 

	 	 	 	 
	Name:
	 	Fei Shen	 	 
	Title:
	 	Director	 	 

 

 

Annex A: Termination Agreement

This Termination Agreement (this “Agreement”) dated as of January 12, 2011, by and
between:

RAE Systems (Asia) Limited 
(“RAE”), a company established under
the laws of Hong Kong, the People’s Republic of China (“China” or “PRC”), with its legal
address being at Units 1516-18, 15/F Delta House, 3 On Yiu Street, Shatin, N.T., Hong
Kong; and

Liaoning Energy Investment (Group) Co., Ltd. 
(“Liaoning Coal
Group”), a company established and existing under the laws of the PRC, with its legal
address being at 13 Xiannongtan Road, Shenhe District, Shenyang.

WHEREAS,

          (A) RAE and Liaoning Coal Group entered into a Contract for Sino-foreign Equity Joint Venture
(the “JVC”), dated December 10, 2006;

          (B) Pursuant to the JVC, RAE and Liaoning Coal Group established RAE Coal Mine Safety
Instruments (Fushun) Co. Ltd. 
(the “Company”), in which RAE holds 70% of the
equity interest and Liaoning Coal Group holds 30% of the equity interest;

          (C) RAE and Shenyang Research Institute of China Coal Research Institute 
(“Shenyang Institute”) entered into an Equity Transfer Contract (the “ETC”), dated as of January
12, 2011, pursuant to which RAE desires to transfer to Shenyang Institute, and Shenyang Institute
desires to purchase from RAE, 70% of the equity interest held by RAE in the Company (the “Equity
Transfer”); and

          (D) RAE and Liaoning Coal Group wish to terminate the JVC on the Closing Date of the Equity
Transfer (as defined in the ETC).

NOW, THEREFORE, it is agreed as follows:

          1. The JVC shall be terminated in its entirety on the Closing Date.

     2. Liaoning Coal Group hereby consents to any and all the provisions of the ETC and agrees to
provide assistance to carry out the provisions of the ETC. Liaoning
Coal Group hereby unconditionally and irrevocably waives its right of first refusal to the equity transfer
contemplated under the ETC.

          3. Liaoning Coal Group on its own behalf and on behalf of its affiliates, directors and
employees (collectively, in each case, the “Releasors”), effective on the date hereof,
unconditionally and irrevocably releases RAE, its affiliates, directors and employees
(collectively, in each case, the “Releasees”) of and from any and all obligations, claims and
causes of action of every nature, regardless of whether presently known or unknown, pending or
future, certain or contingent, that the relevant Releasors had, now have or hereinafter may have
against the relevant Releasees, arising out of or in connection with any circumstance, agreement,
activity, event or matter occurring or existing on or prior to the
date of this Agreement. For the
avoidance of doubt, the Parties confirm that the Releasors are not hereby releasing

 

 

RAE from its obligations to indemnify the Company against the Non-disclosed Liabilities pursuant
to Section 4.3 of the ETC.

     4. The provisions of this Agreement the negotiations prior to this Agreement and any other
instruments entered into pursuant to this Agreement shall be confidential information and will
only be disclosed to those employees, directors, contractors, representatives, attorneys,
financial advisers and consultants of the Parties or actual or
prospective acquirers, lenders or
investors, who, by virtue of their respective duties or positions or a contract obligation
requirement, have a need to know and then only to the extent needed for the purpose of this
Agreement.

          The foregoing obligations of confidentiality and non-disclosure shall not apply to the
information which either Party is required to disclose by any applicable law, legal process or an
order or requirement of a court of competent jurisdiction or other competent governmental
authority, or by the published rules or any mandatory requirements of any stock exchange on which
securities of there levant Party or its holding companies are listed (or by any law applicable to
such securities).

          5. This Agreement shall be governed by, and construed in accordance with, the laws of the PRC.

          6. RAE and Liaoning Coal Group agree that any dispute or discrepancy arising from or in
connection with the execution or performance of this Agreement shall be resolved through
consultations between the parties. In case any dispute fails to be resolved through such
consultations within thirty (30) days after either party hereto notifies the other for
consultations, such dispute shall be submitted to China International Economic and Trade
Arbitration Commission (“CIETAC”) for confidential and binding arbitration in Beijing in
accordance with the arbitration rules of CIETAC in effect on the date of the submission of such
dispute. The parties hereto further agree that the parties to the arbitration shall each pay the
fees and expenses (including without limitation, attorney’s fees) incurred by it in connection with
the arbitration. The arbitral tribunal shall consist of three (3) arbitrators, with one (1) to be
appointed by each of the claiming party and the responding party, and the third arbitrator to be
jointly appointed by the first two arbitrators. All the proceedings in the arbitration shall be
conducted in both Chinese and English. The parties hereto agree that the arbitral award made by
such arbitral tribunal shall be final and binding upon both parties hereto.

          7. This Agreement is signed in both English and Chinese. Both language versions shall be
equally valid.

          8. This Agreement may be executed in one or more counterparts and by different parties hereto
in separate counterparts. All of such counterparts shall constitute one and the same agreement and
shall become effective when one or more counterparts have been signed by each party hereto and
delivered to the other party.

          9. This Agreement shall become effective on the date hereof.

 

 

Execution Version

Equity Transfer Contract - Annex A

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly
authorized representatives as of the date first above written.

			
	RAE Systems (Asia) Ltd. 	

	 	 	 	 	 

	Authorize Representative:
	 
	 	 	 	 
	Signature:

	 	/s/ Fei Shen	 	 
	 

	 	 	 	 
	Name :
	 	Fei Shen	 	 
	Title:
	 	Director	 	 

 

 

Annex B: Confirmation Letter

To:

	(1)	 	Guarantor: Shenyang Research Institute of China Coal Research Institute;

	(2)	 	RAE Beijing: RAE-KLH (Beijing) Technologies Co., Ltd.;

	(3)	 	RAE Shanghai : RAE Systems (Shanghai) Co., Ltd.; and

	(4)	 	RAE Systems: RAE Systems.

Dear Sirs,

We refer
to the Settlement Agreement (the “Settlement Agreement”), dated as of January 12, 2011,
by and among Guarantor, RAE Beijing, RAE Shanghai and RAE Systems. The terms herein have the same
meaning as those in the Settlement Agreement.

This is to acknowledge and confirm that:

	1.	 	     we,                     (formerly known as RAE Coal Mine Safety Instruments (Fushun) Ltd., Co.), a company
incorporated and existing under the laws of the People’s Republic of China, with its legal address
at No. 3, Binhe Road, Fushun Economic Development Zone, Liaoning Province, PRC, is 30% owned by
Liaoning Coal and 70% Owned by the Guarantor; our legal representative
is                     ; and
	 
	2.	 	     we have duly executed the Settlement Agreement as the Debtor, and the Settlement Agreement
has been and will continue to be legally binding upon us.

	 	 	 	 	 

	 	 	 
	 
	 	 	 	 
	 

	 	Signature:	 	 
	 

	 	 	 	 
	 

	 	Name:	 	 

	 	 	 	 	 
	 

	 	  Title:
	 	Legal Representative

                                             , 2011exv10w18

Exhibit 10.18

Settlement Agreement

This Settlement Agreement
 (this “Agreement”) dated as of January 12, 2011, is entered into
by and among the following Parties:

	(1)	 	RAE Coal Mine Safety Instruments (Fushun) Co., Ltd., a company
incorporated and existing under the laws of the People’s Republic of China, with its legal
address at No. 3, Binhe Road, Fushun Economic Development Zone, Liaoning Province, PRC
(the “Debtor”) ;
	 
	(2)	 	Shenyang Research Institute of China Coal Research Institute, an entity incorporated and
existing under the laws of the People’s Republic of China, with
its legal address at No. 11,
Binhe Road, Fushun Economic Development Zone, Fushun City (the “Guarantor”) ;
	 
	(3)	 	RAE-KLH (Beijing) Technologies Co., Ltd., a company incorporated and existing under
the laws of the People’s Republic of China, with its legal address at RAE-KLH Plaza, No. 7
Fengxian Middle Road, Yongfeng Industrial Base, Haidian District, Beijing (“RAE Beijing”) ;
	 
	(4)	 	RAE Systems (Shanghai) Co., Ltd., a company incorporated and existing under the laws of the
People’s Republic of China, with its legal address at 788 Zhaoxian Road, Jiading
District, Shanghai (“RAE Shanghai”) ; and
	 
	(5)	 	RAE Systems, a company incorporated and existing under the laws of the USA, with its legal
address at 3775 North First Street, San Jose, CA 95134 (“RAE Systems”).

RAE Beijing, RAE Shanghai and RAE Systems shall be collectively referred to as the “Creditors”.
The Creditors and the Debtor shall be here in after referred to individually as a “Party”, and
collectively as the “Parties”.

WHEREAS:

	(A)	 	The Debtor is a Sino-foreign joint venture enterprise jointly established by Liaoning
Coal Industry Group Co., Ltd. (“Liaoning Coal Group”) and RAE Systems (Asia) Ltd. (“RAE
Asia”), in which Liaoning Coal Group and RAE Asia respectively holds 30% and 70% equity
interests;
	 
	(B)	 	The Guarantor and RAE Asia entered into an Equity Transfer Contract (the “ETC” ) dated as of
January 12, 2011, pursuant to which, RAE Asia, shall transfer to the Guarantor 70% of the
equity interests held by it in the Debtor; and
	 
	(C)	 	As of the date hereof, the Debtor has not paid the relevant debts and/or
service fees owed by it to RAE Beijing, RAE Shanghai and RAE Systems.

NOW THEREFORE, the
Parties have reached the following agreement on the relevant matters regarding the settlements of
debts:

Article 1 Settlement of Debts

	1.1	 	The Parties acknowledge that, as of the date of this Agreement, the relevant outstanding
debts owed by the Debtor to the Creditors are as follows:

	 	(1)	 	The debts owed to RAE Beijing by
the Debtor that have become due but

 

 

	 	 	 	have not yet been paid shall be RMB 6, 538, 976, consisting of trade payables
of RMB 145, and other payables of RMB 6, 538, 831 (“Debts to RAE Beijing”);
	 
	 	(2)	 	The debts owed to RAE Shanghai by the Debtor that have become due but have not
yet been paid shall be RMB 6, 071, 260, consisting of trade payables of RMB 5,014,188
and other payables of RMB 1,057,072 (“Debts to RAE Shanghai”) ; and
	 
	 	(3)	 	The service fee owed to RAE Systems by the Debtor that has
become due but has
not yet been paid shall be RMB 5,090,000 (“Service Fee to RAE Systems”).

	1.2	 	In case the amounts due and payable by the Debtor to RAE Beijing and/or RAE Shanghai as of
December 31, 2010 as set forth in the audit report to be issued by an accounting firm engaged
by the Guarantor (the “Audit Report”) are not
consistent with the amounts specified in (1)
and/or (2) above, the Debts to RAE Beijing and the Debts to RAE Shanghai shall be the amounts
set forth in the Audit Report; provided, however, that,

	 	(1)	 	the Guarantor shall provide a
true and complete copy of the Audit Report to
RAE Systems immediately upon the issuance thereof;
	 
	 	(2)	 	within three (3) days following its receipt of the said copy of the Audit Report
specified in (1) above, RAE Systems shall have the right to submit to the Guarantor a
written dispute about the amounts set forth in the Audit Report; and
	 
	 	(3)	 	in the event that (a) RAE Systems submits any written dispute in accordance with
(2) above and (b) RAE Systems and the Guarantor fail to reach an agreement with respect
to the disputed items within ten (10) days, RAE Systems and the Guarantor shall
immediately and jointly appoint an accounting firm to issue a report on the disputed
items, which report shall be binding upon each Party.

Article 2 Repayment of Debts

	2.1	 	With respect to the Debts to RAE Beijing, the Debtor shall repay to RAE Beijing: (1) RMB
1,000,000 on the date hereof, (2) RMB 1,000,000 each calendar month from February 2011 (inclusive)
to June 2011 (inclusive) on or before the 15th calendar day of each month, and (3) on
or before July 15, 2011 all of the then outstanding amounts of the Debts to RAE Beijing.
	 
	2.2	 	With
respect to the Debts to RAE Shanghai, the Debtor shall repay to RAE Shanghai: (1) RMB 1,000,000 on
the date hereof, (2) RMB 1,000,000 each calendar month from February 2011 (inclusive) to June 2011
(inclusive) on or before the 15th calendar day of each month, and (3) on or before July
15, 2011 all of the then outstanding amounts of the Debts to RAE Shanghai.
	 
	2.3	 	RAE Systems agrees
to release the Debtor from its obligation to pay the
Service Fee to RAE Systems.
	 
	2.4	 	With respect to the debt repayment obligations under Article 2.1 to Article 2.2, if the
Debtor delays in repaying any amount of debt, the Debtor shall be liable to pay a delay
penalty ___ to the relevant

 

 

	 	 	Creditor in the amount of 0.1% of the delayed amount of debt per day from the date on
which such debt becomes due and payable.

Article 3 Security for Debts

The Parties agree that, to secure the repayment of the Debts to RAE Beijing and Debts to RAE
Shanghai by the Debtor, the Guarantor shall issue a separate letter of guarantee to the Creditors
in the form and substance of Appendix 1 hereto, pursuant to which, the Guarantor shall be jointly
and severally liable for the debts owed by the Debtor to RAE Beijing and RAE Shanghai.

Article 4 General Release; Waiver; Termination of Business Relationship

	4.1	 	Each of the Debtor and the Guarantor, on its own behalf and on behalf of its affiliates,
directors and employees (collectively, in each case, the
“Releasors”), effective on the date
hereof, unconditionally and irrevocably releases RAE Systems, RAE Asia, RAE Beijing, RAE Shanghai,
their affiliates, directors and employees (collectively, in each
case, the “Releasees”) of and
from any and all obligations, claims and causes of action of every nature, regardless of whether
presently known or unknown, pending or future, certain or contingent, that the relevant Releasors
had, now have or hereinafter may have against the relevant Releasees, arising out of or in
connection with any circumstance, agreement, activity, event or matter occurring or existing on or
prior to the date of this Agreement. For the avoidance of doubt, the Parties confirm that the
Releasors are not hereby releasing RAE Asia from its obligations to indemnify the Debtor against
the Non-disclosed Liabilities pursuant to Section 4.3 of the ETC.
	 
	4.2	 	The Parties hereby agree and
confirm that each of the agreements set forth in Appendix 2 hereto is and shall be terminated on
the date hereof.

Article 5 Acceleration of Repayment

	5.1	 	Notwithstanding any other provision of this Agreement, in the case that any of the following
events occurs, the relevant Creditor shall have the right to deliver a written notice to the
Debtor and require the Debtor to prepay the relevant amount of debts within the time limit as
requested under such written notice:

	 	(1)	 	The occurrence of any event to the Debtor that may affect its financial
condition or its ability to perform its obligations hereunder, including, without
limitation, any ongoing or contemplated de-merger, merger, reorganization,
restructuring, contemplated listing at a stock exchange or any other change to the
operation methods of the Debtor, reduction of its registered capital, transfer of
its material assets or equity, assumption of any material liability, creation of
any new material liability over the mortgaged properties, the dissolution or
cancellation of registration of the Debtor or filing for bankruptcy by (against)
the Debtor, its involvement in any material lawsuit or arbitration, or its
encounter of

 

 

	 	 	 	any difficulty in the operation or any deterioration in its financial status;
	 
	 	(2)	 	The
Guarantor fails to perform its obligations under the letter of
guarantee specified in Article 3 hereof; or
	 
	 	(3)	 	The Guarantor fails to perform its
obligation under the ETC.

	5.2	 	The Debtor and the Guarantor shall notify all Creditors in writing upon the occurrence or
threatened occurrence of any of the events set out in the above Article 5.1(1) in a timely
manner.
	 
	5.3	 	Upon the occurrence of events under Article 5.1, the relevant Creditor will be entitled to
require the Debtor to repay: (1) all or part of the Debts to RAE Beijing and Debts to RAE
Shanghai that have not yet been repaid by the Debtor; (2) interest accrued on the above
outstanding debts as from the date hereof and to be calculated based on the then applicable
lending interest rate of the Bank of China; and (3) delay
penalty calculated in accordance
with Article 2.4 hereof (if applicable).

Article 6 Confidentiality

	6.1	 	The provisions of this Agreement, the debt settlement stipulated herein, the negotiations
prior to this Agreement and any other instruments entered into pursuant to this Agreement
shall be confidential information and will only be disclosed to those employees, directors,
contractors, representatives, attorneys, financial advisers and consultants of the Parties or
actual or prospective acquirers, lenders or investors, who, by virtue of their respective
duties or positions or a contract obligation requirement, have a need to know and then only
to the extent needed for the purpose of this Agreement.
	 
	6.2	 	The foregoing obligations of confidentiality and non-disclosure shall not apply to the
information which either Party is required to disclose by any applicable law, legal process
or an order or requirement of a court of competent jurisdiction or other competent
governmental authority, or by the published rules or any mandatory requirements of any stock
exchange on which securities of the relevant Party or its holding companies are listed (or by
any law applicable to such securities).

Article 7 Dispute Resolution

	7.1	 	This Agreement shall be governed and construed in accordance with the laws of the PRC.
	 
	7.2	 	The Parties agree that, any dispute or discrepancy arising out of or in connection with the
execution and performance of this Agreement shall be resolved by the Parties through
consultations. If the dispute is not resolved through consultations within thirty (30) days
after either Party has served a written notice on the other Party requesting the commencement
of consultations, then the Party delivering such notice may submit the dispute to the China
International Economic and Trade Arbitration Commission for arbitration in Beijing in
accordance with its then applicable rules. The arbitration shall be conducted on a
confidential

 

 

	 	 	basis and shall be binging upon the Parties. The Parties further agree that, the
Parties to the arbitration shall bear their respective costs and expenses in connection
with the arbitration (including, without limitation, the attorney’s fees).
	 
	7.3	 	The arbitration tribunal shall consist of three (3) arbitrators, of which, one (1) shall be
appointed by the claimant, one (1) shall be appointed by the respondent, and the third
arbitrator shall be jointly elected by the above two (2) arbitrators. All proceedings in any
such arbitration shall be conducted in both Chinese and English. The Parties hereby agree
that, the arbitration award shall be final and binding upon all the Parties.
	 
	7.4	 	When any dispute is being resolved in accordance with this Article 7, except for the matters
under dispute, the Parties shall continue to fulfill their respective obligations under this
Agreement.

Article 8 Miscellaneous

	8.1	 	Without the prior consent of the other Parties, none of the Parties may assign this
Agreement or its rights and obligations under this Agreement.
	 
	8.2	 	To the extent permitted by the PRC laws, the failure or delay of any Party hereto to exercise
its rights under this Agreement shall not operate as a waiver thereof, nor shall any single or
partial exercise of a right preclude any other future exercise thereof.
	 
	8.3	 	Unless otherwise provided in this Agreement or in any other agreement or contract referred
to herein, this Agreement and the appendix hereto shall constitute the entire agreement
between the Parties with respect to the subject matter hereof, supersede any prior expression
of intent or understanding relating hereto and may only be modified or amended by a written
instrument signed by the authorized representatives of the Parties.
	 
	8.4	 	If any term of this Agreement is held invalid, illegal or unenforceable under any law or
public policy, all other terms of this Agreement shall nevertheless remain in full force and
effect for so long as the economic or legal substance of the transactions contemplated by
this Agreement is not affected in any manner materially adverse to either Party. Upon such
determination that any term is invalid, illegal or unenforceable, the Parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original intent of the
Parties as closely as possible in an acceptable manner in order that the transactions
contemplated by this Agreement are consummated as originally contemplated to the greatest
extent possible.
	 
	8.5	 	This Agreement shall be made in both Chinese and English. Both versions shall be equally
authentic.
	 
	8.6	 	This Agreement shall be effective on the date hereof.
	 
	8.7	 	Any notice or written communication from any Party to the other Parties under this Agreement
shall be made in Chinese or English, and sent by courier service or by facsimile. The date of
receipt of a notice or communication hereunder shall be deemed to be seven (7) days after the
letter is given to the courier service and two (2) days after sending in the case of a
facsimile

 

 

	 	 	evidenced by a transmission report. All notices and communications shall be
sent to the appropriate address set forth below, until the same is changed by
notice given in writing to the other Parties.

	 	 	 	 	 

	 

	 	To the Debtor:	 	 
	 

	 	Address:
	 	No. 3, Binhe Road, Fushun Economic Development
Zone, Liaoning Province
	 

	 	Facsimile No:
	 	0413-7676559
	 

	 	Attention:
	 	                                        
	 
	 	 	 	 
	 

	 	To the Guarantor:	 	 
	 

	 	Address:
	 	No. 11, Binhe Road, Fushun Economic Development Zone,
Fushun City
	 

	 	Facsimile No:
	 	0413-6616900
	 

	 	Attention:
	 	Liu Bin
	 
	 	 	 	 
	 

	 	To RAE Beijing:	 	 
	 

	 	Address:
	 	RAE-KLH Plaza, No. 7 Fengxian Middle Road, Yongfeng
Industrial Base, Haidian District, Beijing
	 

	 	Facsimile No:
	 	010-58717568
	 

	 	Attention:
	 	Li Wang
	 
	 	 	 	 
	 

	 	To RAE Shanghai:	 	 
	 

	 	Address:
	 	788 Zhaoxian Road, Jiading District,
	 

	 	Shanghai	 	 
	 

	 	Facsimile No:
	 	021-69522623
	 

	 	Attention:
	 	Bernice Bao
	 
	 	 	 	 
	 

	 	To RAE Systems:	 	 
	 

	 	Address:
	 	3775 North First Street, San Jose, CA 95134
	 

	 	Facsimile No:
	 	001-408-952-8480
	 

	 	Attention:
	 	Fei Shen

 

 

Execution Version

Settlement Agreement

IN WITNESS WHEREOF, the Debtor the Creditors and the Guarantor have caused their duly authorized
representatives to sign this Agreement on the date first written above,

	 	 	 

	RAE Coal Mine Safety Instruments (Fushun) Co., Ltd.
	 	 
	 
	 	 
	Authorized representative:
	 	 
	Signature:             
             

Name:
Title:	 	
	 
	 	 
	
	 	 
	 
	 	 
	RAE Systems (Asia) Ltd.
	 	 
	 
	 	 
	Authorized
representative:

	 	 
	Signature: /s/ Fei Shen

	 	 
	Name: Fei Shen
	 	 
	Title: Director
	 	 
	 
	 	 
	RAE-KLH (Beijing) Technologies Co., Ltd.
	 	 
	 
	 	 
	
	 	 

8

 

Execution Version

Settlement Agreement

	 	 	 

	RAE Systems (Shanghai) Co., Ltd.
	 	 
	 
	 	 
	Authorized representative:

	 	 
	Signature: /s/ Ming Ching Tang

Name:

	 	 
	Title:
	 	 
	 
	 	 
	RAE Systems
	 	 
	 
	 	 
	Authorized representative:

	 	 
	Signature:
/s/ Robert I. Chen

	 	 
	Name: Robert I. Chen
	 	 
	Title: President and CEO
	 	 

9

 

Appendix 1 Unconditional and Irrevocable Letter of Guarantee

Guarantor: Shenyang Research Institute of China Coal Research Institute

Registered address: No. 11, Binhe Road, Fushun Economic Development Zone, Fushun City

Legal representative: Wang Jianguo

Beneficiary A: RAE-KLH (Beijing) Technologies Co., Ltd. (“RAE Beijing”)

Registered address: RAE-KLH Plaza, No. 7 Fengxian Middle Road, Yongfeng Industrial Base, Haidian District, Beijing

Legal representative: Chen Yizhi

Beneficiary B: RAE Systems (Shanghai) Co., Ltd. (“RAE Shanghai”)

Registered address: 788 Zhaoxian Road, Jiading District, Shanghai

Legal representative: Chen Yizhi

In response to the request of RAE Coal Mine Safety Instruments (Fushun) Ltd., Co. (the “Debtor”),
Shenyang Branch of China Coal Research Institute (the “Guarantor”) hereby issues this unconditional
and irrevocable letter of guarantee, dated as of January 12, 2011, to RAE Beijing and RAE Shanghai
(collectively, the “Beneficiaries”) to provide an unconditional and irrevocable guarantee on a
joint and several basis for the payment obligation of the Debtor under the Settlement Agreement
dated as of January 12, 2011, entered into by the Guarantor, the Debtor, RAE Beijing, RAE Shanghai
and RAE Systems (the “Settlement Agreement”). The guarantee liabilities assumed by the Guarantor
are as follows:

	1.	 	The Guarantor hereby unconditionally and irrevocably guarantees that, it will bear joint and
several guarantee liability for the payment of the Debts to RAE Beijing and the Debts to RAE
Shanghai, both as defined in the Settlement Agreement, and any and all interests and penalties that
may accrue in connection there with pursuant to the Settlement Agreement. If for any reason the
Debtor fails to fully repay the relevant amount on time in accordance with the Settlement
Agreement, the Guarantor shall first pay such relevant amount, and will assume all payment
liabilities of the Debtor. The Guarantor guarantees that, within seven (7) business days after its
receipt of a written demand from any Beneficiary hereunder, it will forth with fully repay the
secured amount to such Beneficiary subject to the scope of guarantee of this letter of guarantee.
	 
	2.	 	During the term of guarantee under this letter of guarantee, the guarantee liability of the
Guarantor shall remain unconditional and irrevocable, and the content or validity thereof shall not
be affected as a result of any of the following events:

	 	(1)	 	the extension of the term of performance of the Settlement Agreement, or any change to other
provisions of the Settlement Agreement; 

or

 

 

	 	(2)	 	any change to the form of organization or legal status (including without limitation, change of
corporate name, or change of shareholders, or split-off or merger) or status of assets of any party
hereto; or any proposed change to the form of organization or legal status of the Guarantor, in
which case, the Guarantor shall notify each Beneficiary 20 days in advance; or any split-off of the
Guarantor, in which case, all the liabilities hereunder shall be assumed by the entity resulting
from such split-off;
	 
	 	(3)	 	any agreement by and between the Guarantor or either Beneficiary on one hand and any other
entity on the other hand;
	 
	 	(4)	 	the bankruptcy or dissolution of the Debtor or failure or inability of the
Debtor to perform its payment obligation under the Settlement Agreement.

	3.	 	The Guarantor hereby warrants and undertakes to the Beneficiaries that:

	 	(1)	 	it will comply with and perform all obligations hereunder;
	 
	 	(2)	 	it waives the claim and defense for not performing all of its obligations;
	 
	 	(3)	 	it is validly existing in accordance with the laws of the People’s Republic of China, and has
full right and authority to own and legally owns its assets, and has full capacity required for
the performance of the guarantee obligation hereunder;
	 
	 	(4)	 	its issuance of this letter of guarantee does not violate any law or regulation, or its
articles of association, or any contract to which it is a party;
	 
	 	(5)	 	all approvals or authorizations provided by the relevant laws, regulations and its articles of
association have been obtained by it for providing the guarantee under this letter of guarantee;
and
	 
	 	(6)	 	it is not currently in any default, or is or will be a subject to any
litigation at any court, governmental or administrative authority
or arbitration institution, or involved in any event that may
affect its performance of its guarantee obligation.

	4.	 	After this letter of guarantee comes into force, the Guarantor shall furnish
to the Beneficiaries its financial information as may be requested by any
Beneficiary.
	 
	5.	 	Without the written consent of the Beneficiaries, the Guarantor may not
assign its guarantee obligation to any other party.
	 
	6.	 	This letter of guarantee shall come into force after it is affixed with the common seal of the
Guarantor and signed by the legal or authorized representative of the Guarantor, and shall be
terminated after the amount payable under the Settlement Agreement is paid up.

 

 

Execution Version
Settlement Agreement Appendix 1

Date: January 12, 2011

Beneficiary A: RAE-KLH (Beijing) Technologies Co., Ltd.

Beneficiary B: RAE Systems (Shanghai) Co., Ltd.

Authorized representative:

Signature:
/s/ Ming Ching Tang
           

Name:

Title:

Date: January 12, 2011

 

 

Appendix 2 Agreements Terminated

(i) The Non-exclusive International Distributor Agreement, dated as of
January 1, 2009, between RAE Coal Mine Safety Instruments (Fushun) Ltd., Co., and RAE
Systems (Shanghai) Co., Ltd.;

(ii) The lease agreement, dated as of September 30, 2007, between RAE
Coal Mine Safety Instruments (Fushun) Co., Ltd. and RAE-KLH (Beijing) Technologies Co.,
Ltd. with respect to the lease of certain office facility in Beijing by RAE-KLH (Beijing)
Technologies Co., Ltd. to the Beijing Business Unit of RAE Coal Mine Safety Instruments
(Fushun) Co., Ltd.;

(iii) The agreement, dated as of January 7, 2008, between RAE Coal
Mine Safety Instruments (Fushun) Co., Ltd. and RAE-KLH (Beijing) Technologies Co., Ltd.
with respect to the provision of certain office and human resource services by RAE-KLH
(Beijing) Technologies Co., Ltd. to the Beijing Business Unit of RAE Coal Mine Safety
Instruments (Fushun) Co., Ltd., and its amendment dated as of August 2, 2010; and

(iv) The RAE China Region Sales Cooperation Guidelines, dated
October 11, 2010, between RAE-KLH (Beijing) Technologies Co., Ltd. to the Beijing
Business Unit of RAE Coal Mine Safety Instruments (Fushun) Co., Ltd.

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